Directors not responsible for org. culture? That’s barbaric …

  • Mike Sullivan
  • Legal

RECENT media statements by senior company directors distancing themselves from ‘toxic’ corporate cultures within the organisations they govern – examples include the 7Eleven staff underpayment inquiry and Commonwealth Bank’s insurance revelations – have come under heavy attack from Australia’s The Ethics Centre.

The Ethics Centre executive director, Simon Longstaff, said the “disgraceful” views of a number of senior company directors, who are excusing themselves and instead attacking the Australian Securities and Investments Commission (ASIC)  for  “suggesting that company directors might, in some circumstances, be held liable if a pernicious corporate culture is directly linked to wrong-doing”. 

“That they should adopt this aggressive stance against responsibility, especially in the wake of a growing number of corporate scandals, is quite remarkable,” Dr Longstaff said.

“After all, shareholders enjoy the privilege of limited liability only because they have delegated, to boards, the power to direct the affairs of companies. If company directors are not ultimately responsible for the most important factor in shaping the conduct of a corporation – culture – then who is?

“Do these few, influential directors want the liability to fall back on shareholders? Or do they think that nobody should be held to account?”

Dr Longstaff pointed out that the character of a corporation’s culture has been a feature of Australia’s criminal law since 1996.

“That is, the concept of corporate culture has been a defined legal term for twenty years. Not once, in all of that time, has a company director expressed public concern,” Dr Longstaff said.

“Indeed, the alarm was only raised after ASIC proposed, in quite general terms, that the ‘culture provisions’ of the Commonwealth Criminal Code Act should be extended to encompass the Corporations Law. Only then did company directors start to pay attention to legal concepts that they had happily ignored (or lived with in blissful ignorance) for two decades.

“ASIC has been accused of trying to specify a blue print for corporate culture. That accusation has no foundation.

“Like APRA has already done, in its risk culture standard CPS220, ASIC was merely flagging its intention that company director should be clear and explicit about the character of the corporate culture that they intend to see established – and that they should monitor and remediate any gaps between the ideal culture (as specified by the board – not ASIC) and the actual culture as ‘lived’ and experienced.”

Dr Longstaff posed the question: Why does this matter so much?

“The ‘culture provisions’ of the 1996 law were enacted for a very good reason,” he said. “Up until then, Australian companies had been able to hide behind formal systems of compliance in which all of the boxes had been ‘ticked’. Meanwhile, the culture would either be indifferent to – or encouraging of – illegal conduct.

“That is when bad things happen – and no amount of regulation and surveillance can prevent the harm that follows.

“The worst of this is that ASIC has not been given the chance to develop its proposals. For example, it is likely that directors would only be held liable if recklessly indifferent to the culture of a corporation or if actively encouraging a culture of non-compliance – as they should be,” Dr Longstaff said.

““This is especially worrying as all of the tools needed for the accurate measurement and assessment of corporate culture are well-developed and in use.

“Fortunately, the Australian Institute of Company Directors (AICD) has recognised the central role that directors must play in setting the foundations for and in monitoring the corporate culture developed by management. Thank heavens for that!”


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