ASIC’s regulation of Boardroom behaviour: being fair is simply doing what is right

How would you ensure a fair, strong and efficient financial system?

If you’re ASIC, you could start with psychologists in the boardroom.

In light of the Hayne Royal Commission, the corporate regulator has reinvigorated it’s longstanding ‘fairness imperative’ along the themes of setting positive tones from the top, focusing on non-financial risk and creating true checks and balances on management.

ASIC continues to remind us that “fairness” as a concept is well ingrained in financial services law.  Specifically, there is a legal obligation on financial services licensees to act efficiently, honestly and fairly.

In more simple terms, we should all be able to understand what is fair and what is not – for ASIC, being fair is simply doing what is right

ASIC’s corporate psychologist, in their role as observer, proposes to be able to gauge the effectiveness of boards in these areas. Understandably, there is mixed sentiment as to whether a corporate psychologist, attending boardroom discussions as an observer, can gain any insight into the true workings of the board dynamic. There is also concern that boardroom deliberations could become stifled as a consequence.

But this is not an initiative without precedent.

The Netherlands central bank (DNB) introduced behavioural and cultural supervision into its supervisory duties of the Dutch financial sector several years ago to apparent success.

DNB has specially trained organisational psychologists who work within institutions to identify patterns of both individual and group behaviour that could increase the risk of misbehaviour.

The DNB initiative has influenced the Australian regulators, and encourages the idea that corporate culture can be regulated.

It is not surprising that ASIC believes it will be able to gain invaluable insight into the workings of the board by actually holding a seat at the boardroom table.

The ability to observe the board through the eyes of a corporate psychologist, coupled with ASIC’s close and continuous monitoring (CCM) program that involves onsite visits from ASIC representatives, sees ASIC penetrate all of the right levels of decision making and reporting lines for those participant organisations.

Although in its early stages, this most recent initiative by ASIC has had mixed responses.

For those in support of the regulators taking carriage of the regulation of corporate culture, instilling a psychologist in the boardroom promotes better behaviour, including putting a stop to group-think – where group decision making remains unchallenged signalling a lack of robustness in board deliberations.

By contrast, there is scepticism as to whether an observer in this light could gain any real insight into the board and its decision making processes. Being placed under regulatory scrutiny in this way would no doubt encourage self-preservation, including (to some degree) self-censorship.

But Boards are becoming accustomed to being viewed with increased scrutiny by regulators. Accordingly, it is incumbent upon the regulator to acknowledge the imperfectness of decision making,

Although the ASIC psychologist will be more focused on processes and behaviour (both at the individual and the collective board level), there must be an acceptance for error, even at the most senior level of the organisation. This is only “fair”

ASIC is expected to report on its CCM program and corporate governance review findings by the later part of this year.  These reports will be followed with keen interest.

Hoda Nahlous is a corporate governance and board advisory expert.

Additional author: Karl Norman, Law Graduate, KPMG Law

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