Key Findings

Code of Conduct issues

• Poor risk management of some risks and zero coverage of some key risks in codes of conduct: According to the report, 67% of companies failed to cover five of the 13 recommended topics in their code of conduct.  Overall, ASX50 companies were found to have better coverage than the ASX51-200 companies, but there were still, ACSI writes, 'significant gaps among their coverage'. These omissions include: fair dealing/product responsibility, data protection and cybercrime, anti-money laundering and counter-terrorism finance (AML/CTF) which ACSI comments are known business risks.  ACSI states that 'Companies whose codes of conduct do not include key topics miss an important opportunity to manage these risks'.

• Set and forget? Codes of conduct are not being regularly reviewed: ACSI found that 58% (116 ASX200 codes of conduct) had not been reviewed in last two years or were undated.   ACSI adds that, 8% (15 codes of conduct) had not been reviewed for five years or longer. ACSI notes that the New York Stock Exchange recommends that codes of conduct be reviewed every two years, or after significant corporate compositional changes – an approach ACSI supports. 

• 'Tone from the top' is missing: ACSI states that an 'essential element in setting the tone from the top' is signalling endorsement of the code of conduct by the CEO eg via an introduction.  ACSI found that a relatively small proportion — 28% (56 ASX200 codes of conduct) — included an introduction by the CEO.  

• Hard to read, navigate and put into action: ACSI writes that a key factor in determining whether a code of conduct will be effective is the usability of the code ie the ease with which it can be read, interpreted and put into action.  ACSI suggests that the use of case studies, questions and answers, frequently asked questions could assist in this, for example. ACSI found that only 17% of companies incorporated these features into their codes.

• Very few codes of conduct demonstrate 'leading practice': According to ACSI, 6% or 11 codes demonstrated 'leading practice' as measured by being two years old or less, using examples, Q&As or case studies and setting a tone from the top by having a CEO introduction. ACSI comments: 'Clearly, there is significant opportunity for ASX200 companies to improve the quality of their codes of conduct'.

Whistleblowing systems — weaknesses

• According to ACSI, a number of 'vital features' are absent from many whistleblowing systems.  Many ASX200 companies do not disclose if they offer anonymity (91 companies or 45%) or 24-hour availability1 (97 companies or 48%) or a commitment that retaliation is not acceptable (71 companies or 36%) ACSI writes. 

• Missed opportunity? ACSI states that whistleblowing is the initial source of detection for 39% of frauds and the code of conduct is the document most widely distributed to employees.  Yet, ACSI notes, a relatively small proportion of codes of conduct — 38 ASX200 codes of conduct (19%) — make no reference to whistleblowing.  ACSI comments that this is 'a significant missed opportunity for companies to detect fraud as well as other types of wrongdoing'.  ACSI CEO Louise Davidson states, 'I find it hard to fathom that so many of Australia’s largest listed companies tolerate such significant gaps in their codes of conduct and whistleblowing systems. This represents a material risk to their reputation, licence to operate and value'. 
  
  Three recommendations to reduce the risk of poor corporate culture
  The report includes three recommendations to address the issues identified: strengthening board oversight; strengthening guidance in the ASX Corporate Governance Principles and Recommendations and engaging with government on legislative change.

• Strengthening board oversight of codes of conduct and whistleblowing systems: Investors and directors should ask relevant questions of boards and company management.  ACSI suggests that active questioning by both directors and by investors will encourage boards to have more robust oversight of codes of conduct and whistleblowing systems.  To assist in this, the report includes a set of suggested questions for investors to ask boards and for directors and senior management to consider internally to identify gaps in the quality of the codes of conduct and whistleblowing systems. 

• ASX Corporate Governance Principles and Recommendations (ASX Principles and Recommendations) (due for revision in 2018). ACSI writes that it is actively advocating for improvements to address weaknesses in companies’ codes of conduct and whistleblowing systems identified in the report.  More specifically ACSI states that it intends to recommend that the following practices be included in the revised edition of the Principles and Recommendations:

  • Encourage the inclusion of questions in engagement surveys which assess the consistency of lived behaviour as compared with the company's espoused values. 

  • Codes of Conduct: regular review of codes of conduct to ensure that their ongoing relevance; encourage the use of practical case studies, Q&As and FAQs and a framework for ethical decision-making in codes of conduct to promote education and understanding; and independent testing of the implementation of codes of conduct (including communication and training effectiveness) and whistleblowing systems.

  • Whistleblowing: whistleblowing systems should allow users to remain anonymous and be available 24 hours a day; ensure that staff that report wrongdoing are protected against retaliation and supported; remediation policies for those found to suffer retaliation for wrongdoing are in place; and provision for services to answer queries regarding the code of conduct (a ‘helpline’) as well as for reporting wrongdoing (‘hotline’ services).

• Legislative change — Whistleblowing Bill does not go far enough: ACSI notes that the government introduced the Treasury Laws Amendment (Enhancing Whistleblower Protections) Bill 2017 in December of 2017.   ACSI comments that the 'draft Bill does not go far enough to promote effective whistleblowing protections. We will be advocating for additional protections and encourage other investors to do the same'. 

[Note: Treasury Laws Amendment (Enhancing Whistleblower Protections) Bill 2017 (Whistleblowing Bill) was referred to the Economics Legislation Committee for inquiry and report by 16 March.  On 16 March, the date was extended to 22 March 2018.]

A significant opportunity to 'promote a more resilient culture':  ACSI CEO Louise Davidson comments on the report findings overall: 'We have identified a significant opportunity for companies to promote a more resilient culture by addressing shortcomings in their codes of conduct and whistleblowing systems. We’re urging companies to move beyond a tick the box mentality and ensure their approach works in practice.  We encourage investors to support this process, by asking directors and senior managers questions about their codes of conduct and whistleblowing systems. For our part, ACSI is advocating for leading practices to be enshrined in the legislation that applies to listed companies'.

About the report: ACSI writes that the research and conclusions in the report are based on a review of the relevant literature and a desktop analysis of publicly available codes of conduct and separate whistleblowing policies. The ASX200 codes of conduct and whistleblowing policies examined in this research were accessed between January and March 2017.

[Sources: Australian Council of Superannuation Investors media release 14/03/2018; ACSI Codes of Conduct Whistleblowing and Corporate Culture 14/03/2018; SMH 14/03/2018]