Treasury admits corporate governance is broken but baulks at systemic fixes

Andrew Linden, RMIT University and Warren Staples, RMIT University

With the Banking Royal Commission’s interim report looming, public jockeying to influence what Commissioner Kenneth Hayne might recommend is intensifying.

In response to damming evidence at the commission, the Australian Institute of Company Directors (AICD) has doubled down to maintain the policy status quo (which helpfully protects its professional director members).

Read more:
Solving deep problems with corporate governance requires more than rearranging deck chairs

The AICD is involved in a quick redraft of the ASX corporate governance code. It is advocating voluntary increases in board gender diversity and continues to claim that so-called independent non-executive directors should dominate boards.

Controversially, new AMP chair David Murray has repeatedly attacked the AICD’s policy position. He declared that “the board’s got to conduct itself in a way that it looks to the CEO for everything”.

Now in a submission just published on the royal commission website, Treasury, Australia’s paramount source of economic policy advice, has weighed in to make some startling public concessions about the state of corporate governance in Australia.

Treasury concedes that, based on evidence to the commission, shareholders have no interest in protecting customers, the wider community or the public interest. It notes:

… shareholders’ interests do not necessarily coincide with customers’ interests, particularly in the short-term; indeed much of the misconduct has generated significant returns to the firms that have flowed through to healthy dividends. Of course, when misconduct affecting consumers threatens profitability and reputation, the response of shareholders can be quick and strong.

The idea of shareholder primacy and maximisation of shareholder value has shaped public discourse, dominated political debate and determined what constitutes “good” corporate governance in Australia for the last three decades.

To rephrase Charlie Wilson’s observation about General Motors, it has been thought that what is good for shareholders is good for everyone.

Shareholder primacy has supported a political disposition favouring industry self-regulation and wars on red tape, as well as regulator cutbacks and passivity.

Treasury now says this received orthodoxy is dangerous.

Red flag calls for bolder reforms

This red flag on the dangers of shareholder primacy comes in the wake of a recent guidance note from the Australian Prudential Regulation Authority. APRA reminded directors they have core legislated duties that should not be equated with meeting shareholders’ demands and that boards are not the playthings of shareholders.

However, Treasury then baulks at even broaching reforms that evidence from other jurisdictions (see here and here) suggests will increase board accountability and lower systemic risk.

Read more:
The way banks are organised makes it hard to hold directors and executives criminally responsible

Treasury devotes most of its paper to discussing important changes in prudential oversight and standards. It fails to mention these options for systemic corporate governance reform that could apply to all companies (not just banks).

For example, the British government is considering reforms such as employee directors. Even the UK equivalent of the AICD mentions this as a reform option.

Bizarrely, Treasury, perhaps anticipating the views of the government, then says a regulatory non-market-based response is its least preferred option for preventing systemic misconduct.

The Treasury’s confused response is underscored by the Australian Securities and Investments Commission’s recent approval of the revised banking code of conduct. The code is not mandatory and still relies on the banks to police themselves.

To be clear, relying on market-based responses, self-regulation and shareholder primacy will only result in more of the same.

For example, prominent corporate governance scholars claim that corporations ought to be regarded as republics and states-within-states. It’s easy to see how managers and directors can justify ignoring the law using that logic.

And the royal commission has heard damning evidence that banks chose to ignore the law to maximise profits.

Fix the structure of boards

Instead of looking to quick conventional fixes (as Treasury does), such as re-emphasising directors’ duties and increasing diversity through soft targets, we argue that the unitary board structure itself is an underlying factor in systemic misconduct.

Executive and non-executive directors sit on the same unitary board. This allows power to be concentrated in the hands of dominant (usually) executive directors. It’s exactly what the APRA report on the governance at CBA describes.

The unitary company board structure urgently needs reform.

It has long been recognised that unitary boards are self-perpetuating oligarchies. Imperial CEOs or chairs who are themselves dominant or controlling shareholders (or owe allegiance to one) preside over these boards.

The board structure in Australia is a relic of early Victorian-era company legislation. Like parliaments of this era, unitary board systems like Australia’s still use a property franchise to restrict voting eligibility and deny representation to other actors.

It’s hardly surprising then that corporations presided over by unitary boards are regularly described as dictatorships and have poor external accountability.

Agency theorists valorise hyper self-interest and corporate dictatorships. They ignore that corporations rely on legislated rules to exist and directors have public interest obligations (for example, to follow the law).

In this context the agency theory-inspired idea that shareholder interests can be equated with customer interests or the public interest now looks ludicrously naïve.

Read more:
Why shareholder value drives income inequality

So, if shareholders can’t (and won’t) protect customers and the wider public interest, who can?

As we have argued recently, to lessen the chance of systemic misconduct, board representation should be broadened and board functions should be split across two boards.

The ConversationThat Treasury fails even to broach this option after acknowledging the system is broken, and instead opts for piecemeal solutions, is a recipe for future disaster.

Andrew Linden, Sessional Lecturer, PhD (Management) Candidate, School of Management, RMIT University and Warren Staples, Senior Lecturer in Management, RMIT University

This article was originally published on The Conversation. Read the original article.


At least two killed today, another succumbed to axe injuries Wednesday; 400 houses burned.

NEW DELHI, October 3 (Compass Direct News) – At least two more Christians were killed today in Orissa state’s Kandhamal district after Hindu extremists this week set fire to nearly 400 homes there and in Boudh district. A third man succumbed to axe injuries on Wednesday (Oct. 1).

Weeks after Hindu extremist violence erupted against Christians, this morning tribal peoples in Sindhipankha village killed Dushashan Majhi, a local influential Christian, first shooting him and them cutting him to pieces. Local Christian leaders reported that Majhi was a government servant working in the treasury.

The mob then turned on Sanyasi Majhi, also said to be Christian, who was with Dushashan Majhi. There were unconfirmed reports that a third victim was killed along with the other two.

A local Christian who wished to remain unnamed told Compass that after killing the two men, the assailants massacred cattle belonging to village Christians and burned Christian-owned houses. Sindhipankha is about seven kilometers (four miles) from Tumudiband.

Local news reporter Lalit Jena told Compass from Kandhamal that the attacks – which have continued unabated since Hindu extremists blamed Christians for the death of Hindu leader Laxmanananda Saraswati on Aug. 23 even though Maoist militants admitted murdering him – involve women first ransacking the Christian homes.

“The modus operandi of the tribal mob is such that women go first and attack the Christian houses,” he said. “They ransack and rob the household’s gold and other jewelry, TVs and all that is precious. The men then follow and burn the houses. Lately it has been reported that now they are fighting among themselves for the booty.”

Jena added that tribal peoples who lived in poverty before the violence now have obtained many heads of cattle, including goats and cows, within a short span, as well as household goods.

“They may have no electricity in their villages, but one can see lots of television sets, nearly all of it looted from the Christians,” he said.


Axe Murder

On Wednesday (Oct. 1), Lalji Nayak, believed to be about 80 years old, died from axe wounds after a Hindu extremist mob attacked his village of Hrudangia the previous day. Nayak and 14 others were wounded, with Nayak struck between his neck and chest.

While three of the wounded received first-aid at a health center in Kandhamal, eight others, including Nayak and his wife Mandaki, were admitted to MKCG Medical College in Berhampur. At press time Nayak’s widow, who received an axe blow just below the ear, remained in the medical center with a serious head injury.

Local Christians in Berhampur wanted to give Lalji Nayak a Christian burial, but police did not allow it. Utkal Christian Council members B.D. Das and J.R. Patro expressed strong objections to the police action.

Nayak’s brother, Junas Nayak, was taken to Cuttack Medical College for gunshot wounds. He remained in critical condition at press time with multiple gunshot wounds, and according to Jena has a total of 13 bullets in him.

“Seven are on his left thigh, and six in his right hand, but the doctors have so far done nothing to remove them from his body, even though he has been admitted in the hospital since September 30,” Jena told Compass. “We are concerned that he may develop septic [shock or infection] because of the delay.”

In the attacks, an 8-year-old boy miraculously survived after being hit by an axe in the middle of his skull.

Two pregnant Christian women, Archana and Geeta Sahu, this week were brought from Kandhamal to Berhampur hospital, where they gave birth and were said to be out of danger.


Houses Burned

Nearly 400 houses were burned or destroyed in Orissa state’s Boudh and Kandhamal districts this week.

On Wednesday (Oct. 1), mobs set fire to dozens of houses in the Raikia area of the Kandhamal district. Yesterday the violence crossed over to neighboring Boudh district as about 100 houses were torched by mobs in at least nine villages. Worst affected was the village of Kantamal.

The burning of houses continued this morning, with more than 400 houses reported to have been either burnt or destroyed in Boudh and Kandhamal districts.

Police have reportedly arrested five people so far in connection with the burning of the houses in Boudh district.

Additional District Magistrate Mihir Chandra Mallik told reporters, that unidentified people set fire to over a hundred houses of Dalit Hindus in at least nine villages in Boudh district.

“We have set up a relief camp at Kantamal town to provide food and shelter to the people who have lost their homes,” he added.

The administration said that the motive for burning these houses was ethnic, as Kandh tribal peoples attacked Dalit Pana homes.

Area church leaders confirmed this, but one said on condition of anonymity, “First they were targeting Christian Panas only, but now even Hindu Panas are not being spared. All Hindus who have not joined the mobs in attacking Christians are also being treated in the same way as Christians.”

Both Dalit Pana houses as well as homes belonging to the Christian Pana community have been targeted in Boudh district, he said.

In Barakhama village near Kandhamal, Christians may move to the safer Daringbadi. A local pastor told Compass that Barakhama was also targeted last December, when around 400 homes belonging to Christians were burned and demolished.

“The same continues now,” he said on condition of anonymity. “The Christians love their homes, but it is just not safe to live here anymore, for the government has failed to protect us. The Christians in Barakhama have almost decided to move collectively to Daringbadi, which is at least a bit safer.”

It is estimated that around 500 Christian families will leave the village.


Nun Raped

Police have finally confirmed the rape of a nun in Kandhamal two days after the death of Hindu leader Saraswati.

A mob of around 40 men attacked the nun at K. Nuagaon village, where she and a priest, Father Thomas Chellantharayil, had taken shelter after their center was attacked. The mob allegedly dragged her and the priest to a deserted office of a Non-Governmental Organization, where she was stripped and raped. The priest was reportedly doused with gas and beaten as he tried to stop the attack on her.

Police have arrested four suspects in the rape. Juria Pradhan, 52, his 22-year-old son Kartik Pradhan, Biren Sahu, 35, and 26-year-old Tapas Patnaik were arrested in connection with the assault and rape of the 29-year-old Catholic nun on Aug. 25.

The inspector-in-charge of Baliguda police station has since been suspended in connection with the incident. The Orissa government has also ordered a probe, 39 days after the initial complaint.

District Superintendent of Police S. Praveen Kumar this week told reporters that a medical examination report confirmed that the nun was raped.

The Hindustan Times reported today that although the report was filed weeks ago, police obtained the medical examination report only two days ago following media reports and the efforts of Sister Nirmala, Superior-General of the Missionaries of Charity, who wrote to the state seeking justice.

“A police official said they were busy in maintaining law and order and could not find time to look into the case,” the national daily reported.


Attempts at Law and Order

Since Wednesday (Oct. 1), 46 people have been arrested on charges of rioting in Kandhamal district. A police official said that they had arrested more than 300 people in the past month.

Christian leaders attributed the sudden arrest of 46 people in the last two days to new state Director General of Police (DGP) Manmohan Praharaj, who took over from Gopal Chandra Nanda, who retired on Tuesday (Sept. 30).

Hindu extremist Vishwa Hindu Parishad International President Ashok Singhal did not take kindly to the latest arrests.

“The new DGP is indiscriminately arresting leaders of Hindu organizations that are not related to any case,” he told reporters this week.

Nearly 53 companies of paramilitary forces have been appointed in Kandhamal district, and curfew was still imposed. The central government sent 1,000 paramilitary personnel in the form of 10 Central Reserve Police Force companies on Wednesday (Oct. 1) to Kandhamal district. Local sources said 10 more companies were expected by Sunday (Oct. 5).

The central government has come down heavily on the Orissa state government. Union Home Minister Shivraj Patil wrote a strongly worded letter to Orissa Chief Minister Naveen Patnaik on Wednesday (Oct. 3) asking him to take effective measures and provide security for the Christian community in the state.

“Merely continuing to ask for additional forces after every few days cannot be the solution,” Patil wrote. “The state government has to implement overall strategy for creating an environment of security.”

The letter came hours after the Union Cabinet expressed grave concern over the situation in the state, with Prime Minister Manmohan Singh directing Patil to present a report on the situation at the next cabinet meeting.


Peace Rally in New Delhi

In New Delhi, nearly 15,000 Christians joined in a peace march in solidarity with the victims of the Orissa and Karnataka violence yesterday.

The peace march was the culmination of the week-long sit-in organized by the Christians of Delhi and NCR (National Capital Region) beginning Sept. 26 to protest atrocities on Christians in Orissa and Karnataka. The peace march took place on the birthday of Mahatma Gandhi, father of the nation.

Many national leaders, including central ministers Lalu Prasad Yadav and Oscar Fernandes, addressed the gathering at the Dharna (sit-in). Yadav, the union minister for Indian Railways, promised to personally meet with the prime minister and urgently discuss the matter. He said that he would “take up the anti-Christian violence in Parliament and debate the hatred of Hindutva [Hindu nationalist] forces.”

Hindu leaders such as Swami Agnivesh addressed the peace march at Rajghat (Gandhi’s final resting place), saying that the “very killers of Mahatma Gandhi, are the same killers of Christians in Orissa, Karnataka, Madhya Pradesh and other parts of the country . . . The Hindutva fascists do not represent the peace-loving Hindu societies, rather they are damaging the Sanatam Dharma [eternal law] of Hinduism,” he said.

Report from Compass Direct News