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Deakin Law Review |
Rick Sarre[*]
The Australian corporate cemetery of the 1980s contains a number of well known corpses. One could quickly list Laurie Connell’s Rothwell’s merchant bank collapse[1], the attempted stripping of assets from Bell Resources by Alan Bond-related companies in 1988-89,[2] the ruination of the Hooker Corporation under the corrupt leadership of George Herscu[3] and the collapse of Christopher Skase’s Qintex empire in 1989[4] to name but a few. Terry McCrann, writing in the Weekend Australian in June 2001,[5] with a piece entitled ‘The lesson: money has no conscience’, highlighted three major features that the recent spate of corporate collapses in Australia (such as OneTel,[6] Harris Scarfe,[7] Ansett[8] and HIH[9]) share with those of the 1980s: greed, the loss of institutional memory of the fact that boom always ends in bust, and regulatory failure. To that list one could add another three familiar elements that may be less causative but ever-present just the same: directors denying rumours of financial trouble in the light of failing business,[10] auditors signing off on accounts that later prove to be faulty[11] and regulators being caught by surprise and then engaging in buck-passing or blame aversion.[12] Be that as it may, it is interesting to reflect on Terry McCrann’s etiological analysis. Greed is, sadly, somewhat axiomatic in these affairs. For example, there have been revelations that the directors of OneTel and HIH had been paying themselves large bonuses or were continuing to receive internationally competitive emoluments at the same time as their share prices were plummeting or their cash-flow was becoming critical.[13] Moreover, there is little one can do about ‘memory loss’, for no amount of regulation or law can eliminate hedonism. It is the issue of regulatory failure that provides the focus of this paper. Rather than giving in too easily to the spectre of repeated failure,[14] policy-makers, it is argued, can make the regulatory process more effective, and hence corporate collapses less likely, if they reconceptualize the nature of the process of regulation.
It is worth reviewing, for a moment, the sorts of compliance requirements, in law and in practice, currently in place that purport to prevent corporate negligence and to thwart malfeasance.
The Corporations Act 2001 (Cth)[15] makes it clear that corporate directors are accountable to the law and that there are severe penalties in the event of misconduct and even inadvertence. Directors have, by virtue of sections 180-184 and the common law, a duty to act honestly (which is more than a duty not to act dishonestly), to exercise care and diligence, not to make improper use of their position and not to make improper use of information to which they may be privy. Moreover, directors remain under the scrutiny of the Australian Securities and Investments Commission (ASIC) not to engage in any behaviour that is in contravention of the law, such as the prohibition against trading while insolvent.
The Trade Practices Act 1974 (Cth) (TPA) Part IV provides massive fines for companies that engage in anti-competitive behaviour. The Australian Competition and Consumer Commission (ACCC) monitors corporate compliance with the Act and pursues any allegations of unlawful or inappropriate activity such as price fixing, secondary boycotts and mergers that have an anti-competitive effect.[16]
Finally, there are the not inconsiderable resources of other regulatory agencies whose task it is to ensure compliance with the law (for example, the Australian Tax Office (ATO), the Australian Transaction Reports and Analysis Centre (AUSTRAC), the National Crime Authority (NCA), and the Australian Bureau of Criminal Intelligence (ABCI)), and the resources of State and Federal Directors of Public Prosecutions whose task it is to prosecute those companies and directors who fail to abide by the law with or without the consent of the agencies responsible for superintendence of the corporate sector.[17]
There are, moreover, the compliance rules of the Australian Stock Exchange (ASX). Take the ‘governance disclosure’ requirements of ASX listing rule 4.10.3, for example. This rule requires publicly listed companies to include a corporate governance statement explaining the main practices, control mechanisms and governance processes employed by the company during the reporting period.[18]
The fact remains that all of these legal prohibitions and requirements were in place while the high-profile collapses in the first nine months of 2001 in Australia continued apace. Regulatory requirements and laws are not necessarily allaying stakeholders’ concerns,[19] nor are they acting to change sloppy management practices, and, despite the existence of the ASX requirements, there continues to be concern over the failure of Australian companies to meet international best practice standards.[20]
There is not a strong track record for official regulators either. As a result of the HIH collapse, for example, the official regulator, the Australian Prudential Regulation Authority (APRA), claimed that a lack of resources contributed to its alleged neglect. The auditors, Arthur Andersen, claimed that they had been given incorrect information.[21] The company directors, defending themselves against allegations that they may have contravened the (former) Corporations Law by trading while insolvent, blamed economic and other forces beyond their control. ASIC claimed that it was APRA who bore the responsibility of regulatory oversight, adding that the full weight of the law would be brought to bear on anyone found guilty of corporate misconduct. The actuaries noted that they had provided warnings twelve months earlier but that these had gone unheeded. Finally, the Howard government’s response was simply a suggestion that there ought to be tightening of the law and rigorous enforcement of its criminal sanctions.[22] The HIH debacle has brought buck-passing and blame aversion to the status of an art form.[23]
Some of the apparent confusion regarding regulatory roles, laws and requirements stems from our collective inability to recognise the limited role that the law (and governments in enacting those laws) can play in regulatory governance. It appears that, as a society, we are incapable of agreeing upon philosophies attached to the role of prudential oversight. Consider the following two opinions on the way in which regulation should be approached. On the one hand, there is the view that the law (and, therefore, governments as legislators and prosecutorial authorities as their clarions) should do more to bring about regulatory enforcement. Bob Baxt, former Chairman of the Trade Practices Commission (now the Australian Competition and Consumer Commission or ACCC), said, almost a decade ago:[24]
For there to be a future for regulation in this country, there is a very real need for regulators to enforce the law. Failure to do so will provide idle speculation that they have been captured by their specific industries ... or certain influential sections of them. ... But, regrettably, through a combination of inadequate laws, or laws which are ‘poorly’ drafted, unrealistic penalties to fit ‘the crime’, inappropriate courts to adjudicate on some of the major issues, grossly inadequate funding of agencies and courts, unimaginative and often mixed-up policies and interstate jealousies, we have a scenario in which the agencies operating [in companies and securities, tax and trade practices] have failed their charter over the last decade or so ... causing irreparable damage to the confidence of the community and to our regulatory framework. ... Governments must take much of the blame.[25]
In contrast, Stan Wallis, the Chairman of the Wallis Inquiry into the financial services sector,[26] claims that it is Australia’s tough corporate governance rules that are a major reason for the under-performance of local companies. In a speech to the Centre for Corporate Public Affairs in June 2000, Mr Wallis advocated the winding back of boardroom independence rules since ‘too much attention to corporate governance can cloud a board’s judgement’[27]. Governance, he said, had become an end in itself and obscured the real issues, and, as a result, directors were predisposed to be ‘risk-averse at a time when bold moves are often needed’[28].
It is arguable that neither of these two views was or is adequate. In contrast to the Wallis view that Australians would be better off with fewer restrictions on corporate independence, there is a wealth of historical evidence that prudential supervision is needed in order to prevent the ‘bold moves’ from precipitating financial doom. At the same time, however, bludgeoning firms with the heavy hand of the law does not have a solid track record as the most effective way to deal with businesses intent on taking risks with other people’s assets. There are a number of regulatory options, discussed below, that find an appropriate middle ground between the Baxt and Wallis views. They relate more to process and mindset than activity and legal standards.
The argument presented by this paper is that regulatory processes can be better conceived if they embrace the paradigm shift that is occurring worldwide in relation to the development of the notions of corporate reputation and corporate social responsibility[29]. For example, in the face of sustained criticism arising out of the Brent Spa fiasco of 1995,[30] Shell International has now established a multi-million dollar foundation for sustainable development.[31] Firms such as Nike (in relation to workplace conditions in third-world countries) and Monsanto (in relation to genetically-modified crops) have both had to fend off virulent criticism from shareholders (and customers) that they have failed to meet expected ethical and environmental standards in their day-to-day practices. Recent research carried out at the University of South Australia highlights the growing mobility within capital and product markets that can exacerbate the vulnerability of the modern corporation to the expectations of the marketplace.[32]
[T]he research provides clear evidence that the community certainly does care about corporate behaviour and has shown that it is willing to punish and reward corporations on this basis.[33]
Corporate reputation, it appears, is increasingly a factor influencing investor and consumer decisions.[34] In fact, it is arguable, contrary to the Naomi Klein view of the corporate marketing world,[35] that logo or brand reputation is a good thing, for in assailing or questioning the ethics or practices of a particular brand can be a highly effective tool by which to bring about change. The days of corporate arrogance, on this view, may be numbered. It is in this realm where the greatest possibilities lie for corporate regulation. That is, it is in the pressures associated with one’s reputation for social responsibility (or indeed irresponsibility) that preferred strategies and answers lie. This is not an entirely new approach. The emotions of shame and pride in being law-abiding featured heavily in criminologist John Braithwaite’s seminal work Crime, Shame and Reintegration.[36] Braithwaite’s hypothesis is that fear of shame is one of the major social forces for preventing criminality and thus any criminal justice responses that create anger and foster indignity undermine respect for law and one’s willingness to obey it.[37] Reconceptualising regulation around reputation, shame and responsibility requires further theoretical development. In the paragraphs that follow, it is argued that building corporate reputation and organisational pride as forms of regulation can be enhanced by marrying them with the notion of ‘corporate social responsibility’.
There is a view that business performance may be enhanced by the creation of initiatives (government or private) and the fostering of stakeholder pressures designed to build a ‘social responsibility’ ethic into a corporation’s ‘culture’. One happy consequence of this is that these sorts of initiatives may bring about greater overall business performance and thus a better return for shareholders. Broadly, this has been described as the movement towards corporate social responsibility or ‘CSR’.[38]
It is clear that more and more stakeholders, including shareholders,[39] are demanding greater accountability from company managers on issues other than simply financial returns to investors. CSR has been the subject of much academic attention in recent years[40] in the broader context of regulatory pluralism.[41] Broadly speaking, the concept of CSR requires corporations not only to abide by the law, to be good corporate citizens and to abide by government and professional compliance codes and requirements, but to do more – to display an elevated level of quality in all that they do. It requires cultivation of an organisational ‘culture of mindfulness’,[42] a vigilant and constant awareness of the possibility of wrongdoing, a personal ethic of care, and an assumption of individual responsibility for the consequences of one’s actions. This includes an organisational commitment to ensure that companies not only conform with the law and regulatory obligations, but perform to a higher standard than that which is required by the law.[43] In other words, it is a rejection of the notion that prescribing minimum standards, and enforcing them by law, is an adequate form of regulation. Minimum standards quickly become maximum standards; regulators may be captured by those they are regulating, and so forth. Different manifestations of the notion of CSR are discussed below, namely initiatives designed to foster corporate culture, to encourage the development of industry codes of conduct, to develop the idea of a ‘licence to operate’ (which must be earned rather than granted freely, that is, a ‘corporate obligation’), and ‘triple bottom line’ reporting.
Companies are taking it upon themselves to declare their credentials in this regard. AMP for example, placed these paragraphs in a recent newsletter to shareholders:
At AMP we have a proud history of innovative work practices, community involvement and environmental practices. The next step in our journey is creating a framework for sharing these initiatives across our diverse businesses ... We are including sustainable business issues within our strategic plans ... In March 2001, AMP Henderson Global Investors launched a socially responsible investment product called ‘Sustainable Future Funds’. The funds offer customers an investment portfolio that focuses on industries of the future including healthcare, communications, renewable energy and education, and on companies committed to operating in a socially responsible way ...The purpose ... is to encourage companies to adopt higher social and environmental standards, hence the term socially responsible investing is now being used.[44]
Governments, too, have prompted this type of initiative. The United States government, in its 1991 Sentencing Guidelines, makes the existence of an internal compliance ‘culture’ that seeks to minimise corporate crime a mitigating factor when a judge is setting penalties upon conviction for such a crime.[45] The 2000 Federal Sentencing Guidelines Manual (USA) lists innovative measures for the punishment of corporations including fines based upon turnover or divestment of equity, probation and other forms of surveillance, disqualification from certain commercial activities and the winding-up of the corporation itself.[46]. Furthermore, in some United States jurisdictions corporations can be penalised if they are not actively engaged in the development of an ethos or corporate culture in which law-breaking is discouraged.[47]
An Australian example of a legislative initiative that is designed to create a ‘culture of mindfulness’ is found in the 1995 developments regarding specific corporate criminal responsibility. While a corporation is deemed to be a legal person for the purposes of the criminal law in all Australian jurisdictions, a corporation cannot be tried for an offence which can only be punished by imprisonment and where the persons who made the error of judgment or who acted in a callous way were not the ‘guiding mind’ of the corporation, or did not ‘embody’ the corporation.[48] Part 5 of the Commonwealth Criminal Code Act 1995[49] does, however, attempt to give a ‘cultural’ emphasis to the notion of corporate criminal liability. Section 12.1 confirms that the Code applies to corporations, and says that they may be found guilty of any offence, including those punishable by imprisonment. The Code explicitly states that harm caused by employees acting within the scope of their employment is considered to be harm caused by the body corporate, and introduces the crucial concept of ‘corporate culture’, defined in Section 12.3(6) of the Code 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 take place’. A company with a poor corporate culture may be considered as culpable under this legislation as individual directors or senior managers.[50] The change was designed to catch situations where, despite the existence of documentation appearing to require compliance, the reality was that non-compliance was expected. For example, a company would be guilty of reckless endangerment under the Code where its corporate culture tacitly authorised breaches of the safety codes (for example, by removing equipment guards, or allowing drivers to ingest drugs in order to drive longer hours)[51] even if there can be no actual attribution of blame. In other words, companies can avoid criminal liability but only if there is evidence that justifies that outcome.[52]
Corporate codes of conduct, charters or manifestos are not new ideas. For example, the report of the 1987 Treadway Commission in the USA[53] into fraud control recommended public companies should develop and enforce written codes of corporate conduct in order to foster a strong ethical climate, to open channels of communication and to help protect against criminal activity,[54] in addition to simple structural change in order to prevent fraud.[55] In Australia in 1990, a Working Group was formed under the auspices of the former Australian National Companies and Securities Commission (now ASIC). The group published a discussion paper entitled Corporate Practices and Conduct (or CPC) dealing with corporate codes of conduct, in an effort to improve corporate accountability of directors, auditors and directors.[56] The discussion paper concluded that, to a large degree, financial responsibility to shareholders is dependent, in the long term at least, on factors such as responsible environmental management, safety, and responsiveness to societal needs and demands.
A brief mention in this regard should be made of the so-called ‘Caux Principles’, the outcome of a group of international executives based in Caux, Switzerland, and premised upon the principles created by the Minnesota Center for Corporate Responsibility in 1992. As stated in the preamble to the document, ‘Laws and market forces are necessary but insufficient guides for conduct’.[57]
The notion of ‘corporate obligation’ has been finding its way into the academic literature.[58] This obligation is justified as a fair return for society granting corporations the legal protection of limited liability and according them the social permission to operate freely in the marketplace, that is, industry should earn a ‘social licence to operate’.[59] The argument is that corporations that enhance their corporate social responsibility are more likely to be sustainable and hence less likely to suffer financial catastrophe. Those that cannot show this should, it is argued, lose their right to operate with the protection of limited liability.
This idea can be allied with the view of Robert Hinkley that corporations exist only because laws have been passed that give them a licence to operate. Indeed, when limited liability laws were first enacted, no attempt was made to promote a broader social ethic or responsibility. It is Hinkley’s view that there could be, by legislative amendment, an expansion of the duties of directors under corporations law to ensure that their primary profit-making enterprise for shareholders is not ‘at the expense of the environment, human rights, the public safety, the communities in which the corporation conducts its operations or the dignity of its employees’[60]. That is, it is an appropriate time to amend the law to encourage corporations to be good citizens as well as make money. This ‘balancing factor’, Hinkley writes, ‘should be implanted in corporations in a manner that tempers – but does not destroy – their drive to achieve profits’.[61]
Should there be any recourse for shareholders against directors in the event that such an alteration of duties affect the level and rate of dividends? Assuming that such a causal connection can be established, there would need to be legislative amendments to ensure that protection from legal suit is guaranteed by the corporations law,[62] and, furthermore, there would need to be some thought given to the potentially contradictory role of legal advisers to the corporate sector.[63]
How can companies be assured that CSR will make companies more sustainable and less likely to suffer financial collapse? The triple bottom line (TBL) concept is an idea that is designed to highlight the view that a company’s consideration of only one measurement of success – the financial ‘bottom line’ – is inadequate in a number of respects. Triple bottom line thinking insists that there are at least two other aspects of doing business today that require equal consideration and active managerial attention – the social impacts (for example, health, welfare and safety), and the environmental impacts that a company’s activities may be having.[64]
Advocates of triple bottom line reporting declare that the idea of three reporting considerations instead of one is also necessary for, indeed irretrievably linked to, the financial bottom line and hence prevents financial irresponsibility. In other words, financial success itself is reliant upon not only economic sustainability but also social and environmental sustainability. A company that can meet the needs of the present in terms of social and environmental impact, without compromising the needs of the future, is, so the thinking goes, more likely to appeal to investors and customers alike, and thus be financially successful. This is done by using TBL reporting as a selling point in the marketplace, through appealing to customers concerned about the environment and the reduction of risk to workers, consumers and the public in general. Companies that incorporate this approach in their strategies can, it is claimed, generate substantial competitive advantages. Hence, triple bottom line thinking, according to its advocates, is not a short-lived marketing ploy but a strategy that is designed to enhance long-term competitiveness and thus encourage effective risk management. Explaining the concept of TBL, British environmentalist John Elkington wrote,
[a]t the heart of the emerging value creation concept is a recognition that for a company to prosper over the long term, it must continuously meet society’s needs for goods and services without destroying natural or social capital.[65]
The term ‘triple bottom line’[66] was, in fact, the brain-child of Elkington, chairman of the London-based consultancy, SustainAbility Ltd. He developed the idea that companies need to be able to measure and display sustainability, using a range of measurable performance indicators across the three areas mentioned.
In September 1999, the Dow Jones Sustainability Group Index (DJSGI) was published for the first time, introducing to analysts and investors the notion of sustainability as a performance indicator. Under this process, voluntary disclosure assesses corporations on their implementation of systems to pursue sustainability-related opportunities, and to manage sustainability-related risks.[67]
The final ratings are based upon the ability of a company to encourage stakeholder relationships, respect human rights, ensure appropriate employment conditions, and foster an environment of anti-corruption, amongst other things. The organisation responsible for analysing the data for the DJSGI is SAM Sustainability Group, a Zurich-based asset management company founded in 1995. The index is currently composed of 229 firms (market value US$4.3 trillion) across 22 countries. These firms (including Fujitsu, Unilever, Skandia and Honeywell) are, according to the Index, the top 10% of companies (in each of 68 world-wide industries) operating from sustainability-related management practices.
According to the material provided by SAM Sustainability Group, the DJSGI illustrates that better financial performance is possible by ‘sustainable’ companies over their ‘non-sustainable’ competitors. For example, from the beginning of 1994 to the end of 1998, the DJSGI posted a return of 125.80%, while the Dow Jones Global Index managed only 80.58%. The ‘sustainable’ companies, on average, produced higher shareholder returns over five years than other comparable firms in their corners of the world. On the whole, they also performed better than the rest of their particular industry in seven out of nine industry sectors. The risk – the price fluctuation or volatility – was only very slightly higher in the case of the ‘sustainability-driven’ investments.[68]
The notion of corporate social responsibility is controversial in many quarters. David Henderson,[69] for example, believes that the best way to ensure a positive role for business is to extend the scope and improve the functioning of markets, not to demand more of them.
In so far as socially responsible businesses find their new role brings higher costs and lower profits, they have a strong interest in having their unregenerate rivals compelled to follow suit. The effect of such enforced uniformity is to limit competition and worsen the performance of the economy. The system effects of CSR, as well as the enterprise effects, will tend to make people poorer.[70]
Professor Henderson’s opinion, however, is not shared by many of the current captains of industry, who remind us that if corporations cannot accept responsibility for the consequences of their actions and decisions, then they will increasingly be obliged to play by rules that are progressively imposed upon them. For example, Leon Davis, chairman of Westpac and deputy chairman of Rio Tinto, makes the point that companies have ethical responsibilities too.
There is a growing necessity for companies to display a social conscience. In so far as it is a call for business to obey the moral imperative to behave decently and honourably, I support it wholeheartedly. There are some critics who say that business involvement in community-social matters detracts from the main aim of creating shareholder value. I think the opposite – I believe that it builds shareholder value ... [business has] acquired greater responsibilities as a result of being given greater freedom. To my mind there is absolutely no doubt about this – it is not going to go away. If anything, those responsibilities are going to grow.[71]
TBL reporting, like the concept of CSR, has also been the target of attack by critics. One recent salvo was fired by the executive officer of the Australian Shareholders’ Association, Tony McLean. His writing heavy with irony, Mr McLean derides the notion that companies are not paying sufficient attention to conservation, health, safety and local communities.
It’s too bad that the whole community, through their elected representatives, has imposed laws and other regulations that establish standards of conduct and reporting in respect of most of these concerns ... Too bad that it makes good business sense anyway for executives to take account of the interests of, and work closely with, key stakeholder groups and local communities ... Triple Bottom Line Reporting seeks to elevate fuzzy and subjective concepts and place them alongside objective and measurable reporting of financial outcomes. ... [C]ompanies have more than enough on their plates with Single Bottom Line Reporting. The pressures on business are too varied and too intense for management to devote any more time to issues unrelated to financial success.[72]
McLean’s contribution then repeats the Wallis view (above) in linking the collapses of 2001 with these sorts of demands, a rather startling claim.
[T]he collapse of four prominent companies this year is just another sign of executive distraction. ... Any practice that interferes with a company’s ability to achieve its financial objectives undermines the very reason for the company’s existence. In fact it is tantamount to killing the goose that lays the golden egg.[73]
In a rebuff to the McLean view, the publishing editor of Ethical Investor, Paddy Manning, denounced critics’ myopia.
If companies were as diligent about their environmental and social obligations as Mr McLean suggests, the pressure for triple bottom line reporting wouldn’t be there. Better company reporting is a constructive answer to the anti-globalisation, anti-corporate sentiment that is a more serious problem for society and shareholders alike. ... The best answer to [the] complaint that triple bottom line reporting ‘can’t be done’ ... is, of course, to point ... to those companies that are already doing it.[74]
Where do these theoretical positions take us? To summarise the argument: the notion of corporate social responsibility is foundational to the idea that corporations are less likely to engage in activities that are unsustainable (a precursor to collapsing) where their reputation is strong and where the shame factor provides deterrence against irresponsibility. In that light, regulatory ‘carrots’ that are designed to enhance the development of a sound corporate culture and business reputation should be put in place both by governments and industry associations alike. Corporations should be required to put in place codes of conduct in order to earn the social licence to operate. Those businesses that adopt triple bottom line reporting should be given tax and other business incentives as rewards for their initiative. The ‘bottom line’: these types of ‘carrots’ are more likely to be effective in preventing corporate collapses than legal and regulatory ‘sticks’.
Will this work? There are a few ‘sticking points’ and unanswered questions worthy of consideration. The first is the role of government, the second is the ethical issue of motive, and the third is the experience of Pasminco, a company that was exemplary in this regard and yet fell into the hands of administrators late in 2001.
The above ideas might be read as suggesting that the role of government in the regulatory sphere is less significant than it may have been in the past. It is not the purpose of this paper to convey the notion that governments should back away from their responsibilities. Governments are certainly not irrelevant, even in an era of less formal regulation. Governments should retain a role in engineering, if not directing
... a regulatory system in which they themselves play a less dominant role, facilitating the constructive regulatory participation of private interests ... monitoring the overall regulatory system, broadly defined, and one of ‘fine tuning’ - manipulating incentives in order to facilitate the constructive contributions of non-government interests. Government regulatory agencies will no longer occupy center stage, but rather will be unobtrusively influential from a position offstage ... Governments can vary their degree of investment, both symbolic and material, in forums for consultation and decision, and in the interest of intermediaries themselves. As such they can give new voice to the previously disenfranchised, and can tone down those interests which would unreasonably dominate.[75]
Governments as legislators thus have a key role to play in this regard. Corporations can be encouraged, with the appropriate use of rewards, to adopt and implement risk management guidelines,[76] to engage in socially responsible projects, to become philanthropic, and to build a reputation that is widely respected. Governments may be in a position to shame those organisations that fail to meet community and stakeholder expectations and to reward those that succeed. These rewards may include the opportunity provided to businesses to gain government subsidies, to gain freedom from the burden of regular audit, to attract specific accreditation, to attract self-insurer status, and so forth.[77] Moreover, one might suspect that there could be enormous value in a government granting tax concessions or preferences in contract tendering to businesses and corporations who are able to show, through the use of agreed performance indicators, that they have reduced the possibility of fiscal, environmental and social irresponsibility. A good example is the March 2000 decision of a number of United States police forces to purchase Smith and Wesson firearms exclusively, for the reason that this company announced publicly that they were prepared to take steps to ensure that their firearms were safer, and thus children, especially, were at less risk of harm.[78]
By way of confirmation, the Federal Minister for the Environment and Heritage, Senator Robert Hill, had the following to say on the subject of triple bottom line reporting in 2000.
If we are to move our economy to a truly sustainable basis, we must bring about a change in culture within both Australian industry and the broader community. We must develop a culture where the environmental value and social value added by an action is as significant in assessing its worth to the nation as the economic value it brings. This is the concept we know as the triple-bottom line. It’s the traditional bottom line profit of a company, with the added dimensions of social and environmental accountability.[79]
Companies may need make only small adjustments to bring about large rewards.
Before leaving the topic of the role of governments, it should be noted that on 11 March 2002 the Financial Services Reform Act 2001 (Cth) commenced operation.[80] Significantly, the Bill, finally passed in August 2001, was the subject of a late Labor/Democrats amendment that requires all investment products to disclose the extent to which environmental, ethical and social considerations have been taken into account. Added to the existing requirement of Section 299(1)(f) of the Corporations Act (added in 1998) which states that ‘if the entity’s operations are subject to any particular and significant environmental regulation, under a law of the Commonwealth or of a State or Territory [a company must provide] details of the entity’s performance in relation to environmental regulation’, there appears to be a strong commitment of governments to this type of reporting.[81]
There is the perennial issue concerning whether applying corporate social responsibility pressure, be it stakeholders, shareholders, consumers, industry associations or governments doing the pressuring, is done for business reasons alone. It is quite possible to be able to equate good business with good business ethics, according to observers.[82] In other words, good business can follow where corporate social responsibility initiatives are designed to encourage rather than constrain business performance.[83] But if that evidence were not there, would altruism necessarily outweigh the demands for shareholder profits? Melissa Richards, formerly marketing chief at Unilever, makes the following observation.[84]
It’s unfortunate that in their search for competitive advantage companies are rediscovering social responsibility. It’s a pity that social programs are designed for gain rather than a desire to make a contribution to the wider community.
Richards does, however, end on a note of optimism:
It will be the companies that truly embrace the concept of balancing all stakeholder values that will succeed. Like most other fads in marketing, those that try to fake it will ultimately be found out.[85]
Earlier in this paper, the point was made that all of the existing legal and regulatory requirements were in place as companies came crashing down in the first nine months of 2001. Yet what of those collapses in cases where management practices were ostensibly sound? Pasminco Ltd, the world’s biggest integrated zinc and lead producer, was placed into voluntary administration on 19 September 2001 after failing to secure the support of its bankers in an economic climate worsened by low zinc prices and a low Australian dollar.[86] According to commentator David Uren,[87] its last corporate governance statement, outlining board membership and board reporting processes, was exemplary. The board ran three committees on audit, remuneration and health, safety and the environment. They reviewed the effectiveness of internal control systems, commercial practices and policies, while the board received advice on operational and financial risk. Yet they appear to have failed.
To draw the simple conclusion that one exception destroys the management principles outlined above would be peremptory.[88] What the Pasminco case illustrates is that no system of regulation is ever infallible. What may be required in addition to the regulatory mechanisms and a broader notion of corporate social responsibility is a vigilant process of inquiry. Uren’s call in this light might be seen to be akin to the ‘culture of mindfulness’ discussed above.
Can subordinates challenge their superiors and does information flow freely? [In an ideal world there] will be more open relationships between boards and executives.[89]
The fact remains that there is no magic bullet for sustainability and no infallible process of regulation. What is clear is this: if there be a ‘transparency’ of operation, encouragement of an active dialogue with those affected by an entity’s operations, and systems to observe and correct errant activity,[90] in most circumstances, these features will have the desired prophylactic effect. What can safely be assumed is that a company is more likely to be sustainable where it is adopting open reporting on a range of areas, is involved in a process of constant improvement, and has a sound reputation. That sort of business is more likely to attract investment. Likelihood, however, is never a guarantee.
The traditional managerial responsibility to fulfil society’s demand for accountability and to mitigate financial risk is usually seen simply at the level of legal responsibility, that is, obeying the law and meeting minimum standards. The problem is that the law is slow and expensive, and acts ex post facto. Minimum standards quickly become maximum standards. Recent history has reinforced the notion that, in order to prevent corporate disaster and corporate irresponsibility, the state cannot simply rely upon legal regulation, nor simply leave matters to the market. Companies, with the positive encouragement of governments, must develop initiatives to cultivate an organisational ‘culture of mindfulness’, including an awareness of the possibility of illegality, a personal ethic of care, and an assumption of responsibility in the event that improper practices occur, in short, an ethic referred to broadly as corporate social responsibility.
Companies that wish to embrace corporate social responsibility must seek out and act upon initiatives from governments, consumers, pressure groups and industries alike encouraging and rewarding risk-management. Through incentives, governments can encourage risk-prevention propriety in business affairs. By virtue of demanding triple bottom line reporting mechanisms, shareholders can convince those still wedded to the financial bottom line that the pursuit of sustainability does not necessarily carry financial risk; in fact, it can usually enhance profitability. Pressure groups, consumers and other stakeholders are realising their power in the marketplace to effect change. This is the principle of regulatory pluralism.[91] The challenge will be for governments, industry associations and companies themselves to investigate the possibilities tossed up by these challenges and to evaluate them for their potential to effect the desired outcome, that is, a corporate landscape filled with business and enterprise rather than one littered with remnants and corpses.
[*]Associate Professor of Law, School of International Business, University of South Australia.
[1] Trevor Sykes, The Bold Riders: Behind Australia’s Corporate Collapses (2nd ed, 1996) chapters 3 and 4.
[2] Ibid, chapter 6.
[3] Ibid, chapter 8. Refer Herscu v R [1991] HCA 40; (1991) 173 CLR 276.
[4] Losses of some A$1.5 billion. Having fled Australia in 1989, Skase died in Majorca on 6 August 2001.
[5] June 9-10, 2001, 36.
[6] Collapsed May 2001 and placed into liquidation July 2001 with early estimates of liabilities at A$600 million.
[7] Placed in receivership in February 2001, debts of A$160 million.
[8] On 14 September 2001, three days after the New York terrorist attack, Ansett was placed into voluntary administration, liabilities unknown. 16,000 jobs were placed in jeopardy and a figure of A$200 million being used as the sort of financial life-line that would be needed to resurrect the operation. Has since collapsed irretrievably.
[9] Collapsed in March 2001 with a A$5.3 billion shortfall. In provisional liquidation from March, full liquidation from August 2001. See Christopher Jay, ‘The Day of Reckoning’, in Diane Marks and Ian Ramsay (eds) Collapse Incorporated: Tales, Safeguards and Responsibilities of Corporate Australia (2001) chapter 1.
[10] In June 2001, former Air NZ CEO Gary Toomey assured markets that Air New Zealand did not need a bail out and had more than adequate cash. Refer Mark Westfield, ‘Absolutely Going Going Gone’, Weekend Australian, 15-16 September 2001, 35.
[11] The original claim against the auditors of the South Australian State Bank Group was A$1.1 billion against Price Waterhouse and A$3.108 billion against KPMG Peat Marwick for a total of A$4.208 billion over their flawed auditing of the bank group between 1984 and 1991. The cases were settled out of court in September 1997 for $120 million. Refer Rick Sarre and Brenton Fiedler, ‘Investigating and Preventing Fraud Against Australian Businesses: Counting the Costs and Exploring the Strategies’ (1999) 23(3) Accounting Forum 275.
[12] The Australian 18 May 2001, Editorial ‘ASIC must get results from HIH inquiry’, 14.
[13] The HIH Royal Commission was told on 10 December 2001 that a A$1.6 million ex gratia payment was made to the HIH finance director just hours before the provisional liquidation of HIH. The Australian 11 December 2001, 4, ‘HIH Board Voted Itself Extra Pay’). It is not just collapsing entities where this phenomenon is rife. Consider, for example, the report in The Advertiser of 15 October 2001, 3 that AMP CEO Paul Batchelor had a salary rise from A$1.8 million to A$4.19 million while AMP’s after tax earnings for the period dropped 47%. Collapses are rarely caused by inflated executive salaries, of course. There may be a correlation, however, that fits with the ‘greed’ allegation.
[14] ‘[I]t is no longer possible to assume that the state [through governments, prosecutorial authorities and regulators] is in a position to regulate corporate harm, or that it has the motivation to do so’. Fiona Haines, ‘Towards Understanding Globalisation and Control of Corporate Harm: a Preliminary Criminological Analysis’, (2000) 12(2) Current Issues in Criminal Justice 166, 176.
[15] Operative from 15 July 2001.
[16] See <http:www.accc.gov.au> There is another issue here that requires exploration. What may be the connection between the dominant theme of the Trade Practices Act, the elimination of anti-competitive behaviour, and the ultimate demise of competition that that elimination may cause, for example, the collapse of Ansett? On 16 October 2001 (The Australian of that day), the Prime Minister Mr Howard was reported to have suggested that section 50 of the Act (the prevention of market dominance section) might need to be reviewed.
[17] This inter-agency tension has sometimes confused the role of regulators as prosecutorial advisers. See Rick Sarre, ‘Keeping an Eye on Fraud: Proactive and Reactive Options for Statutory Watchdogs’ [1995] AdelLawRw 8; (1995) 17 Adelaide Law Review 283.
[18] The ‘indicative’ list of corporate governance matters that an entity must take into account when making the statement is found in Appendix 4A of the ASX listing rules.
[19] Dean Neu, Hussein Warsame and Kathryn Pedwell, ‘Managing Public Impressions: Environmental Disclosures in the Annual report’, (1998) 23 Accounting Organizations and Society 265.
[20] Tracie Arkley-Smith, ‘Audit committee disclosures: time to regulate?’ Australian CPA, August 1999, 36-39.
[21] There are currently allegations that the auditors allowed the existence of arrangements between HIH and their other consulting arm to cloud their judgement too (ABC Radio National Background Briefing, 23 September 2001). Their American counter-part, Andersen, has collapsed following the demise of the giant US energy trader Enron on 2 December 2001 wiping US$30 billion in shareholder value, the biggest bankruptcy filing in US history. The Powers enquiry concluded that Enron overstated its earnings in the last year of its existence by almost US$1 billion, and paid the same amount (US$27 million) to Andersen in auditing fees as it paid it for other consulting services. See ‘How Enron Chiefs Hid Huge Losses’, The Australian, 4 February 2002, 34. Moreover, an ASIC survey in 2001 of 100 of Australia’s largest companies revealed that directors do not make enough effort to ensure that the auditors they engage are free from conflicts of interest. A number of proposals to deal with this issue have been included in the Ramsay report submitted to the government in October 2001. Source: ASIC MR 02/13 dated 16 January 2002.
[22] The Australian editorial, 3 September 2001, 12, ‘HIH inquiries turn up the heat’.
[23] See, more generally, Rick Sarre, ‘Risk Management and Regulatory Weakness’, in Diane Marks and Ian Ramsay (eds), Collapse Incorporated Tales, Safeguards and Responsibilities of Corporate Australia (2001) Chapter 10.
[24] A view reiterated in Peter Grabosky and Adam Sutton (eds), Stains on a White Collar (1990) 240-241.
[25] Robert Baxt, ‘Thinking About Regulatory Mix: Companies and Securities, Tax and Trade Practices’, in Peter Grabosky and John Braithwaite (eds), Business Regulation and Australia’s Future, Australian Studies in Law Crime and Justice (1993) 117, 117. This view is repeated in Robert Baxt, ‘The Necessity for Appropriate Reform’, in Diane Marks and Ian Ramsay (eds), Collapse Incorporated Tales, Safeguards and Responsibilities of Corporate Australia (2001) Chapter 11.
[26] The Wallis Inquiry report, released by the treasurer Peter Costello April 9 1997, made recommendations regarding not only safeguarding consumers’ interests, but promoting efficiency and maintaining a competitive environment in the financial services sector. <http://www.onthenet.com.au/~bridges/finance/Content/Features/WallisInquiry/ss04.html>
[27] Reported by Malcolm Maiden, ‘Business Chiefs Too Timid: Wallis’, The Age, <http://www.theage.com.au/news/20000603/A42157-2000Jun29.html>
[28] Ibid.
[29] The ongoing protests outside meetings of economic forums in cities such as Seattle, Genoa, Davos and Melbourne give some indication of the anger that has been and can be directed against corporate institutions that fail to consult with stakeholders.
[30] In May of that year Greenpeace boarded and occupied an abandoned oil installation, the ‘Brent Spa’, floating in the North Sea to save it being scuttled and sent to the bottom of the North Sea by its owners, the Shell Corporation. Greenpeace acted on the grounds that the sinking of the rig would have led to an environmental disaster. Greenpeace’s actions caused enormous damage to Shell’s environmental credentials and brought about a change of policy by the UK government regarding the management of the disposal of off-shore oil well facilities.
[31] Alyson Warhurst, ‘Corporate Citizenship and Corporate Social Investment: Drivers of Tri-Sector Partnerships’, (2001) 1(1) The Journal of Corporate Citizenship 57, 65. See Royal Dutch Petroleum: How do we stand? The Shell Report <http://www.shell.com/shellreport-en/>
[32] Debra King and Alison Mackinnon, ‘Who Cares? Community Perceptions in the Marketing of Corporate Citizenship’ (2001) 3 The Journal of Corporate Citizenship 37.
[33] Ibid 52.
[34] Brian Hale, ‘Ethics: Do Good, or Else, the Public Warns’ (1999) 21(43) Business Review Weekly 94-95.
[35] Naomi Klein, No Logo: Taking Aim at the Brand Bullies (2000). It is Ms Klein’s view that the twentieth century concept of the multi-national brand logo has precipitated market imbalances and permitted grossly unfair and unethical business practices.
[36] Cambridge: Cambridge University Press, 1989.
[37] Refer also in this context to the discussion in Lawrence Sherman, ‘Two Protestant Ethics and the Spirit of Restoration’ in Heather Strang and John Braithwaite (eds), Restorative Justice and Civil Society (2001) Chapter 3, especially at 43-44.
[38] In accounting literature, CSR sometimes stands for the not unrelated notion of Corporate Social Reporting.
[39] This is not to say that there are not difficulties faced by those who see shareholders holding the key to accountability. See Robert Webb, Roddy McKinnon and Matthias Beck, ‘Problems and Limitations of Institutional Investor Participation in Corporate Governance’, paper prepared for the Division of Risk, Glasgow Caledonian University, Scotland, 2001.
[40] For example, Clarence Walton, Corporate Encounters: Ethics, Law and the Business Environment (1992), 54-57.
[41] Sarre, above n 23.
[42] Karl Weick, ‘Why efficiency is the enemy of safety’, The Manager, www.themanager.com.au (June 1999).
[43] Rick Sarre, Meredith Doig and Brenton Fiedler, ‘Reducing the Risk of Corporate Irresponsibility: the trend to corporate social responsibility’, (2001) 25(3) Accounting Forum 300-317.
[44] AMP Shareholder News, August 2001, 2. Also <http://www.amp.com.au/shareholdercentre>
[45] Sandra Cahill and Philip Cahill, ‘A Killer Abroad’, Chartered Secretary, November 1998, 22-23.
[46] United States Sentencing Commission, Federal Sentencing Guidelines Manual, Washington DC, 1 November 2000, Chapter 8; cited in Richard Fox, ‘New Crimes or New Responses: Future Directions in Australian Criminal Law’ (2002) Monash University Law Review (forthcoming).
[47] Roman Tomasic, ‘Corporate Crime’, in Duncan Chappell and Paul Wilson (eds), The Australian Criminal Justice System: The Mid-1990s (1994), 264.
[48] For that reason a corporation cannot currently be found guilty of murder in Australia.
[49] The Act is the result of an ambitious project to produce a model criminal code that could be adopted by each jurisdiction, an outcome still a long way from realisation. There are benefits of simplifying joint federal / State investigations, prosecutions and trials (see Eric Colvin, ‘Unity and Diversity in Australian Criminal Law: A Comment on the Draft Criminal Code’ (1991) 15 Criminal Law Journal 82), although the simplification process is not yet being embraced by State parliaments.
[50] Refer Criminal Code Act, Part 5: Para 501.2.1.
[51] The actual effect of the law is limited by the fact that there will be few opportunities for this legislation to apply to State-based criminal codes unless those codes have adopted the 1995 Code. Note that a non-Code State government (the Bracks Labor government in Victoria) nevertheless introduced like-minded new industrial manslaughter laws into parliament in November 2001. Under the Victorian Bill, a senior manager could be jailed for five years if found guilty of industrial manslaughter.
[52] A good example from the United Kingdom is the guidance of the Health and Safety Commission on directors’ responsibilities that insists upon every board assigning one of their number to be a ‘health and safety director’ to ensure that all risk management issues are fully addressed both at board level and within the organisation as a whole. This guidance is in line with the Turnbull Report on corporate governance, the proposed new offence in the UK of ‘corporate manslaughter’ and the publication in June 2000 of the Commission’s Revitalising Health and Safety found at <http://www.hse.gov.uk/pubns/indg343.pdf>
[53] United States, Fraudulent Financial Reporting, Report of the National Treadway Commission, 1987.
[54] The Commission recommended the following steps:
-Establish and communicate specific goals articulating corporate ethical standards;
-Develop and implement procedures to use in achieving corporate ethical standards;
-Create and install reward systems that encourage acts of moral courage;
-Define and provide resources employees need to perform their ethical duties;
-Create a work environment where supervision at all levels is characterised by consideration and “human-ness”, thereby serving as a role model.
[55] John Braithwaite, To Punish or Persuade (1985).
[56] Henry Bosch, ‘Corporate Practices and Conduct’, Information Australia (1991). Note also the Australian Democrats introduced a Corporate Code of Conduct Bill 2000. See <http://www.democrats.org.au/campaigns/conductbill/ccb.pdf> It failed. The Parliamentary Joint Committee on Corporations and Securities recommended that the Bill not be enacted because it was “unworkable”. <http://www.aph.gov.au/senate/committee/corp_sec_ctte/corp_code.htm>
[57] The Caux Principles, reproduced at <http://www.caux.ch/anglais/initer.htm>
[58] Sarre, Doig and Fiedler, above n 43.
[59] KPMG International, April 2001, The Business Case for Sustainability, 1.
[60] Robert Hinkley, ‘The Profit Motive Can Work With a Moral Motive’, The Australian Financial Review, 7 April 2000, 33, cited in Bryan Horrigan, ‘Teaching and Integrating Recent Developments in Corporate Law, Theory and Practice’ (2001) 13 Australian Journal of Corporate Law 182.
[61] Ibid.
[62] Robert Baxt, ‘Avoiding the Rising Floods of Criticism: Do Directors of Certain Companies Owe a Duty to the Community?’, Company Director, December-January 2001, 42. Currently the law rejects any view that directors owe duties to persons other than shareholders, not even existing or potential creditors, see Spies v R [2000] HCA 43; (2000) 201 CLR 603.
[63] Paul Finn, ‘Simplification and Ethics: A Commentary’ (1995) 5 Australian Journal of Corporate Law 158, 161-162.
[64] Rick Sarre, ‘The Triple Bottom Line in Corporate Management and Governance’, Business/Higher Education Round Table News, Issue 9, November 2000, 23-25.
[65] John Elkington, Cannibals with Forks: the Triple Bottom Line of the 21st Century (1997) 109.
[66] The development of the term is discussed in ‘Tilling the Middle Ground’, The Wall Street Journal Europe, March 23, 2000, 25, 31.
[67] According to <http://indexes.dowjones.com> the top 200 corporations on the DJSGI have outperformed the Dow Jones Global Index by approximately 10 per cent since its inception in October 1999.
[68] Data reproduced from an advertising brochure for the SAM Sustainability Index Fund, dated 2000, produced by the SAM Sustainability Group, refer <http://www.sam-group.com>
[69] David Henderson, ‘Misguided virtue: false notions of corporate social responsibility’ (2001) can be found at the website of the New Zealand Business Roundtable <http://www.nzbr.org.nz> . For the famous monograph advocating this view, see Milton Friedman in the New York Times, ‘The Social Responsibility of Business is to Increase its Profits’, New York Times Magazine, 13 September 1970, 122-126, reproduced in Laura Hartman (ed), Perspectives in Business Ethics (1998), 246-251, also N. Craig Smith, ‘Arguments for and against corporate social responsibility’, in Laura Hartman (ed), Perspectives in Business Ethics (1998) 252-257.
[70] Henderson, above n 69. A synopsis can be found in The Australian 19 June 2001, 24. The Australian’s Economics Editor Alan Wood, in praising Professor Henderson on 15 May 2001, 11 (‘To thrive, capitalism needs room to breathe’) argued that the Henderson paper was ‘not an argument for robber-baron excesses but a timely warning of excesses of a very different sort, promoted by fashionable anti-market alarmism being embraced with little questioning by both governments and business’.
[71] Leon Davis, ‘Business can reap social profits’, The Australian, 18 May 2001, 15.
[72] Tony McLean, ‘Reject Zealotry as Triple Trouble’, The Australian, 18 September 2001, 32.
[73] Ibid.
[74] Paddy Manning, ‘Ethics Happen’, The Australian, 20 September 2001, Letters.
[75] Peter Grabosky, ‘Using Non-Governmental Resources to Foster Regulatory Compliance’ (1995) 8(4) Governance: An International Journal of Policy and Administration 527, 543-544.
[76] Refer, for example, to the Australian New Zealand standard AS/NZS 4360:1999 and the complementary standard on Compliance Programs in Australia AS 3806:1998.
[77] With a series of incentives in place, there is, it is argued, a greater likelihood of an entire business region becoming more competitive, nationally if not internationally, purely through its being able to prevent more potential financial losses than its competitors.
[78] Time magazine 10 April 2000, 36.
[79] Senator Robert Hill, Business/Higher Education Round Table News, Issue #9, November 2000, 1, 2.
[80] The Bill built on reforms suggested in the government’s Corporate Law Economic Reform Program (CLERP) Policy Paper No. 6 (1997) as a way of enshrining consumer sovereignty in the choice and purchase of financial products, as well as creating a single licensing framework for financial service providers.
[81] Whether this reporting is significant and effective is discussed in a useful report entitled, ‘The Thin Green Line’, UTS Faculty of Law Report by Karen Bubna-Litic and Lou de Leeuw, 2000.
[82] Patrick Primeaux, ‘Maximizing Ethics and Profits’, reproduced in Laura Hartman (ed), Perspectives in Business Ethics (1998) 258-263.
[83] Ian Dunlop, ‘Governance and Related Issues: An international perspective’, unpublished address to the Arthur D Little/Conference Board Conference, New York, 28-29 April 1998, 14.
[84] Quoted in Paul McIntyre, ‘Weightless Training’, The Australian Media section, 20-26 September 2001, 15.
[85] Ibid.
[86] Total liabilities, according to administrator Ferrier Hodgson, ‘Pasminco carve-up curve’, The Australian, 26 September 2001, 25, were, at that date, A$2.9 billion, although by the end of the week that figure had grown to A$3.4 billion.
[87] David Uren, ‘If all else fails, rewrite the instruction book’, Weekend Australian, 22-23 September 2001, 48.
[88] In the same way that it is absurd to suggest that, because someone has smoked a packet of cigarettes all one’s life and lived to a ripe old age, smoking cannot be bad for one’s health.
[89] Uren, above n 88, 48.
[90] Rick Sarre and Meredith Doig, ‘Preventing Disaster by Building a Risk-Prevention Ethic into Corporate Governance’, (2000) 15(2) Australian Journal of Emergency Management 54.
[91] Ian Ayres and John Braithwaite, Responsive Regulation: Transcending the Deregulation Debate (1992).
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