How to achieve the best version of what we have already

Commissioner Hayne made clear over the course of the Commission hearings that he considers that boards (and senior management) bear primary responsibility for the issues identified but does not advocate radical change in terms of the role or composition of boards. For example, the separation of management and the board is strongly affirmed in the report as is the value of the board as a vital check on senior management. Rather he calls on boards to do a better job of discharging their duties to act in the long term best interests of their organisations and in line with community expectations. His expectation is that 'improvements in the culture of financial services entities, their governance arrangements and their remuneration systems should reduce the risk of misconduct in future'.

Steps boards should take

1. Boards need to ensure that they are equipped with the right information to effectively challenge management and be prepared to do so.
2. Boards should also be prepared, if necessary, to intervene and say 'fix this, and fix it now' where management fails to act in accordance with the long term best interests of the organisation eg where management's actions risk damaging the organisation's relationship with regulators.
3. Boards cannot justify pursuit of profit (at the expense of all other considerations) on the basis that they are ultimately accountable to their shareholders. Acting in the long term best interests of the corporation they serve demands more from directors than optimising short term financial returns to shareholders, and cannot justify prioritising the interests of shareholders above the best interests of customers. Rather, directors are expected to take a longer term and more holistic view of what is in the best interests of their organisations and to act accordingly.
4. Boards need to ensure there is sufficient focus within the organisation on management of non-financial risk (despite the lack of detail in APRA's current guidance in CPS 220)
5. Boards need to ensure there is clear accountability for non-financial risk. They need to ask: 'Who is to be held accountable for what is done or not done? How are those who are accountable held to account? '
6. Boards need to give effect to their own understanding (without waiting for confirmation from the regulator) of what constitutes ethical behaviour, and ensure that their stated purpose, vision and values are reflected in practice.
7. Boards need have the mix of skills and experience required to execute their roles effectively, and (superannuation boards in particular, but we would suggest the Commissioner's comments are applicable to boards more generally), are advised to ensure there is provision for regular and orderly board renewal and replacement. Elsewhere the commissioner notes the potential benefits for boards in including non-executive directors on boards (NEDs).

The elimination of conflicts

The elimination, as opposed to the management of conflicts, wherever they occur is a theme running through the report which informs many of the recommendations and indeed observations included in the report. We suggest boards would be well advised to consider this in the context of the commissioner's observations with respect to board effectiveness.

Given the Commissioner's observations, APRA is likely to be much more active in supervising how entities manage non-financial risks and over time remuneration, and both ASIC and APRA will have a much more litigious approach to enforcement.  Boards should take immediate steps to assess their culture, governance and remuneration practices and to implement recommendation 5.6 without waiting for additional guidance from the regulators.