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We've looked to nature to consider how the latest royal commission will affect you. (You're the butterfly!)

Bully for Brontosaurus: How the financial royal commission affects you

By Chris Borthwick, Thinker-in-Residence, Our Community

 

Think of a smallish Australian not-for-profit - one of the 40% of NFPs with about $50,000 in assets. Imagine it as a single smallish butterfly - a Cabbage White, perhaps, weighing a quarter of a gram.

Think of a big Australian bank. Think of it as a 15 ton Brontosaurus (or, if you want to be picky, an Apatosaurus) wandering through the Jurassic forests feeding hungrily from the treetops.

That's about the weight ratio - one to sixty million - of one to the other. One is very big: the other is very small.

That being the case, it's not immediately obvious that Commissioner Hayne's report on the misdeeds of the big banks has any application to most Australian not-for-profits.

 

Few Australians, though, are accustomed to counting in trillions, and when a clamour arises for more regulation and greater accountability, they're not going to split hairs. However unfairly, both dinosaurs and butterflies are going to be expected to up their game.

And some general principles are invariant. The Commissioner was tasked with, among other things, reporting on "whether any conduct, practices, behaviour or business activities … fell below community standards and expectations" - and given the expectations that Australians have of their community groups, even a comparative butterfly might do that.

Let's look at a few of those principles.

  Community Directors Intelligence, Feb 2019

 

 

Financial services Royal Commissioner Kenneth Hayne.

Incentives matter

The Commissioner's main complaint, to be sure, was that the banks' despicable conduct was motivated by the pursuit of profit, and you might think that not having profits would keep the third sector pure. As he points out, though, the mechanism that drove the horrific incidents was that the organisation's profit coincided with the gain of the individual behind the desk. A warped system of incentives produced the kind of results that might have been - should have been - expected. The small fry were rewarded for sales growth, not for promoting the interests of the client, and they followed the money.

Not-for-profits sometimes assume that because the aim of the organisation is to do good, the aim of its workers is to do good. Well, yes; but it is also necessary for not-for-profits to pay their people, and it may be time to check what they're being paid for. Are their performance goals or promotion prospects keyed to the budget, or to their client feedback, or to their legal compliance? Where thy treasure is, there shall thy heart be also, as a much earlier ethics code specified.

Conflicts of interest matter

As the Commissioner writes, "[The laws] … speak of 'managing' conflicts of interest. But experience shows that conflicts between duty and interest can seldom be managed; self interest will almost always trump duty…. [An employee] who seeks to 'stand in more than one canoe' cannot."

The bar is being raised. Take note. Review your Conflicts of Interest register and ask yourself whether it's up to these fresh expectations.

Oh, and if there isn't an Australian not-for-profit devoted to promoting canoe-standing as an Olympic sport, there should be.

Regulation matters

The Commissioner says, "Misconduct will be deterred only if entities believe that misconduct will be detected, denounced and justly punished. Misconduct, especially misconduct that yields profit, is not deterred by requiring those who are found to have done wrong to do no more than pay compensation. And wrongdoing is not denounced by issuing a media release."

That's specifically addressed to ASIC and ACCC, who Haynes sees as soft.

He goes on to say of ASIC's enforcement culture, "…. it is well established that 'an unconditional preference for negotiated compliance renders an agency susceptible to capture' by those whom it is bound to regulate. As one leading American scholar has written, 'corporate behaviour moves quickly to take advantage of any perceived softening. Social norms act less upon complex organizations than upon individuals'."

The ACNC is certainly listening, however, and is noting that the community's tolerance for the gentle touch approach evaporates instantly whenever a scandal surfaces. I'd be surprised if it didn't get out the big stick more often than it has in the past. Take extra care not to do anything that might attract its attention.

Culture matters

ICDA has written before on the importance of promoting a healthy organisational culture. It's more important now than ever, because we're going to be looking over our shoulders more.

Commissioner Haynes says, "Effective leadership, good governance and appropriate culture within the entities are fundamentally important. And culture, governance and remuneration are closely connected. But it now must be accepted that regulators have an important role to play in supervision of these matters. Supervision must extend beyond financial risk to non-financial risk, and that requires attention to culture, governance and remuneration.

The Commissioner calls upon the finance sector to "assess, as often as reasonably possible, the entity's culture and governance, identify any problems, deal with them and determine whether the changes have been effective." It's not an unreasonable goal for NFPs, either.

And my last message, my little butterflies, is this: try not to have a brontosaurus tread on you. They are too big to fail, evidently; you are not.

More information

Full report: Royal Commission findings

Ethics Centres' Simon Longstaff: The world of loopholes has ended

Australian Financial Complaints Authority (AFCA) response: Finance disputes service reacts

ICDA Resources

Special reports: ICDA's resources around organisational culture

Finance focus: Selected financial sustainabilty help sheets and articles

Accountability: How your organisation can be more transparent, more effective

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