Boards, like our cricketers, have exposed themselves to an expectation gap. That is, the difference between what the public, investors and stakeholders believe boards should be accountable for and what a board believes it is accountable? I argue there always was a gap – now it is being highlighted.
I see this phenomenon as replicating the auditing expectation gap we saw developing in the 1970s, being the difference between what the public and financial statement users believed auditors were responsible for and what auditors themselves believed their responsibilities were. It took until the late 1990s before we moved on positively with auditing, auditing standards and changes in the law and regulations. This glacial transition should not be allowed to exist with boards.
Very clear messages have been sent to the corporate world by the Australian Government over the last few years through its independent regulatory agencies and not only are we hearing more about expectations, but we are seeing action being taken. However, the interpretation by boards of what the law says and what the board ultimately communicates to the public and the users of board information, can differ greatly.
A predictable response is to blame the regulators ‒ now there’s a good idea. Move the focus from where it should be – directly on boards and directors. I don’t accept the regulators are at fault when governance frameworks breakdown, executives exhibit bad behaviour, process, procedure and controls are sidestepped and otherwise good organisational culture is manipulated to the detriment of the public, customers and stakeholders. Boards are accountable full stop. So, why are some commentators wanting us to believe the regulators are at fault? Regulators don’t owe a duty to the board, directors do. Regulators don’t have a duty of due care and diligence, directors do. We have to demand boards govern our organisations in the best interest of the organisation and all stakeholders. There is no question that regulators have a significant role in oversight, remediation, control and enforcement and overall they serve us well. We also arguably have the best prudential, regulatory and legal frameworks in the world providing most stakeholders, including governments, with a high level of assurance in the robust operation of our markets and the corporations operating in those markets, from listed entities to the smallest not-for-profit and everything in between.
Of course, we can expect more regulation as a result of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Productivity Commission’s draft report, Competition in the Australian Financial System1, and reviews by regulators. And, there may be calls for funding increases for regulators, which may be justified, but I don’t presume to argue for increased funding that is for the regulators to do and for those bodies enquiring into performance and accountability to comment and recommend. However, I will argue that we are experiencing a board expectation gap and we must find a way to close that gap sooner rather than later.
It’s just not cricket! Let’s get back to delivering on the fundamentals of good governance. Let’s get back to exhibiting the behaviour expected of us all.
For more information or discussion, please contact Principal Advisor, Stephen Howell from our Effective Governanceteam.
1. Productivity Commission, 2018, Competition in the Australian Financial System, Draft Report, https://www.pc.gov.au/inquiries/completed/financial-system/draft accessed 25 June 2018.