Clean up your act: funds calls for improved levels of governance

With the AustralianPrudential RegulationAuthority reinforcing its message about the need for improved levels of corporate governance, five of Australia’s leading public sector superannuation funds have released research showing 83 per cent of companies listed on the S&P/ASX200 have no board oversight of unfair business practices.

The research, conducted by BT Governance Advisory Service, was commissioned by the PSS/CSS, Catholic Super, VicSuper, the Northern Territory Government and Public Authorities Superannuation Scheme, and the Emergency Services Superannuation Scheme.

The bottom line warning for companies failing to live up to expectations with respect to ethics is that these five superannuation funds have signalled they are duty-bound to avoid risk that might flow from inadequate ethical standards.

The funds say they are duty-bound to ensure the companies in which they invest have systems in place to avoid potential regulation, litigation and reputation costs to shareowners.

Speaking on behalf of the funds, the chief executive of VicSuper, Bob Welsh, says the research was commissioned in an effort to gauge the extent of a company’s business ethics by measuring proxy issues including unfair business practices, consumer privacy, community safety and welfare and responsible marketing and promotion.

The research found that:

* more than half of all companies do not publicly disclose information on their processes for protection against violations of consumer privacy;

* nearly half (46 per cent) of all companies make no mention of staff or contractor training with regard to product safety or the handling of materials hazardous to public health;

* nearly half (46 per cent) of all companies do not publicly disclose policies protecting whistleblowers; and

* appropriate codes of conduct among 52 per cent of companies do not address the company’s adherence to responsible marketing and promotion issues such as fair trade and truth in advertising.

Commenting on the research findings, head of BT Governance Advisory Service Erik Mather said bad ethics equate to bad business.

“Irresponsible marketing, poor product safety, pricing collusion and breaches of consumer privacy can create major costs for companies and the shareowners,” he said.

Welsh said from the funds’ point of view, recent amendments to the Trade Practices Act mean companies can be fined up to 10 per cent of their annual turnover for colluding with competitors while, on a global scale, companies have been driven into bankruptcy by damages claims from people harmed by their products.

“The legal environment in Australia allows similar action to be taken against Australian companies,” he said. “Companies that actively promote business ethics and implement systems, codes of conduct, training programs and whistleblower policies are best placed to avoid potential costs and reputation damage caused by poor business ethics.”

The BT Governance Advisory Service position paper said strong business ethics practices serve to safeguard companies against regulatory litigation and reputation risks.

“Maintaining an oversight on business ethics issues also aids companies in balancing short term benefits against sustainable, long-term creation of value for shareowners,” it said.

“Poor governance of ethical standards exposes shareowners to material risk via both tangible and intangible business costs,” the position paper said.

The position paper makes a call to action with respect to business ethics, urging companies to ensure:

* boards oversee areas of business ethics practices that are a potential risk area for the company;

* management processes review, monitor and manage business ethics issues across all company divisions;

* company codes of conduct provide employees with details and illustrative instructions on how to respond to business ethics issues. At the very least, the corporate code of conduct target compliance with the code;

*governance measures are supported by a whistle-blowing policy and compliance training for staff and contractors; and

* companies publicly report on their performance on business ethics issues, and disclose policies on political donations to demonstrate transparency.

Among some of the key findings in the BT analysis were:

* that the top 10 companies currently most exposed to unfair business practice risks were spread across nine sub-industries including food distribution, oil and gas refining, marketing, real estate management, construction and engineering and airlines;

* more than 50 per cent of S&P/ASX200 Index companies have no public information on their internal control systems for managing consumer privacy violation risks;

* over 46 per cent of companies make no mention of staff or contractor training in respect to community safety, welfare issues of product safety, or the handling of materials hazardous to public health; and

* 52 per cent of companies do not disclose in their code of conduct a policy declaring the company’s adherence to such responsible marketing and promotion issues such as fair trade and truth in advertising.