Allens - Thriving in an era of scrutiny
Striking the right balance between culture, incentives and processes is becoming ever more essential in Australia as regulators further increase their scrutiny in these areas. While this extra attention on corporate culture creates legal risk, it also creates opportunity. Having a ‘good’ or ‘ethical’ corporate culture is a possible differentiator for making better business decisions, winning new customers, attracting employees and more.
Culture and conduct – Legal and compliance leaders should act now to combat serious and increasing legal and reputational risk
Corporations face unprecedented scrutiny of misconduct within their organisations and value chains, and it is increasingly common for the blame to be laid, in whole or in part, on the culture of the corporation.
Corporate culture is a basis of legal liability and reputational consequences. The financial and reputational exposure for getting culture wrong is increasing, as is the range of laws that influence culture. Regulators are increasingly proactive in assessing and investigating culture, and have more appetite and means to pursue enforcement.
A strong corporate culture can be a shield against these risks. It can also enhance value and increase performance.
It is critical that corporations have an articulated culture and assess themselves regularly. An assessment of culture needs to be undertaken and documented in a way that reflects these risks and opportunities. It should also focus on what the law and regulators regard as the key drivers of corporate culture, and be conducted in a manner that will satisfy regulatory expectations. The governance of an organisation, and its compliance and risk frameworks, are important influences on corporate culture.
For all of these reasons, it is essential that legal and compliance teams are involved in the assessment process. Here is a list of recommended actions:
- Get involved in assessing culture
- Clearly articulate culture strategy
- Gather the right data points
- Conduct culture assessment
- Start to make a mindset shift
The consequence of getting it wrong
When it comes to corporate culture, the price of getting it wrong is high – greater regulatory penalties, enormous reputational harm and added exposure for executives in an age where regulators are both eager and willing to litigate, matched by a global trend of shareholder and consumer activism.
Corporate culture is a basis for criminal liability under Australia's Criminal Code Act 1995 (Cth) and can be an aggravating factor in prosecution, sentencing and civil penalty decisions in Australia and globally. Additionally, the financial impact of enforcement has been increasing globally and Australia is following suit with a new penalties regime for breaches of the Corporations Act 2001 (Cth) and various financial services statutes. Now, for many breaches, the maximum civil penalty per breach can be up to the greater of:
- A$10.5 million;
- 3 x the benefit gained (or the detriment avoided); or
- 10 per cent of the company's annual turnover (capped at A$525 million).
Similar penalties apply for many criminal offences, and penalties for individuals have also increased. The financial consequences of having a bad corporate culture are now much greater.
The likelihood of regulatory enforcement action against corporations and individuals that have weak corporate cultures is now much greater. Regulators in Australia (and globally) are:
- increasingly and proactively supervising corporate culture as a means by which they can pre‑emptively intervene to prevent or stop misconduct at an earlier stage;
- expecting organisations to regularly assess their own cultures;
- assessing corporate culture as part of their investigations; and
- better resourced and more willing to litigate or prosecute misconduct.
In many instances, the reputational consequences of a failure of culture on the organisation's brand and the position of its directors and executives can be as damaging as the financial and legal consequences. Nowhere was this more acutely illustrated than in Australia's Financial Services Royal Commission. At the same time, there is a global trend of environmental, social and governance related shareholder and consumer activism, which is demanding a more ethical and sustainable approach to business.
The benefits of getting it right
In the same way the cost of getting corporate culture wrong invites added risk and harm, the benefits of getting it right are manifold – enhanced reputation, greater retention and recruitment of value‑driven staff, increasing shareholder value and alignment with community expectations.
- Legal defence and mitigation of penalties – a good corporate culture can be a defence to many corporate criminal offences, and a mitigating factor when it comes to prosecution, sentencing and civil penalty decisions.
- Reputation: good corporate culture can enhance an organisation's brand – just as a poor corporate culture can destroy or damage the reputation of a corporation and its executives, a good corporate culture enhances a corporation's brand.
Organisations can increase their reputation outcomes by 16 per cent through cultural initiatives.1
- Retention and recruitment of employees – ASIC has recognised that recruitment practices can also be a powerful influence on culture.2 A well‑developed company culture can act as a magnet for existing and future talent. The image and values an organisation presents to the employment market will significantly influence the kinds of candidates it attracts, and, in turn, its cultural profile.
When unfilled jobs in the wider market rose by 21.4 per cent from May 2017 to May 2018, voluntary turnover at Australia's top 50 best places to work decreased by 30 per cent.3
- Retention and recruitment of customers – increasingly, customers choose products and services not just on the basis of price and quality, but on other factors such as societal impact, climate impact and the ethical values of the organisation. While emanating initially out of the food & beverage and textile, clothing and footwear industries, this trend is now sectorally agnostic and is accompanied by a rise in product and service sustainability impact ratings initiatives.
- Increasing productivity, profit and shareholder value – at the economic level, a positive, thriving and well‑articulated culture can deliver dramatic and sustained increases in productivity and performance. This is particularly the case in terms of non‑incentive‑based schemes governing remuneration and performance. At the most extreme end of the spectrum, UK bank TSB Bank scrapped sales‑driven targets and rewards, as well as access to sales data at branch and area level. Staff are now rewarded purely on service to customers, and the bank claims the change in strategy has improved not just the bank's reputation but also performance.4
1- Inside HR 2019.
2 - Speech by Greg Medcraft, Chairman of the Australian Securities and Exchange Commission, Thomson Reuters, 4th Annual Australian Regulatory Summit, 21 June 2016, The Importance of Corporate Culture, page 3
3 - Great places to work Australia, 11th Annual Study.
4 - Financial Conduct Authority Discussion Paper 18/2, Transforming Culture in Financial Services, March 2018, page 13.