Corporate Governance

The Damage Associated with Conflict of Interest

There are few things that damage a company’s reputation more than reports of conflict of interest. When a director, or a top executive, or an advisor to an organisation, favours his/her own personal interests over those of the organisation to which duty of care is owed, the takeaway is that there’s not much reason to trust that organisation.

Australia has seen its share of corporate disasters in which conflict of interest played a direct role: The collapse of insurer HIH in 2001, for example, was attributed by subsequent investigations as due to “directors being so busy pursuing their own interests they were incapable of recognising their duties to the company and the shareholders.”

But few past scandals can top the revelation on 2 August, 2019, by a whistle-blower, that National Australia Bank (NAB) has continued bad practices even after the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has scrutinised the bank, publicly shamed it, and it has suffered  attacks in a raft of litigation and class action suits.

The Royal Commission reports document an alarming level of misconduct at NAB, as well as at the other four major banks in Australia. This included:

  • Loans made to consumers who could not afford them;
  • Fees for no service;
  • Non-compliant financial advice;
  • Overcharging commissions to financial advisers.

And there was much, much more. Nor are the amounts involved small: NAB has repaid $32 million to clients for bad financial advice already. In total, NAB has reserved $1.1 billion in customer remediation for issues including poor or non-existent financial advice.

Imagine a financial services provider which has just received the lowest trust rating in the history of the Australian industry – only 36.9 per cent of consumers surveyed now would trust the bank – and yet the same bad practices continued right through the scandal.  NAB shares fell sharply on the news, from $9.88 to $9.77 per share after the reports were published in the Sydney Morning Herald and The Age on August 2.

Trying to keep secrets

The whistle-blower reports showed that NAB chairman Ken Henry allegedly admitted to EY, one of the bank’s auditors, that the lender was still selling non-compliant products to customers, despite the ongoing investigation by the Royal Commission.

The bank’s leadership had every reason to try to keep the non-compliant practices quiet, even though both the top executives and the auditor were duty-bound to disclose them to the Royal Commission. And auditor EY, which profits from extensive contracts for services with the bank they are responsible for auditing, allegedly allowed this conflict of interest to take precedence over its duty to the company and its shareholders.

But NAB was operating a strategy to try to ‘ride out’ the scandal, hoping to return to business as usual as soon as possible, as Nick Cleaver, the head of the Sydney office of advertising agency 303MullenLowe points out in a note.

“NAB is the bank most ravaged by the commission,” Cleaver notes. Yet they still claim, in their advertising, that they are about “More than money.” “NAB has also increased publicity of their various charitable activities,” Cleaver adds.

It is clear that the bank’s leadership had every interest in keeping quiet about the continuing bad practices, as disclosure would have made hash of the ‘ride-it-out’ strategy.

And that is, of course, what has happened. On 2 August, Australian Finance Minister Mathias Cormann has called on National Australia Bank and its former chairman, Ken Henry, to immediately respond to the reports.

Labor senator Deborah O’Neill has successfully moved to set up a parliamentary inquiry into the auditing sector, motivated in part by the controversy around EY and the management of conflicts of interest. In January, the Australian Securities and Investments Commission criticised the national audit industry for “failing to maintain the appearance of independence from their clients.” The firm earned more than $21 million from its audit and non-audit work of NAB in 2018, according to the Australian Financial Review.

The public investigation into this latest scandal at NAB may spark new demands by former customers for significant compensation. NAB’s already damaged reputation and low trust rating will no doubt see further erosion – this is the penalty imposed again and again on companies that ignore good governance.

Diligent’s Conflict of Interest Module resolves governance issues

A world of governance knowledge informs Diligent’s Conflict of Interest module, part of the suite of Modern Governance tools in Diligent Governance Cloud. Conflict of Interest is managed in a single online app, and this saves time and increases the depth and accuracy of the analysis process. What’s more, the entire review of conflict of interest takes place in Diligent’s secure environment, so that the risk of leaks is managed. The administrator can also restrict access to particular parts of the analysis to those who have the right to view them.

For the administrator, there is no need to bother with resource-intensive documentation and long turnaround times – Diligent’s Conflict of Interest module streamlines this process.

For board members, the ability to access all of the information in the Conflict of Interest analysis provides a means to ensure that no aspect of the analysis is lacking. The user-friendly interface offers an elegant and easy-to-use product, which minimises questionnaire completion time and makes it easier for directors to engage with it – board members may access it from anywhere in the world with perfect security.

Good governance isn’t just one thing – so why buy software that only manages your board documents? At Diligent, we empower leading organisations  to turn good governance into a competitive advantage for their business. In the ever-changing landscape of the world, governance hasn’t kept up with the fast pace of business. Quarterly board meetings, paper board books and not using secure communication tools for sensitive data have opened up numerous companies to risk.

To learn more speak to a governance expert  info@diligent.com or request a demonstration.

 

 

 

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