The 2018 Australian Royal Commission into Banking and other financial services has revealed how good people are blind to the ethical conflicts systemically embedded in our most powerful institutions.
Evidence of systemic ethical blindness and/or irresponsibility is that the Chief Executive Officers of the largest banks in the country supported holding of the Royal Commission “to restore public faith”in the banks. But evidence from the Royal Commission created public outrage from the revealed misconduct, cover-ups, denials and malfeasance. Either the responsible CEO’s were not aware of such conduct and/or they did not know it was wrong.
Cultural denial of what is right and what is wrong
The problem of knowing what is right and what is wrong has been compounded by the double speak describing unethical conflicts of interest that are systematically imbedded in Australian institutions. They are described as “good governance” or “best practice”!
The depth and breadth of the unconscionable conflicts of interest in the Australian business culture is illustrated by the membership of Australian Securities Exchange (ASX) Corporate Governance Council. It has twenty member bodies. They include the professional bodies representing lawyers, auditors, directors and regulators.
A basic requirement of sound business practice is to know with whom you are dealing. Lenders and financial advisers also need to know the circumstances of their clients. However, the ASX denies either type of data to be revealed to any prospective investor, securities trader, short seller, hedge fund, superannuation fund, foreign speculator, persons with inside information on the securities being traded including directors and major shareholders of the company whose shares are being traded. The pricing of shares can very much depend upon the identity of the buyer or seller. When share trading began in coffee houses people would know each other. “Sunlight” trading was the normal way of doing business.
The Australian Securities and Investment Commission (ASIC) is irresponsible in licensing the ASX to operate a public exchange that allows its member brokers and other insiders to trade covertly against the interest of their clients. It is ingenious for the ASX to claim privacy considerations should protect their private convert profits arising from their ASIC licence to operate a public exchange.
In 1971 the author was a member of an investment syndicate that held shares and contracts to purchases 55% of the issued shares of Antimony Nickel NL. The Directors of the company also claimed ownership of 55% of the shares! Most of the excess 10% of the shares sold “short” by speculators, who did not own shares, were members of the Stock Exchange Committee who made the rules of how shares could be traded. To avoid personal losses they changed the rules.
Removing covert capitalism
Since 1971, the ASX has become profoundly conflicted by trading its own shares on its own exchange. While only 4,336 US firms were publicly traded in 2017, the number of firms that traded their own shares exceeded this number from possessing employee share ownership plans. The National Association of Securities Dealers Automated Quotations (NASDAQ) is the second largest exchange in the world by market capitalisation has no physical location. The Internet makes it practical for any firm to publicly trade its own shares. An ethical ASIC could licence self-regulating ethical firms to trade their own shares on the basis that sunlight trading was established.
Sunlight share trading would allow directors of firms to learn, to whom they are accountable. The public would in turn learn the identities of the ultimate owners and/or controllers of securities who were not holding their directors to account. The author was required to provide such disclosure to the US regulator about his investment syndicate in 1974. This arose when he was organising a public offer to acquire the shares of a US publicly traded company that owned six seats on the New York Stock Exchange.
Sunlight share trading by any firm would eliminate the need for stock exchanges to exist. This would eliminate substantial transaction costs. It would greatly improve the efficiency of the securities industry as well as exposing unethical transactions.
Unethical practice described as “good” or ignored
The ASX Corporate Governance Principles (CGPs) do not recognize the unethical conflicts arising from external auditors being nominated, controlled and remunerated by the directors whose accounts the auditor is required to judge. Australian law judges would excuse themselves from undertaking a judgment under these conditions. Yet the CGP recommend this unethical practice that creates a conflict of interest for both the auditor and the directors. If any readers do not understand how both parties can act unethically at the same time than think about a giver of bribe and the taker of bribe.
To avoid such systemic conflict of interest, the UK Company Act of 1862 provided a non-binding model constitution for shareholders to form an audit committee rather than the directors as is now practiced. This approach applies in some European jurisdictions. While the CGPs apply on a “comply or explain basis”, the Australian Prudential Regulatory Authority (APRA) has required Australian financial institutions to adopt the unethical practice of directors forming an audit committee. This helps explain the ethical blindness of the Australian financial services industry.
Another source of ethical blindness arises from the CGPs ignoring the conflicts of interests that arise when a director chairs, and so controls the conduct of an Annual General Meeting at which directors are being held to account. This problem is systemic in Australia because the ASX accepts the listing of corporations who have this unethical relationship specified in their constitutions. This conflict does not occur in some European jurisdictions. It makes it difficult to hold directors to account when a director controls the meeting agenda, where and when to hold the meeting, who can speak and for how long, how undirected proxies are voted, deciding which votes are eligible, and counting the votes.
The ASX, ASIC and/or APRA already possess sufficient power to remove all such systemic conflicts by adopting the proposal put forward by Australian Senator Andrew Murray. His proposal was to simplify the role and duties of directors by shareholders changing corporate constitutions to create a Corporate Governance Board (CGB). The CGB would control the conduct of AGMs and take on the roles of audit, remuneration and nomination committees that would otherwise introduce systemic conflicts for the directors involved. As shown by shareholder agreements with Venture Capitalists, there is not operational reason why directors should be systemically conflicted and over worked by possessing both the power to manage a business and govern its corporation.
Professional education reinforces ethical blindness
Evidence of the source of Australian ethical blindness is provided by the professional educational courses provided by a number of 20 members who constitute the ASX Corporate Governance Council. They are all implicated by being members of the council. While those that deliver educational courses may consider conflicts of interest in general, there appears to be none that identifies the systemic conflicts discussed above. Such omissions may not be willful but arise from a business culture that cannot tell the difference between what is right, or what is wrong. A problem identified by The Hon Justice Neville Owen who presided over the Royal Commission into the failure of HIH in 2002.
During the eight years from 1967 to 1974 I became the chair and/or CEO of some of the eight publicly traded firms our investment syndicate acquired and re-organized. This experience led me to form the view that if you did not identify mismanagement, misconduct and/or misappropriations after becoming an uninvited director, then you had not been looking. To counter this systemic problem I suggested in 1971 that there should be an education qualification for company directors. We launched the first such course in the world in 1975. But after I was retired from being a co-author, my section of the course was removed that identified systemic conflicts and how to avoid them.
If the knowledge of what is right and what is wrong is not part of professional education, then the efficacy of any changes that may be suggested by the Royal Commission are likely to become academic. A fundamental condition for obtaining lasting value for money from the Royal Commission is to require practitioners to become educated as to what is right.