IMPRESSIONS MAGAZINE

Issue No.2-2018

by Christine Williams

A group of eleven – mostly former economists, educators, unionists and bureaucrats – have suggested a more trustworthy way forward. Their proposal addresses the commentary on malpractices, and offers an alternative corporate culture for the industry. It would be based on financial corporations taking account of the interests of consumers, employees and the wider society, rather than merely managers and shareholders.

Banking Royal Commissioner Kenneth Hayne

Submission to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry

We, the undersigned, are Australian citizens with decades of experience in many industries at the national and international level who believe this country needs better corporate governance to protect, foster and sustain our society and the environment. We believe a ‘new corporate culture’ can be achieved through more appropriate corporate structures and more efficient company reporting that will deliver improved public benefits while protecting profitability.

 

This Royal Commission has amply demonstrated there are fundamental flaws in the culture of many corporations operating in Australia including some of our most revered and trusted institutions in the banking, superannuation and financial services sectors. There is little doubt these flaws also extend to other industry sectors which would also benefit from governance reform.

 

With regard to the Terms of reference of the Royal Commission we believe that, at the very least, the evidence presented to the Royal Commission to date, clearly meets the requirements of paragraph d):

 

d) “whether any findings in respect of the matters mentioned in paragraphs a), b) and c):

 

(i) are attributable to the particular culture and governance practices of a financial services entity or broader cultural or governance practices in the relevant industry or relevant subsector; or

 

(ii) result from other practices, including risk management, recruitment and remuneration practices, of a financial services entity, or in the relevant industry or relevant subsector”

 

Since the nineteenth century corporations have been granted legislative protection through limited liability and perpetual succession but there is no requirement for any societal quid pro quo. This largesse promoted better access to capital and provided shareholder protection but sadly economic growth and company prosperity has been sometimes accompanied by malfeasance, corruption and detrimental impacts on customers, stakeholders and the community.

 

While some corporations take their social responsibilities seriously, most are still focussed on profit alone. This ‘Shareholder primacy’ focus leads to a drive to maximise short-term profits and extravagant performance-based executive remuneration. It has given rise to a short-term corporate focus that has encouraged and rewarded unethical behaviour at the expense of long-term corporate wellbeing and community trust.

Corporations that take a ‘stakeholder primacy’1 approach have demonstrated time and again that on financial indicators they outperform other companies in their target market and in the wider investment environment. Companies with a focus on ‘public good’ or ‘public benefit’ as well as profits, yield superior performance across all the accepted indices2 . Stakeholder primacy means recognising a range of stakeholders and interests including corporation workers, the community, customers, suppliers, government, the environment as well as shareholders.

 

We believe that the draft definition of “a social licence” put forward by the ASX which was vigorously opposed by business leaders including from many of the very industries whose gross lapses in governance have been exposed by the Commission. Despite these objections that definition is a necessary but not sufficient step towards protecting society from the ulterior aims and ambitions of companies solely driven by shareholder interest.

 

“Preserving an entity’s social licence to operate requires the board and management of a listed entity to have regard to the views and interests of a broader range of stakeholders than just its security holders, including employees, customers, suppliers, creditors, regulators, consumers, taxpayers and the local communities in which it operates. “Long-term and sustainable value creation is founded on the trust a listed entity has earned from these different stakeholders. Security holders understand this and expect boards and management to engage with these stakeholders and to be, and be seen to be, ‘good corporate citizens’.”3

We believe a more prescriptive approach is required to bring the general governance arrangements for all corporations operating in Australia to a more socially responsive model.

New Corporate Governance Models

1. A more holistic governance model must recognize all stakeholder needs and must have measurable outputs to allow relative performance to be compared. Regular reporting of corporate performance on standard parameters is essential. “Integrated Reporting” provides a global standard for corporate reporting that is being adopted by large corporations and government agencies in over sixty countries. It requires comprehensive and auditable triple bottom line reporting but does not demand any change to existing corporate structures. Better reporting provides the mechanism for existing corporate performance to be comprehensively scrutinized and critically appraised to encourage improvements to current governance practices.4 An integrated report is a concise communication about how an organization’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value in the short, medium and long term.5

We believe that ASIC would be a logical organisation to perform their role of stringent requirements

2. “B Corps” are an alternative approach. They are corporations which seek and obtain certification against a range of criteria dealing with stakeholder interests and must maintain that assessment to retain certification. They operate under normal corporation law. B Corps are assessed by B Lab. B Lab is a “nonprofit that serves a global movement of people using business as a force for good. B Lab’s initiatives include B Corp Certification, administration.” 6

 

There are already thousands of B Corps in North and South America, Africa and Europe, Japan, New Zealand and Australia where voluntary certification is provided by an independent third party against agreed standards taking into account the interests of all stakeholders (see Attachment for the categories covered in the B Lab assessment). Two Australian B Corps have been assessed by B Lab as Best for the World. Note the attribution: “Best FOR the World”, not “best in the world”! BCorps are benefit corporations without the protection of statute.

 

3. Another initiative “Benefit Corporations” are created under statute and codify the triple-bottom-line principles of ‘people, planet and profit’ in the corporation’s governing documents. Corporations are enabled to voluntarily seek registration under that law, again subject to external auditing. The model US legislation defines ‘general public benefit’ as:

 

benefit corporations will have a ‘material positive impact on society and the environment, taken as a whole, as assessed against a third-party standard, from the business and operations of a benefit corporation.7

 

Already a number of countries have begun legislating for Benefit Corporations. Some countries use different terms. In Britain legislation has been enacted for philanthropic organisations termed Community Interest Corporations.8 In the US some 35 States and DC have legislated to enable registration of benefit corporations, as has Italy. Argentina, Brazil, Colombia, Canada, Chile, Portugal and Taiwan have legislation under consideration.

 

A critical matter in proving the value of Benefit Corporations and B Corps is oversight. Given the failure of many multi-national auditing corporations to adequately assess corporate culture and actions there should be stringent requirements for any auditing body. We believe that ASIC would be a logical organisation to perform this role. 4 The voluntary “Corporate Social Responsibility” (CSR) concept has been adopted by some corporations into their ‘visions’ or ‘missions’, but delivery on a national level has been poor. A more robust imperative by government is needed to ensure corporate social responsibilities are addressed and companies are publicly accountable for their broader societal and environmental impacts.

Benefit corporations will have a 'material positive imact on society and the environment'

Recommendations

The Royal Commission should recognise the failings of the current legislative framework for corporate governance as has been demonstrated by the evidence before it and call upon the Government to:

• Introduce legislation by mid 2019 to provide for Benefit Corporations based on the US model.

• Introduce legislation requiring integrated reporting by all corporations operating in Australia with ASIC given the power and responsibility to audit compliance.

• Empower ASIC to require all corporations to report annually to agreed comprehensive international standards incorporating social and environmental performance measures as outlined in the governance model 1 above and to audit same.

• Until the passage of legislation enabling benefit corporations direct ASIC to actively promote B Corps as a way to encourage socially responsible corporate governance.

 

Submitted by:

 

Phil Drew, 52 Cromwell St, Leichhardt, NSW 2040. 0417 263 947, phildrew1941@gmail.com

Michael Johnston, 4 Dover St, Summer Hill, NSW 2130, 0417 552 336, majkam@bigpond.net. au

Derk Sweringa, 7 Geerilong Gardens, Reid, ACT 2612, 0418 633 315, derk.swieringa@gmail. com

Warwick McDonald, 50/127 Cook Road, Centennial Park, NSW 2021, 0414 882 584, warwickmcdonald@ozemail.com.au

Peter Bartos, 6 Waratah St, Freshwater, NSW 2096, 0402 477 511, peterbartos@bigpond.com

Neil Watson, 2/23-25 Cook St, Glebe, 0418 332 570, nwatson@netspace.net.au

Mike Newman, 5/99 Marriott St, Redfern, NSW, 2016, 0413 755 363, tilternewman@gmail. com

Glenn Holdstock, 31 Edward Street, Summer Hill, NSW 2130, 0429 440 329, g.holdstock@bigpond.com

Alex Lofts, 27 Kensington Rd, Summer Hill, NSW 2130, 0401 142 756, the.lofts@bigpond.com

Brian Cobb. 10/154 Beach St, Coogee, NSW 2034, 0407 497 257, bgcobb1@gmail.com

John Diplock, 63 Henson St, Summer Hill, NSW 2130, 0419 550245 john.diplock@bigpond. com

Stakeholders have been defined as members of the “groups without whose support the organization would cease to exist”. Freeman, R. Edward; Reed, David L. (1983). “Stockholders and Stakeholders: A new perspective on Corporate Governance” (PDF). 2 Update to members on ASX Corporate Governance Council Principles and Recommendations https://aicd.companydirectors.com.au/membership/the-boardroom-report/volume-16-issue-8/update-to-members-on-asx-corporate-governance-council-principles-and-recommendations 3 Update to members on ASX Corporate Governance Council Principles and Recommendations https://aicd.companydirectors.com.au/membership/the-boardroom-report/volume-16-issue-8/update-to-members-on-asx-corporate-governance-council-principles-and-recommendations 4 Jane Diplock, Holistic or Integrated Thinking: Thinking for the 21st century http://www.sustainabilitymatters.co.nz/ wp-content/uploads/2018/08/Jane-Diplock_Holistic-or-Integrated-Thinking-for-the-21st-Century_CA-ANZ_2018_07_19_ Edited.pdf 5 Integrated Reporting , http://integratedreporting.org 6 About B Lab https://bcorporation.net/about-b-lab 7 Model Benefit Corporation Legislation 2013 s 102, available at http://benefitcorp.net/sites/default/files/documents/Model_Benefit_Corp_Legislation.pdf . 8 There are already more than 14,000 such community interest corporations according to the CIC Annual report.

References

United States

Model Benefit Corporation Legislation (US) http://benefitcorp.net/sites/default/files/documents/Model_Benefit_Corp_Legislation.pdf Certified B Corps and Benefit Corporations https://www.bcorporation.net/what-are-b-corps/certified-b-corps-and-benefit-corporations Mastering the Benefit Corporation (Lawyerly description of how to do it) https://www.americanbar.org/publications/blt/2016/07/02_montgomery.html Benefit Corporations in the United States and Community Interest Companies in the United Kingdom: Does Social Enterprise Actually Work? Michelle Cho Northwestern Journal of International Law & Business, Winter 2017 https://scholarlycommons.law.northwestern.edu/cgi/viewcontent.cgi?referer=https://www.google.com.au/&httpsredir=1&article=1808&context=njilb Small Business B Corp Basics: Requirements & Costs https://humaninterest.com/blog/small-business-b-corp-basics-requirements-costs/ B Corps & Benefit Corporations: Understanding the implications for companies and investors https://static1.squarespace.com/static/5143211de4b038607dd318cb/t/5923fc459de4bb42e1ea118b/1495530609724/ B+Corps+Report+v7-anonymised-companies-no-danone.pdf Financial performance of Benefit Corporations https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=3&cad=rja&uact=8&ved=2ahUKEwjyt_Xm9pPdAhXHQd4KHf6XAm0QFjACegQIBxAC&url=https%3A%2F%2Fthesis.eur.nl%2Fpub%2F33796%2FMA817-Stiphout-van-327670.pdf&usg=AOvVaw0ciirWwAewEBtczy_1_2q3

 

Italy

The First European Benefit Corporation: blurring the lines between ‘social’ and ‘business’ https://www.bwbllp.com/file/benefit-corporation-article-june-16-pdf Australia Social Impact Hub http://www.socialimpacthub.org ProBono

 

Australian

B Corps on Top of the World https://probonoaustralia.com.au/news/2015/04/australian-b-corps-on-top-of-the-world/ Benefit corporations: A sophisticated and worthy reform https://www.dropbox.com/s/kba6l7ga8xdw7ws/Benefit_corporations_worthy_reform_February_2016.pdf?dl=0 B Lab, The Non-Profit Behind B Corps http://bcorporation.com.au/what-are-b-corps/the-non-profit-behind-b-corps-au (See Appendix for the range of criteria assessed). Criteria considered in B Lab assessment form, below. Where to find Australian B Corps https://www.google.com/maps/d/viewer?mid=194UxsI3knKso4OUpofbsd5hyzdY&ll=-33.90253545273913%2C151.226 98649093036&z=14

 

UK

Companies (Audit, Investigations and Community Enterprise) Act 2004 - which created CICs - and the Community Interest Company Regulations 2005, which regulates them. The Community Interest Company (Amendment) Regulations 2009 https://www.communitycompanies.co.uk/cic-and-other-legislation Regulator of Community Interest Companies Annual Report 2017 - 2018. https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/727053/cic-18-6-community-interest-companies-annual-report-2017-2018.pdf 2016 Q3 Research B Corporation Benefits? The impact of B Corporation certification on organisations’ performance and growth http://www.tsiconsultancy.com/wp-content/uploads/2016/01/TSIC-B-Corp-Research-Final.pdf

 

Attachment

 

Criteria considered in B Lab assessment form Corporate accountability Mission and Engagement Governance Anti-corruption Transparency Governance metrics Workers Metrics Compensation and wages

 

Worker Benefits Training and education Worker Ownership

 

Work environment

Management and worker communication

Job Flexibility/Corporate culture

Community

Community metrics

Suppliers &Distributors Diversity Civic engagement and giving

Environment

Environment metrics

Land, Office, Plant

Inputs

Outputs

 

Socially and Environmentally-focussed businesses

Governance business models

Social enterprise

 

Worker business models

Worker ownership

 

Community business model

Community and Products and services

Arts/Media Serving those in need Basic services Health Education Economic opportunity/Empowerment Flow of capital Community business models - Practices Workforce development Supply chain Local Producer cooperative’ Charitable giving Environment produces and services Renewable or cleaner-burning energy Energy and water efficiency Waste reduction Land and wild life conservation Toxic/hazardous substance reduction. pollution prevention and remediation Education, measurement and consulting Disclosure questionnaire Industries Practices Outcomes Penalties

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