Corporate governance and ethics post-Banking RC: could a human rights approach be the answer?

On 4 February 2019, the Final Report and recommendations (Final Report) of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, led by the Hon Kenneth Hayne AC QC, were published. Shortly thereafter, the Commonwealth Government published its response highlighting the actions it will take in respect of all the recommendations.

Since that time, much has been written on the Final Report (and the preceding interim report) findings that a number of boards had failed to ensure ethical outcomes for their organisations and customers. Largely driven by its terms of reference, the Commission found that many of the organisations they were called upon to investigate had failed to meet ‘community standards and expectations’.

We suggest that the Commission’s recommendations can be made clearer and ‘organisation ready’ if the ethical culture is developed that is consistent with internationally-recognised human rights norms.

Because they are based in international law, human rights provide an ethical lens that can transcend national and cultural boundaries. They put peoples’ basic human rights at the center of decision-making and can be used to assess and address any unintended harm. They remove the subjective element from ethics and replace it with internationally-agreed standards ready to be incorporated into thoughtful governance and corporate decision making processes. This type of ethical framework should also help organisations attract and retain customers and employees. Using such a human rights model can help build valuable social capital.

What does a human rights approach entail?

A human rights-based approach to governance design asks an organisation to consider their business conduct and practices against the legitimate rights of stakeholders and the obligations of the organisation to respect all human rights including such rights as the right to privacy, to freedom of expression, the right to work and have an adequate standard of living, and the right to be free from discrimination.

A human rights approach says that where individuals may be directly affected by decisions, an organisation will consider the legal, regulatory, moral and actual rights of those involved and, where practicable, include affected persons in the decision-making process through communication and consultation – an organisation taking such an approach will not only ask the question ‘can we?’ but ‘should we?’

In 2011, the Human Rights Council unanimously endorsed the UN Guiding Principles on Business and Human Rights (UNGPs). These principles establish guidance for businesses to respect human rights and take steps to assess identify, mitigate and prevent adverse human rights impacts.

The UNGPs have gained significant traction around the world. They have been incorporated into OECD guidelines for multinational enterprises and referenced in other global guidelines and national legislation. Twenty one States, including the UK, the USA and Germany, have developed National Action Plans on Business and Human Rights, and Australia has referenced the UNGPs in the Draft Guidance to the Modern Slavery Act 2018 (Cth).

Further, nearly 10,000 organisations across the world have joined the UN Global Compact, meaning they have formally committed to reporting on their progress on human rights, environmental rights, labour rights and anti-corruption on an annual basis. Human rights are also increasingly being referenced in relation to global efforts to address issues like modern slavery in supply chains. However, embedding human rights considerations into decision-making at every level is key to ensuring the framework is effective.

In a recent paper, The Role of Social Capital, the authors suggest that an organisation can build valuable social capital by being seen to self-regulate beyond governmental controls. This demonstrates to consumers that the organisation is ‘ethical’. Further, a number of studies have linked high levels of ethical behaviour to higher profits, with one even showing that customers are willing to pay a slight premium for a product created by a company with high social capital.

A human rights based approach to governance can help develop a corporate culture that considers all stakeholders affected by a particular corporate decision. It means a governance policy that includes a commitment to treating people with respect, dignity, fairness and equality, to help them obtain or maintain basic human rights standards of individual safety, security, health and welfare.[1]>

In the language of the Commission a human rights based model, recognises the ‘differences between a short-term and a longer-term view of prospects and events’. As the Final Report says, ‘the longer the period of reference, the more likely it is that the interests of shareholders, customers, employees and all associated with any corporation will be seen as converging on the corporation's continued long-term financial advantage’. A human rights based approach to governance is also a model that finds support in the recent Brickworks Decision,[2] in which the Federal Court supported a view that allowed directors considerable scope to consider the long term interests of the corporation.

Overlaying director’s duties

Directors must exercise their powers and discharge their duties in good faith, in the best interests of the corporation and for a proper purpose. It is the corporation that is the focus of their duties, but that is not the end of the matter. This is because the interest of the corporation can intersect with the interests of stakeholders (including shareholders).[3]

Accordingly, directors may need to take into account human rights matters. This is especially true of the current environment. Increasingly, directors are being required to steward their organisations through a range of external and internal stakeholders that are looking out for misconduct not just within their organisations but all the way along their value chains. Any misdeeds, be they deliberate or accidental, will be of great cost to a corporation if their cause it is perceived to be based (either in whole or in part) on the absence of an ethical culture in the corporation.

The duty of care and diligence obliges a director to obtain knowledge and sufficiently place themselves in a position to guide and monitor management of the organisation. In the Centro Case,[4] this was described as a ‘core, irreducible requirement’. Directors must become familiar with the fundamentals of the business in which their organisation is engaged, and are under a continuing obligation to keep informed about their organisation’s activities and ‘the effect that a changing economy may have on [its] business’. The Final Report redefines this duty to be:

“… consideration of more than the financial returns that will be available to shareholders in any particular period. Financial returns to shareholders (or ‘value’ to shareholders) will always be an important consideration but it is not the only matter to be considered.” 

What is certain is that no current director can ignore the possible impact on their organisation of poor corporate culture and its reputational consequences. While it will never be a complete solution in and of itself, directors who:

• consider and adopt a human rights framework; and
• act (or decline to act) based upon a rational and informed assessment of the organisation’s best interests,

may be better placed to use the existence of that governance framework as part of a ‘business judgement defence’,[5] especially where they are making business judgements.

This statutory defence protects management decisions provided (amongst other things) that the director has informed themselves of the subject matter and rationally believes that the judgement is in the best interests of the corporation. When directors make business judgements about balancing environmental, social and governance-related issues or the approach they take to shareholder and consumer activism, a human rights framework may go some way towards establishing that the board considered a broad suite of social capital issues in reaching their decision.

In addition, human rights make good business sense. Organisations that integrate human rights considerations into their core business practices can see decisions as justifiable and in the best interests of the organisation because, as the Australian Human Rights Commission sensibly points out, it:

• safeguards the organisation’s reputation and brand image;
• highlights human and environmental risks before technical or investment decisions are made;
• reduces cost burdens associated with stakeholder damage control, labour disputes and security issues;
• reduces the risk of costly litigation; and
• improves governance.

The Final Report challenges the idea that Australian law requires corporate governance based upon shareholder primacy and shareholder wealth maximisation alone. That said, if thoughtfully implemented, a human rights framework underpinning an organisation’s governance code should meet the Final Report’s recommendation that shareholder interests be considered alongside (not necessarily in priority to) those of other stakeholders.

A human rights framework could provide a value-based underpinning for directors as they try to balance the interests of a number of different stakeholders whose interests in the organisation, direct or indirect, appear now to form a part of the director’s statutory and fiduciary obligations. This is particularly true when we look at what Commissioner Hayne said about the type of conduct required of Australian corporates.

Human rights in the context of the Commission’s view of ethical conduct

When Commissioner Hayne handed down the Final Report, he found that many organisations they were called upon to investigate failed to meet ‘community standards and expectations’. In particular they had failed to:

1. Obey the law.
2. Do not mislead or deceive.
3. Be fair.
4. Provide services that are fit for purpose.
5. Deliver services with reasonable care and skill.
6. When acting for another, act in the best interests of that other.

In the section below we explore how these requirements could sit in a human rights based framework designed to promote a culture of acting lawfully, ethically and responsibly? We also consider how these standards sit with the ASX Corporate Governance Council current Corporate Governance Principles and Recommendations (the Fourth Edition). Relevantly, a listed entity is required to articulate and disclose its values. That might include a governance style statement that incorporated a human rights focus, for example:

“Our Company will conduct its business with uncompromising integrity. Our reputation for honesty, fair dealing and ethical behaviour is a defining hallmark of our corporate culture. Each of us bears responsibility for nurturing and enhancing that reputation and for upholding our values. Those values include an obligation to respect the human rights of individuals. This means that we will treat people with whom we deal with respect, dignity, fairness and equality, to help them obtain or maintain basic human rights standards of individual safety, security, health and welfare so as to avoid infringing on the human rights of others or preferring the interests of one group, and we will address any adverse human rights impacts with which we are involved.

Our standards of business conduct serve as our guide to the ethical and legal obligations we have. These standards govern all our dealings with customers, competitors, suppliers, third-party partners, as well as with employees. This means that among other things we will not make representations or omissions, nor engage in any other practices, that are deceptive, misleading, fraudulent or unfair.”

This statement would (see the UN Guiding Principles on Business and Human Rights for more information):

• be approved at the most senior level of the entity;
• be informed by relevant internal and/or external expertise;
• stipulate the entity’s human rights expectations of personnel, business partners and other parties directly linked to its operations, products or services;
• be publicly available and communicated internally and externally to all personnel, business partners and other relevant parties; and
• be reflected in operational policies and procedures necessary to embed it throughout the business enterprise.

It could (and some might say should)[6] also be accompanied by an amendment to the constitution, for example:

“In exercising their power to manage and direct the affairs of the Company, directors may have regard to those matters they consider most likely to promote the interests of the Company. In particular, directors may take into account the human rights of individuals with whom the Company interacts.”

We examine Commissioner Hayne’s six key behaviours to meet ‘community standards and expectations’ as outlined above in more detail below.

Obey the law. Saying ‘obey the law’ may sound trite, but it is not always that easy. Research conducted at Melbourne Law School found the same prohibition in slightly different forms, with different requirements, different defences and different remedies and penalties in more than 30 pieces of state and federal legislation.

While there are many inadequacies in the way our legislation is crafted,[7] the ‘obey the law’ principle requires an organisation to make a simple statement that it will apply the laws that govern it and its relationships with its customers, the community and employees in a purposive way consistent with human rights principles.

Today, the wrong corporate culture can be a basis for liability. The Criminal Code Act 1995 (Cth) contemplates that culture can be a factor in sentencing decisions. In this context, a human rights focus provides guidance by encouraging decision makers to ask: who is affected by this decision and are they positively or negatively impacted? If they are negatively impacted, is it possible to prevent that impact, if not, should we be continuing with this activity, operation, service or transaction?

If these questions are not considered early in the decision making process, even where a decision is clearly within the law, there may be a risk to business development, sustainability, brand and reputation.

Do not mislead or deceive. If a corporate culture, policies, guidelines, procedures and decision-making processes are based on a fundamental respect for human rights and the human rights of all stakeholders, it is possible to build a culture of transparency and accountability. The importance of this approach can also be seen in the context of the OECD guidelines for Multinational Enterprises, which require enterprises to ‘not make representations or omissions, nor engage in any other practices, that are deceptive, misleading, fraudulent or unfair’.

Be fair. Countless studies[8] have shown that humans have a deep aversion to inequity engrained in their psyche. Regardless of the actuality, should something appear to have been ‘unfair’, those adversely affected look for a redress of what they think are ‘wrongs’.

Such an approach is never going to serve the best interests of an organisation who is seen to be behaving unfairly. A human rights perspective says that the impact of any decision should have been considered from the point of view of all relevant stakeholders. Has the organisation tested the decision to make sure it is not going to unfairly impact one group of stakeholders in preference of another?

In some instances, these decisions can be framed with the help of human rights considerations – for example, limiting the freedom of expression of some people to protect the safety and security of others. Identifying salient human rights risks, or recognising where the adverse impact is greatest, may help business to identify the ‘fair’ decision.

Provide services that are fit for purpose and deliver services with reasonable care and skill. These two behaviours can also be seen in the context of the OECD guidelines for Multinational Enterprises, which state that enterprises should ‘act in accordance with fair business, marketing and advertising practices and should take all reasonable steps to ensure the quality and reliability of the goods and services that they provide’. Putting business decisions through a human rights lens can help to determine what services are fit for purpose. What is the aim of this service? Who will benefit from it? Are there any stakeholders who may be negatively affected?

When acting for another, act in the best interests of that other. Are the human rights of others being respected? Are you having a positive or negative impact on them, and how does that manifest itself in the outcomes brought on by the decisions you are making?

Looking forward

The Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has challenged corporate Australia to rethink the orthodoxy of their corporate governance model. So too have the new ASX Guidelines, which show that the ASX Governance Council is requiring boards to consider (or reconsider) their own practice to ensure their processes are designed to maintain a sound culture and acknowledge the need to meet community expectations.

Human rights is a well-established ethical framework through which to frame that conversation. Where human rights have been considered in the decision-making process in difficult situations, boards and senior managers may be in a better position to outline what did they did to prevent the situation, what they did to detect it and what they decided to do when they found out about it.

Commissioner Hayne is right to highlight the important role of directors and management in embedding an ethical culture. His Final Report suggests that the community expects corporate Australia to foster a culture that promotes good leadership, decision making and ethical behaviour.

Human rights provides a basis for practical understanding of what is ethical, of what is efficient, honest and fair, of what is the ‘right’ thing to do. For directors and managers, putting a human rights framework in place can help shape a ‘human centred approach’[9] that address the behaviours the Commissioner suggests are key to meeting community expectations.

^{[1] Sheehan, Kym Maree and Kinley, David, Community Expectations: Putting People Before Profit Means Taking Human Rights Seriously (November 6, 2018). Sydney Law School Research Paper No. 18/73. Available at SSRN: https://ssrn.com/abstract=3279...
[2] RBC Investor Services Australia Nominees Pty Limited v Brickworks Limited [2017] FCA 756
[3] This idea was explored in some detail in Bell Group Ltd (in liq) v Westpac Banking Corporation (No.9) (2008) 39 WAR 1 in the context of the of the interests of the interest of the shareholder and the corporation
[4]Australian Securities and Investments Commission v Healey [2011] FCA 717
[5] Lumsden, Andrew J., The Business Judgement Defence - Insights from ASIC v. Rich (March 25, 2010). Companies and Securities Law Journal, Vol. 28, No. 3, 2010. Available at SSRN: https://ssrn.com/abstract=1584...
[6] Lumsden, Andrew J. and Fridman, Saul, Corporate Social Responsibility: The Case for a Self Regulatory Model. Company & Securities Law Journal, 2007; Sydney Law School Research Paper No. 07/34. Available at SSRN: https://ssrn.com/abstract=9879...
[7] For a new model see: Statutory interpretation and the critical role of soft law guidelines in developing a coherent law of remedies in Australia.
[8] Fehr, E. & Schmidt, K. M. A theory of fairness, competition, and cooperation. Quart. J. Econ. 114, 817–868 (1999)
[9] Peter Kell, Why a Human Centred Approach Matters.}