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Values proposition: Pamela Hanrahan on reframing corporate governance

November 16, 2016
Leadership

Pamela Hanrahan is a professor and director of research in the school of taxation and business law at UNSW Business School. She joined UNSW with more than 20 years experience as a solicitor and as a senior regulator. Pamela has published widely and her new book, Corporate Governance, co-authored with John Farrar, is published next month by LexisNexis. She spoke with Julian Lorkin for BusinessThink.

An edited transcript of the interview follows.

BusinessThink: Can I start off by asking you about a social licence? You mention it quite a lot in the book, but what is it?

Pamela Hanrahan: Social licence first turned up in corporate governance discourse  about 25 years ago in the context of mining industries. And it was really a view that companies that come into communities and extract value from those communities have a responsibility to leave those communities better off than when they arrived.

And I think what the interesting development has been in the past few years is that we're starting to see global leaders talk about social licence in the context of financial services firms as well, particularly after the global financial crisis. 

A lot of concerns around governance in financial institutions led to a lot of frustration on the part of communities and regulators with how to achieve really meaningful structural change in those organisations. And so we saw Mark Carney at the Bank of England, and also last year our own Prime Minister, Malcolm Turnbull, talk about whether we ought to ask financial institutions to accept that notion of social licence in their own governance and operations in our community. 

BusinessThink: You just mentioned the GFC. Many organisations seem to be stubbornly unresponsive in terms of what happened with the GFC, and they just carried on as before. 

Hanrahan: It's now eight years since the crisis hit in Australia, and I think there is a level of community concern, a level of perhaps disenchantment or cynicism, around what is seen as a kind of florid culture of apology; and mea culpa; and lots of very prosperous-looking bankers coming in front of parliamentary committees and vowing to change, but perhaps [there has been] no real progress in terms of the community as a whole seeing organisations reframe themselves in the way that was perhaps expected.

So I think for many people, that kind of cynicism and disillusionment is really driving a lot of what we're seeing politically, both here and overseas. The lack of confidence in established institutions and structures is driving communities towards more populist solutions. And you can talk about the Trump phenomenon in the US, or Brexit, indeed, in the UK, but we're seeing elements of that I think in discussions in Australia about the need, for example, for a royal commission into banking, and people's kind of concern that they're not understanding the direction in which those developments are going, and how quickly they're going. 

BusinessThink: There must be plenty of examples of big corporates who've said one thing and just completely green-washed it, and done something totally different on the ground. 

Hanrahan: Sadly, there are many examples of that, so that's why we place such emphasis on the idea of authenticity, of actually living up to the stated commitments that you've made. An example of that would be an organisation that says, "We value an inclusive workplace or gender diversity" and then celebrates success by going to a strip club. That's a clear example of where the values proposition of the organisation is not being realised in the corporate culture. 

And I think the community can see that, and I think that feeds into the increasing cynicism that we're seeing. After the turn of the century, there was a great rush towards these voluntary codes and statements of commitment to these values, but to the extent that corporations don't actually live up to those, they're actively undermining community confidence. 

BusinessThink: A knee-jerk reaction is quite often to impose new regulations, and just to impose a sort of new culture externally. But I'm not convinced that's always going to work. 

Hanrahan: One of the things that we've really thought about in the new book is that we think we've lost an ability to talk with each other about these issues. So we see a lot of interest groups shouting at each other, effectively, from the mountaintop about what change is needed, and how you might achieve that, without having a kind of uniform frame of reference within which to have that debate. 

So we talk about a new way of framing discussions about corporate governance that focus very much on the fact that the corporations themselves have a range of obligations, not all of them legal obligations, that boards and others internally to the organisation need to take into account, both in terms of setting the direction for the business, but also in communicating with their various stakeholders, with the government, and with community about the direction in which they're moving. 

So it's really about providing a new way of holding that discussion so that we can clearly identify the issues on which we do agree, and those where we disagree, and have a fruitful discussion about those and stop talking at each other at cross purposes, I guess. 

‘An example ... would be an organisation that says, “We value an inclusive workplace or gender diversity” and then celebrates success by going to a strip club’ 

– PAMELA HANRAHAN





BusinessThink: One of them seems to be an obligation to act in the public good over the long term, and yet many corporations just seem to be focused on the shareholders, and indeed the next quarter, not just the next year. How do you get a public corporation to put the shareholders' interests second? 

Hanrahan: That's an interesting question. What we propose in the new book is to say that corporations really have five or six sets of quite distinct obligations, and we start with the obvious one, which is an obligation to obey the law. It sounds obvious, and yet you often hear regulators, in particular, expressing some concern that the sort of penalties that are attached to non-compliance with regulation are just seen as a cost of doing business and so we put at the centre of the corporation's obligations this obligation to act in accordance with law. 

Secondly, though, we controversially, I guess, put the obligation to act authentically – that is, to keep your word. In this century, there's been a great impetus or trend towards companies adopting codes of practice and statements of intention about their values and the extent to which they'll take into account non-shareholder interests. 

But sometimes that can feel like green-washing. Sometimes it can feel like the corporation's saying one thing publicly but behaving very differently at home, and so we put that second obligation to keep your word, and if you sign up to a particular values proposition – which is what we call it – to actually live that in the business. Then we put a cluster of obligations to shareholders, to contractual stakeholders such as employees and so on, but also non-contractual stakeholders such as the community, [and] the tax base. 

All of those are, I think, well accepted in corporate governance scholarship. The sixth one's the controversial one, and that's the one you mentioned, which is about whether companies have some kind of obligation to posterity, an obligation to ensure that they don't undermine global systems such as the financial system, or the climate system; an obligation to make sure that their conduct doesn't undermine notions of human rights or the rule of law. 

And in that area, that's still very much contested, and so what we try to do in the book is provide a frame of reference within which people can have the debate about the extent to which corporations should focus on those things, and if so, how that might be reconciled with the more prosaic kind of day-to-day, quarter-to-quarter responsiveness to investor and customer needs. 

‘But the real difficulty is that the kind of change we’re talking about can only come organically within the organisation’ 

– PAMELA HANDRAHAN






BusinessThink:  So how do we move this from being jawboning by politicians and regulators to also getting on board the corporate sector, which will see this as a vital part of what they do? 

Hanrahan: We hope that putting this new frame of reference in place will enable boards, and managers, and institutional investors, and government – all of whom have a stake in where we come out in this debate – to really think about what they're arguing about, and how they might better communicate that with other stakeholders. 

So, by opening up a discussion that says to a board, "Forget the limitations of what we sometimes refer to as corporate culture. Let's talk about what this company's values proposition is. So, not its value proposition but it's values proposition. So, to what extent do we as a board, representing the interests of shareholders, choose to prioritise or give attention to interests other than short-term shareholder wealth maximisation and on what basis can we justify that and explain that to our stakeholders? 

And then, once we've settled upon the values proposition for our organisation, the corporate culture part of it is to make sure that all of those inside the organisation are aligned to that values proposition and are delivering on it. 

So we're not in any sense – though I have a personal view, and particularly as a former regulator – [saying] where people ought to fall on that spectrum. What we're trying to encourage people to do is to be quite thoughtful and to explain better where they fall on that spectrum and then how the corporate culture is aligned to that in a way that's going to deliver meaningful change. 

BusinessThink: So what would you personally, as a former regulator, like to see? 

Hanrahan: The job for regulators is difficult. I think that you can provide a framework within which people can talk about these issues, and I think you can provide clear guidance as to what you see as community expectations about behavioural standards. But the real difficulty is that the kind of change we're talking about can only come organically within the organisation. 

Boards have a really significant role to play in that, but it's not always driven from the top. It's a much more local problem and so [paying] close attention to the sort of local culture within the organisation – making sure that people on the ground are not paying bribes in foreign countries, or manipulating the bank bill rate – to make sure that the local cultures within the organisation are aligned to that values proposition that's being articulated by the board.  


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