The internal autonomy of the firm

ABSTRACT

Banks and financial institutions have been excoriated in recent years for having bad firm cultures. However, when faced with the prospect of regulation of the culture of their organisation, banks and financial institutions frequently claim that their internal organisation should be free from outside interference – that they should be autonomous. Government reports echo this claim. This article interrogates it. The article suggests that such claims rest on political liberalism, economic theory or legal impossibility. On examination, none of these bases survives as unassailable although they are conceded to have seized the debate. From this point, the essay moves to consider how the policy debate might be reconceived to make a more sophisticated discussion possible.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes on contributors

David Wishart is Associate Professor at the Law School, La Trobe University.

Ann Wardrop is Senior Lecturer at the Law School, La Trobe University.

Marilyn McMahon is Associate Professor at the Law School, Deakin University.

ORCID

David Wishart http://orcid.org/0000-0003-2281-4745

Notes

1 This article takes account of events and debates up and until 15 June 2018. Much more is scheduled to be dealt by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry in coming months and so matters will probably still dominate the news. However, we do not think there will be a substantial change in the positions taken by interest groups or by the regulators and it is with these that we are concerned.

2 Royal Commission Transcript, 23 April 2018.

3 Royal Commission Transcript, 19 April 2018.

4 Royal Commission Transcript, 27 April 2018.

5 AUSTRAC (2017).

6 ASIC (2017a); ASIC (2016, 2018).

7 Royal Commission Transcript, 19 March 2018. The Commonwealth Bank sold credit card insurance to customers who were unemployed, on disability benefits, pensioners and students. To be eligible to make a claim under the policies the insured had to be working more than 15 hours a week, see ‘Commonwealth Bank’s junk insurance scandal is as bad as Matt Comyn predicted’ Financial Review 19 March 2018 (online) https://www.afr.com/brand/chanticleer/commonwealth-banks-junk-insurance-scandal-is-as-bad-matt-comyn-predicted-20180319-h0xogl.

8 See also APRA (2016); Parliament of Australia; Senate References Committee (2017). Ferguson and Williams (2015); Australia and New Zealand Banking Group Ltd, ‘ANZ to Reimburse Prime Access Clients after Review Identifies Documented Annual Review Not Provided’ (Media Release, 16 April 2015); Australian Securities and Investments Commission (2013); ASIC (2017b); ABN AMRO Bank NV v Bathurst Regional Council (2014) 224 FCR 1; [2014] FCAFC 65; Wardrop (2014a)

9 APRA (2018).

10 Reports on such scandals include: The Financial Crisis Inquiry Commission (2011) (US); Parliamentary Commission on Banking Standards, Changing Banking for Good (2013) (UK); The Group of Thirty (2015) (lots of countries). See also Glazer (2016).

11 Morrison (2017).

12 Parliament of Australia, House of Representatives Standing Committee on Economics, Review of the Four Major Banks: First Report, November 2016.

13 Rhodes (2017).

14 Treasury Law Amendment (Banking Executive Accountability and Related Measures) Act 2018 (Cth).

15 AUSTRAC 2017. On 4 June 2018 an agreement between AUSTRAC and the Commonwealth Bank was announced to resolve the Federal Court Proceedings. The CBA agreed to pay $700 million as a penalty. Whether the Court will approve is not certain as yet.

16 Prime Minister and Treasurer, Media Release 30 November 2017.

17 Treasury (2017).

18 Australian Government (2018).

19 Distinguish this purpose from that of, say, Tomasic (2014) where the reality of corporate autonomy is discussed. Here it is a matter of whether and to what extent an argument is cogent is assessed, there it is a matter of determining what the present situation is.

20 Hurst (1970).

21 Constituted by the Australian Prudential Regulation Authority Act 1988 (Cth).

22 Constituted by the Australian Securities and Investments Commission Act 2001 (Cth)

23 Corporations Amendment (Future of Financial Advice) Act 2012 (Cth) and Corporations Amendment (Further Future of Financial Advice Measures) Act 2012(Cth).

24 In Wardrop Wishart and McMahon (2016) at p 173 we survey the field. A more recent list is provided by the authors in Wishart and Wardrop (2018).

25 For example, Australian Prudential Regulation Authority, Information Paper: Risk Culture, October 2016; Parliamentary Commission on Banking Standards, Changing Banking for Good, HM Parliament, London, 4 April 2013; Parliament of Australia, Senate Economics References Committee, ‘Lifting the fear and suppressing the greed’: Penalties for white collar crime and financial misconduct in Australia, 23 March 2017.

26 Irvine et al (2018). The suggestion was made by Alan Fels, ex-chair of the ACCC.; regarding the sell down, see Stephen Letts, ‘National Australia Bank to sell MLC as another bank flees wealth management’ 3 May 2018, ABC News (online) http://www.abc.net.au/news/2018-05-03/nab-offloading-mlc-$2.5b-half-year-profit/9720782.

27 Banking Act 1959 (Cth) s 37CA.

28 Banking Act 1959 (Cth) s 37F-FB.

29 Banking Act 1959 (Cth) s 37EB.

30 Banking Act 1959 (Cth) s 37J.

31 Banking Act 1959 (Cth) s 37C & 37G.

32 For further detail on the BEAR, see Wishart and Wardrop (2018).

33 Most often ‘firm’ is replaced by ‘corporate’ in this phrase. Companies and corporations, as well as human beings, are what the legal system recognises as the subject of regulation – the legal person: see, generally, Lowe (1987). It does not recognise the firm. There is no necessity in this but it has been so in Anglo-derived jurisdictions since 1612 and the Case of Sutton’s Hospital, (1612) 77 Eng. Rep. 960 (K.B.); 10 Co. Rep. 23 a. (see Wishart (2016)). Laws and regulation are aimed at legal persons because enforcement is through the legal system – this is discussed below. Supervision, on the other hand, need not have so determinate a subject. The discussion in the debate above is generally about firms: a bad financial institution is comprised of many different legal entities. Most legislation deals with this by aggregating a body corporate and its subsidiaries into a group; see, for example Banking Act 1959 (Cth) s 5(3).

34 Criminal Code Act 1995 (Cth) cl 12.3(6)

35 Tanzer (2015), pp 1–2, picking up Edward Schein’s definition out of organisational psychology Schein (2004), p 34:

The pattern of shared basic assumptions that was learned by a group as it solved its problems of external adaptation and internal integration, that has worked well enough to be considered valid and, therefore, to be taught to new members as the correct way you perceive, think, and feel in relation to those problems.

36 See Wardrop et al (2016) 173.

37 APRA (2018).

38 While even passing acquaintance with the literature on banking scandals would support the assertion that the events recounted here are typical, a very recent empirical study reinforces the notion of the unity of the business sector in its support for the financial sector and that this persists across jurisdictions. The implication is that focussed advocacy increases political power. See Young and Pagliari (2017).

39 See Bill Shorten’s Media Release ‘Royal Commission into the Banking and Financial Services Sector http://www.billshorten.com.au/royal_commission_into_the_banking_and_financial_services_sector.

40 Parliament of Australia, House of Representatives Standing Committee on Economics, Review of the Four Major Banks: First Report, November 2016.

41 See the Announcement of a taskforce to review the enforcement regime of ASIC by the Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer: http://kmo.ministers.treasury.gov.au/media-release/095-2016/ (accessed 11 May 2018)B.

42 Parliament of Australia, House of Representatives Standing Committee on Economics, Review of the Four Major Banks: First Report, November 2016, p 96.

43 The Hansard of the Hearings of the Standing Committee on Economics Annual Review of Australia’s Four Banks is for 4–6 October 2016.

44 Medcraft (2015); McConnell (2015). What the regulators actually do in this space is discussed in Wardrop et al (2016).

45 Kofman (2016); Colvin and Argent (2016).

46 Australian Prudential Regulation Authority, Information Paper: Risk Culture, October 2016 available at http://www.apra.gov.au/CrossIndustry/Documents/161018-Information-Paper-Risk-Culture.pdf, p 5.

47 McIlroy et al (2016).

48 Parliament of Australia, Senate Economics References Committee (2014).

49 See the Announcement of a taskforce to review the enforcement regime of ASIC by the Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer: http://kmo.ministers.treasury.gov.au/media-release/095-2016/ (accessed 11 May 2018).

50 See Wardrop et al (2016).

51 See, for example, Australian Prudential Regulation Authority, Information Paper: Risk Culture, October 2016 and to a lesser extent Parliamentary Commission on Banking Standards, Changing Banking for Good (HM Parliament, London, 4 April 2013).

52 Financial System Inquiry, Financial System Inquiry Final Report (Commonwealth of Australia, 2014), pp 6–7.

53 Loussikian (2016).

54 APRA, Prudential Inquiry into the Commonwealth Bank of Australia, 30 April 2018, p 5.

55 APRA, Prudential Inquiry into the Commonwealth Bank of Australia, 30 April 2018, p 5.

56 G30, p 23.

57 G30, p 23.

58 G30, p 55. US spelling in original. Of course, this assertion is untenable from the viewpoint of criminal law – what else would its function be?

59 APRA Report, p 92, referring to the G30 report pp 15 and 54, although no page number is given.

60 Financial Stability Board, Guidance on Supervisory Interaction with Financial Institutions on Risk Culture. A Framework for Assessing Risk Culture (7 April 2014), p 4. ‘Note’ refers to footnote 11 in the in the Guidance.

61 For a discussion of this struggle in Anglo-derived jurisdictions, see Wishart (2010).

62 See Stoljar (1973).

63 Dworkin (1986), p 193; see Berns (1991).

64 See Tomasic (2014).

65 Mill (1865), p 113. Thus Protocol 1, Article 1 of the European Convention protects the ‘right of a State to enforce such laws as it deems necessary to control the use of property’; compensation is generally thought sufficient justification – as it is for deprivation in the US Constitution and in the Australian Constitution (s 51(xxxi).

66 Locke (1690).

67 Blackstone (1765) vol II, bk II, ch 1, 2; Bentham (1843) vol 1 pt I ch VIII ‘Of Property’, 309a.

68 Universal Declaration of Human Rights, GA Res 217A (III), UN GAOR, 3rd Sess, 183rd Plen Mtg, UN Doc A/810 (10 December 1948).

69 ‘Member’ and ‘shareholder’ are in most respects synonyms. There is a slight difference in emphasis: member tends to refer to internal governance and ‘shareholder’ to the commodification of membership into a security tradeable on markets.

70 Borland’s Trustee v Steel Brothers & Co Ltd [1901] 1 Ch 279.

71 Peters’ American Delicacy Co Ltd v Heath (1939) 61 CLR 457; Ngurli Ltd v McCann (1953) 90 CLR 425.

72 Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722; Spies v R (2000) 201 CLR 603.

73 For an extended discussion of this, see Wishart (2013).

74 Thus Protocol 1, Article 1 of the European Convention protects the ‘right of a State to enforce such laws as it deems necessary to control the use of property’; compensation is generally thought sufficient justification – as it is for deprivation in the fifth Amendment to the US Constitution and in the Australian Constitution (s 51(xxxi)).

75 Thus, when APRA commissioned the inquiry into the Commonwealth Bank (APRA 2018), it emphasised (at seemingly every turn) the ‘prudential’ nature of the inquiry. The Inquiry was into the culture at the bank; to tread that path APRA felt it had to stress there was a reason to move into areas thought to be the province of the management. Certainly, APRA’s purpose is couched in terms of prudential regulation (APRA Act 1998 (Cth) s 8) and to this extent the emphasis is logical. However ASIC could have been tasked with the job.

76 Banking Act 1958 (Cth) ss 14A-16AA.

77 Bottomley (2007).

78 It is more accurate to say that Sir Ivor Jennings argued that this is the implication of Dicey’s doctrine of Parliamentary supremacy: (1959), p 170.

79 See a discussion of the similar situation of the public interest in the insolvency of utilities: Wardrop (2014b).

80 See, generally, Lowe (1987).

81 77 Eng. Rep. 960 (K.B.); 10 Co. Rep. 23a. See Wishart (2016).

82 Robertson (1923), p 85.

83 Coase (1937).

84 See Macneil (1978) and Williamson (1979).

85 Bratton (1989), p 465.

86 APRA (2016), pp 9–13.

87 APRA (2018).

88 Raaijmakers (2015).

89 Wardrop et al (2016), p 173.

90 Coase (1960).

91 This is in any, even bad, microeconomics text. For ease of access, this Wikipedia address sets it out: https://en.wikipedia.org/wiki/Microeconomics. That article has lots of links and the Wikipedia Economics portal is very good.

92 Committee of Inquiry into National Competition Policy (Fred Hilmer, Chairman), Commonwealth, National Competition Policy (1993), p 4.

93 It was the foundation of the National Competition Policy which has continued in one form or another to this day. See the intergovernmental agreement, Competition Principles Agreement, signed 11 April 1995; Council of Australian Governments (2012), ‘National Compact on Regulatory and Competition Reform’. Available at http://www.coag.gov.au/sites/default/files/Signed%20Compact.pdf (accessed 23 April 2014); Competition Policy Review Panel (Ian Harper, Chairman) (2015) Final Report, Commonwealth of Australia.

94 Parliamentary Commission Report (2013), 11.

95 Giddens (1998). Discussion of these ideas are well represented in Giddens (2001); Blair (1998).

96 Hofstadter (1967); Hovenkamp (1985); Scitovsky (1941) See also Monti (2007), p 4:

it is helpful to think about the factors that influence the shape of competition law and the decisions that stem from those rules on the basis of the interaction of three components: a political decision about the aims of competition law; and economic theory about how markets behave, how and when they fail, and how market failure may be remedied; and an institution in charge of enforcing competition law.

In the context of competition law, the benefits of competition are conceded to be subject to being balanced against the public benefit: Competition and Consumer Act 2010 (Cth) s 90. See also Nagarajan (2013) chs 3 and 4.

97 The concession is somewhat reluctantly made by the Hilmer Committee, who parade public choice theory to argue that much legislation is simply rent-seeking by interest groups in society: Hilmer Committee, above n 92, ch 9.

98 See n 10.

99 As was put to Commonwealth Parliament in 1962 by Sir Garfield Barwick in the speech which set out the approach to competition laws adopted ever since then, ‘The Government believes that practices which reduce competition may endanger those benefits which we properly expect and mostly enjoy from a free-enterprise society’: Freeth (1962), 3102.

100 Williamson (1979). See also P. G. Klein, 462.

101 Competition and Consumer Act 2010 (Cth) Part IV.

102 Enterprise Act 2002 (UK) Part 4 Chapter 1; US v AT&T 552 F.Supp. 131 (DDC 1982).

103 Wardrop Wishart and McMahon (2016).

104 Section 12.3. Corporate culture is defined as ‘an attitude, policy, rule, course of conduct or practice existing within the body corporate generally or in the part of the body corporate in which the relevant activities takes place’.

105 [1972] AC 153, 170.

106 See recent discussions such as Tomasic (2014); Langford and Ramsay (2017); Keay (2014) 5.

107 The regulatory compliance pyramid (or triangle) structures the approach of most Australian regulators. The seminal work is Ayres and Braithwaite (1992).

108 Thus for example, a body corporate and its subsidiaries may be aggregated into a group, as they are in the Banking Act 1959 (Cth) s 5(3) and for a variety of purposes in the Corporations Act 2001 (Cth) ss 46-50AAA. The latter Act also deploys the concept of control to construct a regulable firm: s 50AA.

109 Stoljar (1973), pp 179–180; see also Wishart (2013), pp 24–25.

110 See Welsh et al (2014); du Plessis (2003); or even Parker (2002).

111 Corporations Act 2001 (Cth) Part 5.8A,

112 Companies Act 2006 (UK) s 754; Corporations Act 2001 (Cth) 558–561.

113 Companies Act 2006 (UK) s 207; Corporations Act 2001 (Cth) ss 588G-V, 588FE, 1324(1A), Part 2 J; and a rare case law intervention in directors’ duties to creditors in, say, Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722;

114 (1847) I Ph 790, 41 ER 833.

115 In Automatic Self-Cleansing Filter Syndicate Co Ltd v Cunninghame [1906] 2 Ch 24 the English Court of Appeal allowed that a corporate constitution could create original power in various organs of the company rather than, as previously thought, power in a company inevitably flowed from the shareholders to management.

116 Beatty v E & F Beatty [1938] Ch D 708; Andy Kala Pty Ltd v E J Doherty Pty Ltd (1995) 13 ACLC 1630; Quin & Axtens Ltd v Salmon [1909] 1 Ch 714; Pender v Lushington (1877) 6 Ch D 70; MacDougall v Gardiner [1875] 1 Ch D 13; Kraus v J G Lloyd Pty Ltd [1965] VR 232 and, of course, the limited effect of provisions in UK companies’ articles: Companies Act 2006 (UK) s145.

117 Welling (1991), pp 52–73.

118 Peters American Delicacy v Heath (1939) 61 CLR 457; see also Re Smith & Fawcett [1942] Ch 402; Darvall v North Sydney Brick and Tile Co Ltd (1987) 16 NSWLR 212, Ngurli Ltd v McCann (1953) 90 CLR 425.

119 [2013] UKSC 34.

120 This is the usual way: see Wishart (2013).

121 APRA Report (2018), 96.

122 APRA Report (2018) ch 11.

123 Wishart and Wardrop 2018.

124 Enforceable Undertaking given by Commonwealth Bank of Australia Ltd, available at http://www.apra.gov.au/CrossIndustry/Documents/20180430-CBA-EU-Executed.pdf.

125 APRA 2018, p 3. Note also that the Report was expressed to be ‘prudential’ at every possible point. This is probably a reflection of APRA’s powers being statutorily constrained to prudential matters, which relate to systemic stability rather than corporate behaviour (*although if corporate behaviour is bad enough, it can impact on systemic stability.

126 Banking Act 1959 (Cth) s 18A.

127 Raaijmakers (2015) and see Wardrop et al (2016).

128 The Report (APRA 2018) sets out its methodology at pp 106–109 under the heading ‘Activities Undertaken by the Inquiry’. It refers to its ‘Inquiry Team’ without mentioning their qualifications or expertise. It also refers to Oliver Wyman, ‘a global management consultancy’. There is no reference to organisational psychology.

129 On the other hand, the cross disciplinary and detailed technical knowledge to fully explore the possibilities of regulation can be daunting: see Black (2013).

130 Julia Black provides masterly overviews: see Black (2013, 2002b).

131 Again turning to Julia Black’s work, Black (2002b), pp 9–10 lists the correction of market failure (the welfare economics approach), maybe a small distributional concern, regulating the risk society (which is not really a teleology), access to justice, legitimacy (which we deploy here), social justice itself, or the pragmatics of system maintenance (again, not a teleology for corporations). These are encompassed in this discussion as politics, economics and legitimacy.

132 Fraser (1998).

133 Giddens (1998, 2001). See also Cox (1995).

134 See Wishart (1999).

135 Bottomley (2007).

136 Parker (2002), p 248.

137 Hurst (1970).

138 (Aust) Economic References Committee, Commonwealth Senate, Competition within the Australian Banking Sector, May 2011, 70; (UK) Competition and Markets Authority, Making banks work harder for you, August 2016.

139 Lindblom (1959). See also the rejection of grand change in favour of focussed reform in Sparrow (2000).

140 Simeon (1976).

141 Black (2013).

142 In Blacks’ 2002 piece, ‘Critical Reflections on Regulation’ this use of her work is endorsed in a discussion of the debates over regulation of financial markets where she observes that in those debates there is consensus about techniques that should be considered as regulation but that there is less consensus on the particular normative goals that should be achieved in using such strategies’. She then goes on to describe the different normative goals but doesn’t come down on one or another (2002a), pp 9–10. In Black (2002b) she develops an ‘actor enrolment perspective’ to ‘enable(s) better navigation through the system itself, and through the questions of how it should develop’ (2002b), p 282, which is exactly how we would deploy her work.

143 See Morgan (2003).

144 Black (2003), p 436.