The Fundamentals of Good Governance, Post-Hayne

The recent Hayne Royal Commission highlighted some failures in governance in the banking and financial services industry and considered whether banks and financial services organisations had lived up to community expectations. Not-for-profit and for-purpose organisations have much to learn from the recent Royal Commission, as community expectations are crucial to their purpose and their viability.

In essence, the Hayne Royal Commission advocates a focus on and a sharpening of good governance fundamentals: governing for purpose, role clarity, improved capability and the importance of culture. So how can a not-for-profit or for-purpose organisation respond to the lessons from the Royal Commission in building its reputation, integrity and performance?

1. Purpose

Larry Fink, CEO of BlackRock Global Investment Management, stated in his 2018 annual letter to CEOs, ‘Without a sense of purpose, no company … can achieve its full potential’.

Purpose is fundamental for a not-for-profit or for-purpose organisation, not only to performance but also to existence. Not-for-profit and for-purpose organisations must be clear as to why they exist and what they are seeking to achieve. These messages must be clearly communicated in engaging with all stakeholders. Boards must ensure there is clear definition and communication of the strategic goals of the organisation and drive the organisation to achieve these goals.

2. Role clarity

In order for an organisation to perform well, everyone’s role must be clear. The Hayne Royal Commission confirmed:

‘The task of the board is overall superintendence of the company, not its day-to-day management. But an integral part of that task is being able and willing to challenge management on key issues, and doing that whenever necessary…Proper governance requires setting priorities. Setting priorities requires choices.’

Boards should act as guardians of the past and stewards of the future. Active and meaningful leadership is crucial, as true effectiveness occurs when everyone in the organisation is performing a well-defined role working towards achievement of a common goal. Role clarity requires good communication, accountability, regular engagement and training and good governance structures.

3. Capacity

Not-for-profit and for-purpose organisations should ask, “Do we have the right people around the boardroom table and the required capability in our board and management team to enable us to achieve our goals?”

There are various tools to assist with building capacity, including a board skills matrix, board reviews, diversification, training, building each individual’s skills in independent thought and constructive challenge, as well as succession planning. Boards should actively plan their own development, as well as that of their organisation. In doing so, any conflicts of interest or duty must be identified and managed. This is truly leading from the top.

A most crucial element is building communication and an appropriate flow of information in order to better align the board and management. There is an onus on boards to effectively challenge management, ensure risk and compliance oversight and to seek adequate information, with an expectation of candour from management in return.

Workshops and reflection through independent review and enhanced transparency and accountability assist to build the alliance of the board and management. In this context, it is also timely to reflect on board agendas, papers and minutes.

4. Culture

The key overarching theme from the Royal Commission is culture. Organisations must define the culture they require to achieve their strategic goals and then actively seek to develop, manage and monitor that culture. Culture is more than just employee engagement; it must be linked to the purpose and strategic goals of the organisation. Organisations need to measure culture in order to manage it, so thought needs to go into how to do this. Directors increasingly need to get out and ‘kick the tyres’ in order to get a feel for culture.

Culture has been described as what happens when no one is looking. Yet boards of not-for-profit and for-purpose organisations need to establish oversight of culture in order to understand what is happening at the front line of their organisation, and then start pulling some of the levers that can be used to manage culture, such as accountability, transparency, internal controls, engagement and remuneration. The Hayne Royal Commission emphasised the connection between conduct and reward and the need for it.

Commissioner Hayne shared the following six principles to guide the conduct of business:

1. Obey the law.
2. Do not mislead or deceive.
3. Act fairly.
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 interest of that other.

Organisations are also increasingly being encouraged to ask the question “should we?” as opposed to “can we?”. Integrity and conduct are important considerations in answering this question, as ‘the behaviour you walk by is the behaviour you accept’.

The board is responsible for setting the tone from the top in building these fundamentals of good governance, effectively challenging management and ensuring the board has adequate information to discharge its duties: not more information but more effective information. Care should be taken in aggregating any data in reporting so that any emerging issues in the organisation are not masked.

The board and management must lead the culture by example and develop a robust governance framework in order to drive the performance of their organisation. Complacency can no longer be accepted. The Hayne Royal Commission has sent the strong message that boards and management must identify and deal with any issues in a timely and effective manner. This requires active board oversight of both financial and non-financial risks and focus on customers in decision-making.

Moving forward

Community expectations of good governance are higher than ever before. Not-for-profit and for-purpose organisations should take the opportunity to reflect on, learn from and respond to the key governance messages from the Hayne Royal Commission in order to ensure their ongoing success.