Poor conduct by principals and CEOs has resulted in Australia's corporate culture in need of a change, writes Dr Kim Sawyer.
ON 8 DECEMBER 2016, Greg Medcraft, the Chairman of ASIC at the time, gave a speech on the importance of corporate culture. Medcraft asserted that culture matters because it can be the driver of bad conduct.
Nearly every day we see evidence of bad corporate conduct at Royal Commissions like the Banking Royal Commission or in individual company collapses. There is a recurring problem. It seems company regulations don’t matter, at least not for some.
Culture is a vague term. Culture generally refers to values. A good corporate culture is represented by things like transparency, honesty, perhaps even social responsibility — characteristics that seem to have disappeared from the corporate balance sheet. Medcraft was not alone in calling for cultural change. It has been recommended by every inquiry into corporate practice for the last 20 years; for example, the 2014 Financial System Inquiry. Yet there is little evidence that Australia’s corporate culture is changing.
In last year’s budget, $70 million was given to ASIC to establish a governance taskforce. One of the first actions of the taskforce was to insert a psychologist into boardroom discussions of more than 20 leading Australian companies including Qantas, Lendlease and Woolworths and to report back to the regulator on board behaviour by September.
There are two problems with such a study. Alessandra Capezio from the Australian National University pointed to the fact that directors are likely to behave differently when they are being observed by a psychologist. They are likely to be on their best behaviour. But there is also a second problem in that corporate culture depends on the Chairman and CEO. In smaller companies like start-ups and small resource companies, the CEO tends to be more important for the corporate culture. In smaller companies shareholders and creditors are less protected against the bad conduct of directors. They are at the mercy of the Board.
This is amplified by two recent high-profile cases involving two high-profile individuals. Both cases involve companies in the for-profit education sector which now has 65 registered companies (Tertiary Education Quality and Standards Agency). The first case is that of Acquire Learning, a Victorian registered education provider which collapsed in May 2017 with debts of $145 million. The case is currently being heard in the Victorian Supreme Court. There are three aspects of this case that show the problems of Australia’s corporate culture.
Acquire became what it was through the generosity of taxpayers. The Gillard Government boosted vocational learning by allowing students of private colleges to use the VET FEE-HELP scheme, which cost $325 million in 2012 but ballooned to $2.9 billion in 2015. Enter the rorters. Acquire targeted students through telemarketing and there were red flags everywhere. The Australian Competition and Consumer Commission took Acquire to court over its targeting of students and won, but it was too late for shareholders and creditors.
The psychologist inserted by the corporate regulator into boardroom discussions of more than 20 blue-chip companies including Qantas, Woolworths and AMP warns that Australia's financial sector culture is broken. @patrickdurkin #esg https://t.co/eNU7OJJAhS— RIAA (@RIAANews) June 20, 2019
What Acquire Learning shows is the problem of bad conduct. Andrew Demetriou, the former Chairman of the AFL, was Chairman of the company’s advisory board between 2014 and 2016. Also the uncle of the CEO, Demetriou was used to profile the company. They leveraged him. He was paid $900,000 a year for a three-day-a-week advisory role. He was the beneficiary of a company loan of $311,000 now being contested in the Supreme Court hearings. Taxpayers and creditors subsidised the bad conduct of the principals.
The second case is that of Vocation, a vocational skills and training company that collapsed in November 2015. Vocation was dependent on subsidies offered by the Victorian Government for private providers of vocational training. Subsidies were granted on the condition of course quality. But an audit in 2015 by the Victorian Department of Education found Vocation had subcontracted to cheaper third-party providers, lowering standards. As a result, Vocation lost their $20 million government subsidy just before a $74 million private placement. Vocation had 40,000 students. Students, shareholders and creditors paid the price for the bad conduct of the principals.
One of those principals was John Dawkins, Chairman of Vocation and the architect of Australia’s Unified National System of Universities in 1988 where colleges became universities and universities became colleges. The Federal Court has found that Dawkins breached his duties as a director of Vocation by failing to make continuous disclosures to the market about the fact Vocation was facing subsidy cuts and enrolment suspensions for two of its biggest training colleges. Dawkins faces a potential five-year ban from sitting on boards and a million dollar fine. The penalties are still to be determined. Like Acquire Learning, Vocation depended on taxpayer subsidies, on regulators not knowing until it was too late and on the ignorance of creditors and clients.
Corporate culture is more than that on show at Royal Commissions. Corporate culture is also exhibited by the average CEO earning nearly 80 times what the average worker earns, by one-third of large companies paying no tax and by principals of small companies using taxpayer subsidies to rort. I have long advocated for a False Claims Act that specifically targets those who rort the Government. The deterrent effects of such an Act are significant.
“Studies estimate the fraud deterred thus far... runs into the hundreds of billions of dollars. Instead of encouraging or rewarding a culture of deceit, corporations now spend substantial sums on sophisticated and meaningful compliance programs. That change in the corporate culture... may be the law’s most durable legacy.”
We need a False Claims Act. Surely, it would be as good as psychologists in boardrooms.
When we look at Acquire Learning and Vocation, we see the corporate culture of Australia. We see the networks at work. We see the use of taxpayer subsidies. We see regulatory failure of a deregulated sector. We see the role of the principals. Andrew Demetriou presided over the expansion of the AFL from 2005 to 2014, doubling its revenue. John Dawkins was a Federal Treasurer. Both will be remembered for their contributions other than Acquire Learning and Vocation, which will only be footnotes in their histories. Yet Acquire and Vocation exemplify a culture that ASIC wants to change. For culture begins with leaders.
'Teetering education company Acquire Learning planned to pour $1 million a month into the pockets of its shareholders including former AFL boss Andrew Demetriou shortly before its collapse left tens of thousands of students stranded’ #GuaranteeTAFE instead https://t.co/7YrYblCOzs— Adam Curlis (@TAFEeducation) March 7, 2019
Here is part two of our look at the state of corporate culture in some of the world’s biggest economies with insights into Japan, Australia and France. https://t.co/H4SnPlApnl— CorporateBoardMember (@CorpBoardMember) May 24, 2019
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