Warning on post-Hayne caution

One of the nation’s top business leaders has warned against an overly ‘paternalistic’ approach to managing risk.

KPMG chairman Alison Kitchen. Picture: Aaron Francis

One of the nation’s top business leaders fears a sharply renewed focus by companies on the needs of customers in wake of the Hayne royal commission could have adverse consequences if firms take an overly “paternalistic” approach to managing risk.

KPMG chair Alison Kitchen said she fully supported the findings of a KPMG survey of 600 members of the Australian Institute of Company Directors across the listed, private, not-for-profit and public sector that found customers and employees were now the top priority in the eyes of directors, ahead of other stakeholders or issues.

But Ms Kitchen said in her recent discussions with directors across a range of industries, there were growing concerns about how customers and the broader community may react to companies taking an overly cautious approach to risk.

“The renewed focus on the customer in boardrooms is real and tangible and it is a great thing. It will make everyone feel reassured. But the question will come: does that mean people will no longer be able to get services that they think they really need? Will that paternalistic aspect step up?’’ she said in an interview with The Australian.

“There could be inadvertent consequences. You could have a situation where a company in banking, telecommunications, insurance or any services sector says: ‘We can see you need that product but we don’t think you will be able to afford it or manage it.’ Where is the right balance of a company making your decisions for you, stepping in and running your life versus not ripping you off?”

AICD chief executive Angus Armour said the rationing of credit by banks across the economy over the past six months had already highlighted the challenges for financial institutions in weighing the demands of customers versus containing risk.

“The credit application process has already become more complicated since the royal commission,” Mr Armour said. “We are already seeing there is an implied cautiousness and implied regulatory overlay in lending even before any formal new regulation takes effect.”

The KPMG/AICD survey, taken last December, found that directors of larger organisations — those with over $500 million in annual revenue — were most concerned about excessive regulation, director liability and accountability in the post-Hayne era.

Earlier this year former AICD chairman Elizabeth Proust warned that the fallout from Kenneth Hayne’s inquiry would lead to fewer good and qualified people being willing to take on listed company board positions.

The KPMG/AICD survey, which will be formally released today at the AICD’s annual conference in Sydney, also found that, in terms of prioritising stakeholders, customers and employees rated eight out of nine for significance to the relevance and viability of the business. Investors, government and the local community were behind on six out of nine.

On identifying the critical issues impacting the organisation, customer satisfaction came top with a score of eight out of nine, followed by employee satisfaction and internal culture/conduct — rather than financial outcomes.

Top director concerns after Hayne royal commission

Next, on seven out of nine, came public trust; demonstrating social values/contribution to society; innovation and disruption; financial responsibility/sustainability; and cost competitiveness. “The focus on the client needs to start with hearing their voice and understanding what their needs are, but also drawing out what their complaints and concerns are,’’ Mr Armour said.

“You do have to allow for choice; we live in a market environment. You can’t be too paternalistic.”

Many survey respondents said they lacked tools and information to challenge management on key issues potentially affecting reputation.

Almost one-third of respondents rated their effectiveness in this area at a modest five out of nine or lower. “Boards need to have more external people talking to them. They should not just hear from management. They need to do site visits, meet other people. Don’t just get the direct reports of the CEO speaking to the board,’’ Ms Kitchen said.

“When I was a young auditor, I would always go into the tearoom and read the notices on the noticeboard and chat to the people there. They don’t realise they need to filter what they say to you.”

In December AGL Energy and Wesfarmers director Diane Smith-Gander said that directors had an obligation to seek and find secondary sources of information within their companies that provided reassurance management was doing its job.

“At AGL, every time the safety committee meets, we do it on site. We have morning tea with the guys on the tools. The board and the workers. And we have never had an issue with it. And you get really valuable, practical information out of it,” she said.

But others have expressed concerns about the unilateral actions of directors blurring the lines between management and the board.

One of the nation’s most senior investment bankers and chairman of the Australian Sports Commission, John Wylie, has warned that the fallout from the Hayne inquiry was pushing business down the wrong path by placing so much emphasis on boards challenging management and shaming directors seen as not doing enough.

Mr Armour said he was “very surprised” by the proportion of directors who were uncertain whether they had the information to challenge management on key issues affecting the company.

“That is fundamental to the role of a director. From the AICD perspective, we will continue to work with the director community to tease out the detail behind that. To help them understand the questions they should be asking,” he said.

He said it was definitely a positive for directors to engage with customers and staff.