The level of public unease at the relationship between the corporation and society shows no sign of abating. Across the world, there is evidence of tension, suspicion and distrust, reawakening questions of political economy, distributive goals and purpose. A growing corruption scandal in Brazil involving the country’s most influential company, Petrobras, and its links to the incumbent president, has brought thousands onto the streets. In Europe, instability informs political discourse in countries as varied as Spain, Portugal, Greece and the Republic of Ireland. Distrust against the establishment informs both the Republican and Democratic primaries. The recent release of the Panama Papers raises questions of professional complicity in the design of sophisticated tax strategies that may (or may not) prove to cross the line between avoidance and evasion. Nevertheless, the outcry has forced the resignation of the Prime Minister of Iceland and the remarkable release of detailed financial information by his British counterpart. All of this suggests there is a fundamental problem with the underpinning social contract between business, intermediating professions and the societal good each pledges to uphold.
Corporations and professions are accorded a range of privileges by the communities in which they operate. These range from limited liability and easy incorporation; to monopolies in areas of professional practice; to government funding of some professional and corporate activities; to rights to resources; and, for some industries, like banking, invaluable government guarantees. The Global Financial Crisis and its aftermath, including widespread and systematic manipulation of financial benchmarks suggest not only structural but also cultural problems. Seen in this context, the financial scandals are not the result of a failed and failing culture but the triumph of a particular kind of culture, one that has deep ideational rather than rational roots. Given this baleful reality and rising public unease, it is inevitable that there be a questioning of whether these privileges are warranted and to what extent should society recalibrate the complex interaction between rules, principles and social norms?
Addressing these issues requires the contribution of legal regulation, ethical standard setting and institutional design (utilising the skills of political scientists, sociologists, lawyers, ethicists and economists as well as management theorists, practitioners and policymakers). The conundrum is, therefore, not only a pressing public policy but also a corporate priority. It is also fundamental to academic inquiry, across a range of disciplines. These include but are not limited to law, political science, philosophy and applied ethics, economics and management. As such, the agenda for change provides an unrivalled opportunity to build capacity to inform and influence debates on the balance between corporate rights, duties and opportunities.
As this journal has consistently argued, structural reform is insufficient to change the cultural settings of the finance sector and its governance. Equally, this journal has sought to advance an agenda based on evidence rather than political posturing. As such it has been supportive of the Fair and Effective Markets Review in the United Kingdom and its exhortation to industry to integrate a normative dimension to corporate mission that is other-regarding. Indeed, this integration has been pivotal to securities regulation from its outset, as detailed in the author’s biography of James Landis, the intellectual progenitor of the modern regulatory state.Footnote1 Landis always conceived the regulatory role as not being a policeman but as a beneficent facilitator of industry’s capacity to secure societal development, a view he also inculcated in a revision to the Harvard Law School teaching curriculum in terms of what constitutes professional obligation. For Landis what was required was not just the teaching of technical excellence but also the enculturation of the public interest; the social licence that informs professional obligation. As we have progressively moved from command and control regulation to market mores, legitimated by associational governance and actor network theory as well as law and economics, we have lost sight of that normative goal. As such we have been pauperised both intellectually and practically. It is to the enormous credit of the Governor of the Bank of England, Mark Carney, that he has placed the social licence to operate at the forefront of policy calibration in the United Kingdom and, crucially, through his leadership of the Financial Stability Board, international discourse.
Now for the first time, Carney’s agenda has received overt political backing. This has come in the unlikely form of a former Goldman Sachs investment banker (like Carney himself), who is now Prime Minister of Australia. Malcolm Turnbull used a high profile speech at the 199th anniversary of the establishment of Australia’s oldest surviving bank, Westpac, to castigate the nation’s cash starved but highly regarded banking sector for its myopic approach to social obligation. His remarks are worth reflecting at length.
Banks are indeed businesses but they are unlike any other. They are a fundamental pillar, a foundation, of our society and our economy. And they are based on trust … .We expect our bankers to have higher standards, we expect them always, rigorously, to put their customers’ interests first – to deal with their depositors and their borrowers, with those they advise and those with whom they transact in precisely the same way they would have them deal with themselves. And this is not idealism – this is what we expect and I know it’s what the leaders of Westpac expect. Because they know that banks don’t just operate under a banking licence, they operate under a social licence and that is underwritten by public confidence and trust.Footnote2
The Australian Prime Minister teased out the implications in the following key passage.
Wise bankers understand that banks need to very publicly demonstrate that their values of trust, integrity, placing the customer first in every way – these must be lived and not just spoke. They recognise that remuneration and promotion cannot any longer be based solely on direct financial contribution to the bottom line. Employees who live those values, impart them to others and call out those who do not should be rewarded and recognised and promoted in a healthy banking culture. The singular pursuit of an extra dollar of profit at the expense of those values is not simply wrong but it places at risk the whole social licence, the good name and reputation upon which great institutions depend.Footnote3
Malcolm Turnbull's speech was significant in two critical dimensions. First, for its timing and second for its signaling of a new policy discourse made available to but not taken up by the Financial System Inquiry, a review of the health of the system commissioned by Turnbull's predecessor, Tony Abbott.Footnote4 Although Australia did not face a systemic risk during the financial crisis there was abundant evidence of cultural problems across the sector. These include the mis-selling of complex financial instruments to councils and churches, resolved not by regulatory enforcement but the altogether blunter instrument of a class action and litigated, unusually to a judicial conclusion.Footnote5
Critically, from an international perspective they also include the recent enforcement action taken by the Australian Securities and Investments Commission against two of the big four banks, alleging manipulation of the Bank Bill Swap Rate, the most significant Australian financial benchmark.Footnote6 It is telling that the enforcement has caused outrage from the banking sector, including, most notably the author of the Financial System Inquiry, David Murray, himself a former chairman of the Commonwealth Bank of Australia (ensnared in its own cultural dystopia involving financial planning mismanagement, known at the time of compiling the FSI and a subsequent scandal involving its insurance subsidiary). These interlinked scandals have piqued the interest of ASIC, not surprisingly given its chairman’s concurrent role as chairman of the International Organisation of Securities Commissions, an integral component of the Financial Stability Board. IOSCO has made financial benchmark governance a cornerstone of its policy agenda.
ASIC had already secured settlements with no less than three international banks – UBS,Footnote7 BNP ParibasFootnote8 and RBS.Footnote9 Settling with Australian banks was much more problematic, especially given the sector's fear of subsequent class actions. Although proving direct financial loss linked to manipulation on the specific dates alleged by ASIC in its statement of claim might be hard to prove, it is known that a number of publicly listed litigation funders are circling. Indeed this risk was signaled to the FSI in advance of its publication of final report, not least because of settlement agreements reached with the Monetary Authority of Singapore by Macquarie and ANZ for manipulation of the SIBOR, the island state’s financial benchmark. All of this was downplayed or ignored. The myopia is coming back to haunt government and the credibility of the FSI itself alike. To be fair to Murray and his team, he labored under timescales and terms of reference set by the Government. Less acceptable is the assertion by Murray that the global emphasis on cultural change, as manifested by ASIC in a domestic sense was redolent of the policies adopted by the Nazis. His speech, delivered just hours before ASIC formally charged Westpac was both chilling and remarkably misjudged. ‘To be completely candid, there have been people in the world that have tried to enforce that belief [that the same culture should be adopted]. Adolf Hitler comes to mind. If you want people to be free, you cannot do that,’ he proclaimed.Footnote10 Current banking chief executives and chairmen, including Ken Henry, former Treasury Secretary and now Chair of CBA, accepted the need to operate within a social licence. All, however, were hostile to the idea of a Royal Commission of Inquiry, proposed, opportunistically, by the Labor opposition to capitalize on public unease.Footnote11
The author agrees that a Royal Commission of Inquiry is not necessarily the best way forward, not least because it causes regulatory reform agendas to freeze.Footnote12 At this stage we know of the problems, what we do not know is now to actively guard against future misconduct. All too often regulatory reform addresses the past but is less effective in enrolling industry actors to a common conception of purpose. Seen in this context rules can simply be transacted against, principles lack the granularity to be enforceable and the lack of commitment to uphold societal values reduces responsibility. The result is the elevation of the symbolic over the substantive. This is no longer sustainable, either in Australia or internationally. And yet, precisely because of its relative standing for good governance Australia can help facilitate a reasoned debate on what constitutes what Oliver Williamson has termed the ‘non-calculative social contract’.Footnote13 This cannot be imposed; it has to be negotiated and voluntarily agreed. What is required therefore is substantive compliance not technical compliance, warranted commitment to high ethical standards, effective deterrence, enhanced accountability and common commitment to the reduction of systemic risk. Critically this has to be externally validated,Footnote14 hence the attraction of the social licence as an ex ante risk management tool and ex post regulatory one (through mandatory corporate governance reform within negotiated prosecutions).
What is being proposed, therefore, is not the imposition of a cultural straitjacket but an opportunity to rediscover and reengage with the insights offered by some of the most important state-market theorists, ranging from Karl Polanyi to Joseph Schumpeter. There is, as Polanyi noted no neat separation between state and market unless ideationally imposed.Footnote15 Likewise as Schumpeter noted, the stock market is a poor substitute for the Holy Grail.Footnote16 We all would do well we if we revisit history. Ad hominem attacks are no substitute for reasoned analysis or public policy. Australia should not waste another opportunity to recalibrate capital market governance. There is a compelling story to tell. All it requires is honesty and commitment. Malcolm Turnbull has opened the door. It is now time to walk through it, to renegotiate a framework capable of securing public consent, assent and legitimacy.
Notes
1 J O’Brien, The Triumph, Tragedy and Lost Legacy of James M Landis: A Life of Fire (Oxford: Hart Publishing, 2014).
2 M Turnbull, ‘Address to the Westpac 199th Anniversary’, (Speech delivered at Westpac Headquarters, Sydney, 6 April, 2016), available at: http://www.malcolmturnbull.com.au/media/address-to-westpac-199th-anniversary-sydney.
3 Ibid.
4 Department of Treasury, Financial System Inquiry (Commonwealth of Australia, November 2014).
5 Wingecarribee Shire Council v Lehman Brothers Australia (in liq) [2012] FCA 1028 at 662 (According to the Court, the council believed that it ‘had the best of both worlds: principal protection and increased interest. For Grange [a wholly owned subsidiary of Lehman Brothers], this manner of allaying risk averse, financially unsophisticated council officers’ fears of CDOs, was as easy as shooting fish in a barrel’.). The unresolved policy question focuses on whether the conduct complained of in relation to Grange derived from a suboptimal culture within an individual firm. Although a significant actor in the Australian marketplace, Grange was not the sole facilitator of the placing of complex instruments in investor portfolios. In this crucial respect the judgment in Wingecarribee Shire Council v Lehman Brothers Australia raises more questions than it answers.
6 ‘ASIC Begins Civil Penalty Proceedings Against ANZ for BBSW Conduct’, (Press Release, Sydney, 4 March, 2016), available at http://asic.gov.au/about-asic/media-centre/find-a-media-release/2016-releases/15-060mr-asic-commences-civil-penalty-proceedings-against-anz-for-bbsw-conduct/; ‘ASIC Commences Civil Penalty Proceedings Against Westpac for BBSW Conduct’, (Press Release, 5 April, 2016), available at http://asic.gov.au/about-asic/media-centre/find-a-media-release/2016-releases/16-110mr-asic-commences-civil-penalty-proceedings-against-westpac-for-bbsw-conduct/.
7 ‘ASIC Accepts Enforceable Undertaking from UBS’, (Press Release, Sydney, 23 December 2013), available at: http://asic.gov.au/about-asic/media-centre/find-a-media-release/2013-releases/13-366mr-asic-accepts-enforceable-undertaking-from-ubs/.
8 ‘ASIC Accepts Enforceable Undertaking from BNP Paribas’, (Press Release, Syndey 28 January 2014), available at: http://www.asic.gov.au/about-asic/media-centre/find-a-media-release/2014-releases/14-014mr-asic-accepts-enforceable-undertaking-from-bnp-paribas/.
9 ‘ASIC Accepts Enforceable Undertaking from The Royal Bank of Scotland’, (Press Release, Sydney, 21 July 2014), available at: http://asic.gov.au/about-asic/media-centre/find-a-media-release/2014-releases/14-169mr-asic-accepts-enforceable-undertaking-from-the-royal-bank-of-scotland/.
10 K Maley, J Eyers and J Whyte, ‘David Murray Lashes Regulators for Culture Crackdown’, Australian Financial Review, 5 April, 2016, available at http://www.afr.com/business/banking-and-finance/david-murray-lashes-regulators-on-culture-crackdown-20160405-gnz2vr.
11 P Coorey and T Boyd, ‘ Bank Chiefs Ask: What Exactly Are We Investigating Here’, Australian Financial Review, 9-10 April, 2016, 1.
12 See S Maher and B Butler, ‘Shorten to Put Banks in the Dock’, The Australian, 9-10 April, 2016, 1.
13 O Williamson, ‘The New Institutional Economics: Taking Stock, Looking Ahead’ (2000) 38 Journal of Economic Literature 595 at 597. Williamson notes that analysis of this ‘level one’ component of social theory is conspicuous by its absence with regulatory studies. The other three levels comprise institutional arrangements viewed primarily through property rights and positive political theory, governance mechanisms through transaction cost economics and resource allocation frameworks generally examined through agency theory.
14 S Winter and P May, ‘Motivation for Compliance with Environmental Regulations’ (2001) 20 Journal of Policy Analysis and Management 675; see more generally I Ayres and J Braithwaite, Responsive Regulation (Clarendon Press, 1992); for study suggesting the power of outsiders to frame the emphasis on effective internal controls only if there is a perception within the company that performance is being monitored, see Christine Parker and Vibeke Nielsen, ‘To What Extent Do Third Parties Influence Business Behaviour’ (2008) 35 Journal of Law and Society 309 (reporting survey evidence from 999 large Australian companies); for broader theoretical issues, see M Dubnick and J O’Brien, ‘Retrieving the Meaning of Accountability in Capital Market Regulation’ in M Dubnick and G Fredrickson, Accountable Governance (ME Sharpe, 2011), 282-301.
15 K Polanyi, The Great Transformation: The Political and Economic Origins of our Time (Farrar & Reinhart, 1944).
16 J Schumpeter, Capital, Socialism and Democracy (Harper & Brothers, 1943), 137.