This makes it hard to establish criminal culpability (the standard of proof is “beyond a reasonable doubt”), even if directors and executives remain in control of processes and are paid bonuses based on organisational performance.
Certain clauses in commercial contracts and the structuring of corporate groups across multiple jurisdictions can also be used to frustrate investigations.
In cases where corporate criminality can be more directly tied to decisions by executives or directors, subsidiaries (or internal divisions) can be dissolved or sold.
Decoupling occurs when corporations say publicly that they follow the law, and even create policies to tick regulatory boxes, but then do something entirely different as a matter of standard practice.
With existing corporate governance structures in place decoupling is extremely difficult to detect from the outside. It takes active oversight by regulators, internal whistleblowing or public inquiries with coercive powers to gather evidence to identify it.
These include sub-contracting, the use of consultants, creation of subsidiaries and transnational structures, relocating work to low transparency jurisdictions, and the use of franchising systems, dealer networks and agents.
These decisions about organisational structure are made at the board or senior executive levels.
The banks have publicly asserted that their boards are focused on ensuring good corporate governance, and that they have the structure (explicit policies, clear lines of reporting/delegation) to ensure regulatory compliance.
But what has emerged at the Royal Commission shows these structures either don’t exist or don’t function as they should.
There are a number of factors that the Royal Commission and federal government should address to prevent future systemic misconduct, beyond just creating a temporary lull before a return to business as usual.
Australian companies only have one board and that is at the heart of the problem. While all board directors are responsible for the management and governance of corporations, in practice they delegate authority to executive directors who then operate with wide discretion. This includes enacting policy and reorganising the corporation in ways that diffuse accountability and criminal culpability.
While all corporate governance systems have their weaknesses, in two-tiered boards, executive directors are overseen by supervisory boards who appoint their own auditors. These kinds of boards constrain executive director discretion, making decoupling more difficult.
This is one possible reason why countries like Germany, with two-tiered boards, have fewer and less costly systemic governance failures.
In addition to changing the governance of organisations, regulators must be given more resources, greater powers to collect evidence and explicit directions to mount investigations before and not after the systemic misconduct has been identified.
The use of consultants and the rapid expansion of their business model which bundles accounting, audit and legal services together presents is another threat to accountability and transparency. It is also an obstacle to investigating and successfully prosecuting systemic corporate misconduct.
- ^ Financial Services Royal Commission (financialservices.royalcommission.gov.au)
- ^ seen evidence (www.abc.net.au)
- ^ makes it difficult (doi.org)
- ^ systemic misconduct (www.smh.com.au)
- ^ corporations are arranged (www.jstor.org)
- ^ What the Royal Commission can do if the banks don't play ball on evidence (theconversation.com)
- ^ admitted to the Royal Commission (financialservices.royalcommission.gov.au)
- ^ laws (asic.gov.au)
- ^ but a deliberate decision (financialservices.royalcommission.gov.au)
- ^ decoupling (journals.sagepub.com)
- ^ extremely difficult to detect (www.jstor.org)
- ^ It takes (www.jstor.org)
- ^ The Financial Services Royal Commission highlights the vulnerability of many older Australians (theconversation.com)
- ^ enable systemic misconduct (doi.org)
- ^ include (doi.org)
- ^ franchising systems, dealer networks and agents (www.abc.net.au)
- ^ publicly asserted (www.commbank.com.au)
- ^ strong (link.springer.com)
- ^ laws (papers.ssrn.com)
- ^ embolden other senior executives (www.jstor.org)
- ^ Why don't we read the fine print? Because banks know the pressure points to push (theconversation.com)
- ^ creating a temporary lull (www.jstor.org)
- ^ only have one board (www.jstor.org)
- ^ two-tiered boards (link.springer.com)
- ^ fewer and less costly systemic governance failures (openknowledge.worldbank.org)
- ^ corporate criminal behaviour (doi.org)
- ^ fixed and capped (papers.ssrn.com)
- ^ explicit directions (www.jstor.org)
- ^ another threat (theconversation.com)
- ^ accounting industry self-regulation (ro.uow.edu.au)
Authors: Andrew Linden, Sessional/ PhD (Management) Candidate, School of Management, RMIT University