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Why are good people blind to unethical institutions?

By Shann Turnbull - posted Thursday, 8 November 2018


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.

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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.

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About the Author

Dr Shann Turnbull BSc (Melb); MBA (Harvard) is the Principal of the International Institute for Self-governance based in Sydney and a co-founding member of the Sustainable Money Working Group established in the UK. He is a founding life Fellow of the Australian Institute of Company Directors, Senior Fellow of the Financial Services Institute of Australasia, Fellow of the Governance Institute of Australia and Fellow of the Australian Institute of Management. He co-authored in 1975 the first course in the world to provide company directors an educational qualification and wrote Democratising the Wealth of Nations. His bibliography reveals he is a prolific author on reforming the theories and practices of capitalism.

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