Boards must conduct their own inquiries into questionable behaviour, says ASIC chair

Company boards are legally required to conduct their own inquiries if they are suspicious of poor behaviour, ASIC chair Joe Longo has reminded directors.

ASIC chairman Joe Longo. Picture: Colin Murty

ASIC chairman Joe Longo has put directors on notice that they must be responsible for making their own inquiries if they have concerns about poor personal ­behaviour in their company and not just rely on assurances from management.

In a speech to be delivered to the Australian Institute of Company Directors conference in Sydney on Wednesday, Mr Longo warns directors that if they are aware of information that has “awakened suspicion in them”, they are legally required to make their own inquiries.

“They cannot rely on the judgment of management,” he says in the speech.

He will use the speech to point out that the “health of the relationship between a board and senior management” has been at the heart of “several well placed issues in recent months”.

“Some of these issues, and many that ASIC deals with, start with poor personal behaviour before turning into more serious corporate misconduct,” he says.

“Not all personal behaviour leads to governance issues, but governance issues allow poor personal behaviour to thrive.”

He says the evidence from recent “scandals” shows the need for more questioning at board level when directors have concerns.

“Effective governance requires rigorous, diligent back-and-forth between management and the board,” he says. “The board should support management – but it must also question it.

“Likewise, management needs to support the board, and provide it with the information needed to make good judgments.”

Mr Longo will point out that board directors are now often having to deal with board papers from management that are from 200 to as many as 900 pages long, packed with “dense and voluminous” information that took a long time for them to digest.

He says there are concerns about whether the volume of information being provided by management to directors for board meetings is “to inform directors of key issues in the most effective way” or whether it is a way of “absolving” management from having to exercise judgment about what to leave in or out of the papers or what to highlight.

“It remains the role of management to provide clear, comprehensive information that enables boards to make strategic decisions,” he says in the speech.

“Having professional, competent and curious management that the board can rely on is fundamental.”

Joe Longo appearing before a budget estimates committee sitting at Parliament House. Picture: Martin Ollman

In the speech, ASIC will also call on company boards to have more directors with skills in technology and science and not just having a banking, finance, legal or management background.

“There isn’t a single material issue currently facing business – and our institutions more generally – that doesn’t require data, systems, technology and processes to effectively address,” he says.

“For evidence of this, you need only look at major AICD publications in the past year on cyber ­security, AI governance, and mandatory climate reporting.”

He says there needs to be a “healthy diversity of expertise and training” on boards, including having those with technical skills.

“Last year the average number of board members with an accounting, banking, or finance background rose to 40 per cent and the combined total of those with a legal background, finance background and general management was 70 per cent,” he says in the speech.

“By contrast, those with a background in technology was just 7 per cent.”

He points out that a recent KPMG report found that 69 per cent of board members only had moderate access to “the required skills to effectively navigate technological and regulatory disruption and future trends”.

“I know we can’t all be scientists,” he says. “But there is a real opportunity to broaden the skill sets and the perspectives of company boards – both by strategic hiring and by upskilling current board members in areas such as science and technology, especially where it pertains to the core business, or how it’s run.”

Mr Longo will also announce that company director Nicola Wakefield-Evans has been appointed co-chair of ASIC’s new consultative group advising it on ways to simplify its regulations in Australia.

He says the new group is “charged with bringing fresh thinking and practical ideas” in ways to simplify ASIC’s work, including its regulatory guidance and legislative instruments and to recommend legal changes that “address complexity in the regulatory framework”.

Other members of the group include Australian Banking Association chief executive Anna Bligh; Professor Ross Buckley from the University of NSW; the chief executive of the Consumer Action Law Centre, Stephanie Tonkin; Business Council of Australia CEO Bran Black; Australian Chamber of Commerce and Industry CEO Andrew McKellar; Australian Institute of Company Directors chair Naomi Edwards; the chair of the Governance Institute of Australia, Pauline Vamos; Super Consumers Australia CEO Xavier O’Halloran; and Productivity Commissioner Julie Abramson.

Mr Longo says the community has high expectations of directors, but it is harder for them to meet those expectations effectively “in an environment of complex, overlapping, changing, and increasing legal obligations”.

He says ASIC is looking for steps it can take to simplify the way it administers the law and to help reduce the regulatory burden on businesses and directors.

He says ASIC will be using advice from the group to develop a discussion paper that will be released later in the year.

He says practical things that could be done include making easier to find information on ASIC’s website. They also included measures to “ease the burden of breach reporting and better explain ASIC data requests”.

Mr Longo says the new committee is evidence of ASIC’s determination to reduce regulatory complexity around its operations, working in consultation with the business community.

His speech followed comments on Tuesday by Ms Edwards that corporate boards in Australia were “overwhelmed” by regulatory compliance burdens.

In opening remarks to the AICD conference on Tuesday, she said compliance burdens on boards created “inertia” and crowded out space at board meetings for important discussions.

“Government after government has pushed regulatory responsibility up to the board level, completely misunderstanding that a board has always held responsibility for every aspect of its operations,” she said.

She said boards needed the “freedom to operate at a higher level with strong systems and processes”.

She said it would take “courage” for boards to push back against “the inertia of compliance and regulation and instead spend time on the bold discussions” needed for the company’s future.

“It takes courage as a board to stare down proxy advisers or mindless checkbox forms,” she said.

Originally published as Boards must conduct their own inquiries into questionable behaviour, says ASIC chair