Culture Shock

Greg Medcraft, the Chairman of the Australian Securities and Investments Commission (ASIC), in a recent speech reiterated ASIC’s focus on the importance of culture within corporate organisations.

In a previous blog, Organisational culture: ASIC's renewed focus, we discussed Commissioner, Greg Tanzer’s, earlier speech on the importance of organisational culture, and hinting at a renewed emphasis by ASIC to target poor culture.  Mr Medcraft has now re-affirmed ASIC’s targeted focus.

Regulatory intervention

Mr Medcraft acknowledges that culture cannot be regulated with black letter law.  Instead, it will be incorporated into ASIC’s risk based surveillance reviews.

Coinciding with his speech, ASIC also released ASIC report 474, which focuses on corporate culture within the funds management industry.  The report pinpoints several indicators of culture which will likely be at the forefront in ASIC’s surveillance.  ASIC notes that, while the indicators are not necessarily indicative of poor conduct, they may be suggestive of circumstances when ASIC may intervene.  These indicators include:

• the tone from the CEO, board and senior management
• whether that ‘tone’ spreads through the organisation
• how the ‘tone’ translates to business practices
• is there accountability for actions?
• is there open communication and effective challenge of practices, procedures and messaging?
• are conflict management policies supported by recruitment, training and remuneration?
• what is the governance framework?

Potential consequences of bad corporate culture

Section 12.2 of the Criminal Code 1995 (Cth) has already established the possibility for an offence by an employee to also be attributed to the ‘employer’ body corporate, and Mr Medcraft has previously suggested that this may apply if corporate culture encouraged or tolerated the relevant offence.

Now, however, the Government has also agreed to introduce legislation giving ASIC powers to ban individuals from managing financial firms.  Mr Medcraft has stated his intent for this power to be used to remove people from the industry where they were responsible for poor culture.  ASIC are also pushing for the introduction of civil penalties to be considered.

Customer regulation

It was not coincidental that his speech also discussed digital technology, which extended not only to talk about cyber attack risks, but also what he dubbed as ‘customer regulation’.

Corporate culture is no longer secretive.  The sheer volume of information available to the public makes companies directly accountable to the market, with social media and other technologies giving customers a platform to make their opinions and experiences heard.  In part, customers regulate businesses by hearing the experiences of others and voting with their feet, which may alleviate ASIC’s need to exercise its regulatory powers to enforce cultural compliance.

What does ASIC recommend?

Mr Medcraft discussed ‘three Cs’ in the promotion of good corporate culture - effective communication, encouraging challenge and guarding against complacency.  He also specified other possibilities for improving culture which included:

• independent peer panels to review companies
• implementing adequate Whistleblower policies, and
• ensuring individual and corporate accountability.

These elements, along with the indicators identified in ASIC report 474, should be considered when aligning a company with what ASIC defines as a ‘customer first’ culture.

There are certainly some strong views in the market for the ability to regulate corporate culture and, from a legal perspective, it is certainly a difficult area to regulate and take potential enforcement action.  However, ASIC has clearly indicated it will continue its surveillance in this area over the coming year.  Amidst criticism towards their ‘cultural crusade’, Mr Medcraft stated that they will not be looking over a company’s shoulder to test their culture.  However, if the proposed new powers are given to ASIC and cultural issues are not remedied internally by corporations, ASIC may soon have more explicit powers to intervene.