Ethics and Governance in the Australian Corporate World

This document analyzes the case study of Freedom Insurance in the context of ethics and governance in the Australian corporate world. It evaluates the recommendations made by the Royal Commission and highlights the role of executive accountants in establishing a healthy workplace culture. The document also discusses the ethical theory of utilitarianism and its application to the case study.

ECONOMICS
Ethics and governance

ETHICS AND GOVERNANCE 1
Executive Summary
With the widely accepted need of ethical conduct of entities and a number of national
and international organisations working towards it, the Australian corporate world witnessed
inquiries being initiated by the Banking Royal Commission against the organisations carrying
on the unethical conduct in the banking, superannuation and the insurance sector. The work
highlighted the various facets of the ethics in business through the case study of company
Freedom Insurance. The work evaluated the case study and the objectives of the Royal
Commission in the light of the consequentialist ethical theory of the utilitarianism.
The major point that was observed in the evaluation was the unhealthy sales culture at
the entity leading to sales of the complex insurance products to the customers without making
them aware of the associated terms and conditions. The work also shed light on the
recommendations made by the commission for the said entity to enhance its overall ethical
culture and services to various stakeholders. The latter part of the work highlighted the role of
the executive accountants in establishment of the healthy workplace culture as prescribed
under the APES code of ethics. The work concludes with the range of safeguards available to
said professionals, in advancing the principles of professionalism, care and ethical conduct in
business context.

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Contents
Introduction................................................................................................................................3
Ethical Theory of Utilitarianism................................................................................................3
Background of the case study....................................................................................................4
Application of the theory of utilitarianism to the Royal Banking Commission enquiry on
Freedom Insurance.....................................................................................................................5
Recommendations of the Royal Commission to safeguard the interests of customers..............6
APES 110 Code of Ethics for Professional Accountants...........................................................7
Conclusion..................................................................................................................................8
References..................................................................................................................................9

ETHICS AND GOVERNANCE 3
Introduction
The Merriam Webster Dictionary defines the term ethics as the framework that deals
with what is good or bad, and administers the overall conduct of an individual or an
enterprise on the lines of obligation and moral duty towards the society (Merriam Webster
Dictionary, 2019). It is significant to note that the matters of ethics are a concern for every
organisation, individual and the group of individuals that are part of the society. Lately, with
the increased globalisation and increased complexities in the business practices, there has
been placed a greater need of the transparency in business practices while addressing the
needs of the various stakeholders of the business enterprises. In order to guide the actions of
the individuals and enterprises, a number of ethical theories have been developed over the
years.
In the Australian business context, the mounting public pressure of the shocking
revelations of the financial industry’s wrongdoing forced the Royal Commission of Australia
to initiate enquiry against the banks, investment funds, financial advisers and insurers in the
November 2017 (Insurance Journal, 2018). This is regarded as one of the significant steps
across the globe on part of the regulators in terms of ethical conduct and governance. One
such organisation that came under fire and faced the enquiry was the entity Freedom
Insurance Group Limited (Freedom). The entity was heavily criticised for its high-pressure
sales tactics forcing the customers to buy the insurance policies, which has effectively
destroyed its business model. The following work is aimed at analysing the various aspects of
ethics, taking the case study of Freedom Insurance as the central focus.
Ethical Theory of Utilitarianism
The ethical theories are significant to study as they lead to the establishment of a
strong foundation for challenging situations or guide decisions in varied facets of the business
and other contexts. Some of the chief theories that are developed over the years and applied
in various contexts are the Consequence Based (Utilitarian), Duty Based (Deontology),
Contract Based (Rights), Character Based (Virtue) and others. The work will be focussed on
the ethical theory of utilitarianism and assess the actions of the entity Freedom Insurance with
regards to the stakeholders affected and the said theory.
Jeremy Bentham initially established the ethical theory of utilitarianism. Some other
moral philosophers associated with this theory are Henry Sidgwick, David Hume, and many

ETHICS AND GOVERNANCE 4
others (Hollander, 2016). The moral theory works as a form of consequentialism and aids
individuals and organisations to evaluate whether their actions are morally right or wrong.
The classical ethics theory considers actions right if it leads to the maximization of the
overall wellbeing of the varied range of stakeholders of the society (Lyons, 2015). Vice
versa, the actions are considered wrong if it does not maximize the overall wellness of the
society, and are chiefly focussed on the interests of a particular individual or group of
individual. Thus, the theory encourages individuals to act legitimate as considered by them,
but the actions must be evident enough to the greatest levels of wellness to the society as a
whole. The wellbeing of the society’s members is depicted in the form of happiness and
utility in the theory.
The theory of utilitarianism is not only applicable to the individual actions, but is also
applicable to the business context in various forms. Every business enterprise has the chief
goal of earning the profits, however, the enterprises can often resort to the unfair trade
practices, which may be considered immoral, unethical, or illegal from the point of view of
the society, and therefore the theory of utilitarianism guides the enterprises (Barry, 2016).
The theory is primarily centred on the consequence of actions and thus, businesses must be
aware that while they process the various resources such as capital, human resource
personnel, natural resources and others, their business actions impact the lives of the various
stakeholders. The chief stakeholders of a business enterprise are customers, investors,
suppliers, regulators and others. Businesses can establish the concept of consequentialism in
their foundation by inculcating the same in their policy documents, code of conduct and also
in their operations. Happiness and utility in business terms thus, cannot be limited to the
earning of the profits, but includes the provision of the safe and quality goods to the
consumers, increased customer satisfaction levels, improved employee satisfaction levels,
superior reputation, and compliance of the applicable regional as well as international rules
and statutes (Scalet, 2018).
Background of the case study
The entity Freedom Insurance came under the radar of the banking royal commission
in the 6th round of hearing, in which the sales and the retention practices were examined both
in general terms and individual customer (Australian Government, 2019). In terms of the
individual customer, it is significant to note that the entity had sold an accidental death
insurance policy to a customer who was suffering from the Down syndrome. The said

ETHICS AND GOVERNANCE 5
customer was forced to buy the ‘worthless’ insurance products by the sales staff of the entity.
In this situation, it must be noted that while the sales agent of the company was aware of the
fact that the customer did not understand what he was agreeing to, because of his illness, yet
the agent went on with the sales persuasion. The above listed case study is in addition to the
incidents and faults found during the investigation of the Royal Commission.
It is significant to note that later on in the submission provided to the company, it had
acknowledged the fact that it had made aggressive sales practices by making the sales to the
vulnerable customers. This incident is descriptive of an unhealthy sales culture at the entity,
which was driven by the incentives of the sales department employees.
Application of the theory of utilitarianism to the Royal Banking
Commission enquiry on Freedom Insurance
In the Australian business context, the public inquiry was initiated from the late 2017,
and the hearing went on for the 11 months, which led to the shocking revelations of the
financial industry’s wrongdoing, which included the country’s chief banks, insurance service
providers and the superannuation funds. Some of the business actions that were revealed
during the said inquiry were the forcing the farmer off their properties in lieu of the failure of
payment of the loan instalments, fees being charged to the accounts of dead people. This is in
addition to the cash bribes were paid over the counter to win mortgage business, initiation of
the aggressive sales practices by the unusual means and others (Barrett & Pandey, 2019).
On application of the theory of utilitarianism on the acts of the Freedom Insurance,
the following points are noteworthy. The practice of the entity Freedom Insurance to sell the
products such as accidental death, accidental injury, trauma and life covers, and others that
requires detailed study of the terms and conditions on the part of the customers, was carried
on by the entity by the aid of the outbound calls. The consumers are not aware of the clauses
of the complex financial products, and are often compelled to buy the said products without
the adequate information. Thus, in context of utility to the stakeholders at large, the practice
of sale of insurance on calls does not bring good to the customers. On lines of the social
wellbeing at large, it must be noted that insurance contracts are legal contracts and both the
parties must be aware of the terms and conditions mentioned therein to agree to the same.
Further, it must be noted that the company would run a range of internal competitions to
drive the employees to sale more and more (Han, 2018). The gifts and prizes involved the
cash prizes, luxury trips to Bali, luxury cruise stays and other similar incentives to the staff to

ETHICS AND GOVERNANCE 6
induce them to sale more products. Further, the retention agents of the company were paid
bonuses to save the policy, while they used the intrusive and inappropriate communications
to save the policy being cancelled by the customers (Thomson, 2018). Such competitions and
policies of the entity would thus, force the employees to resort to unhealthy sales practices to
meet their targets. Thus, the sales policy is indicative of the fact that little or no utility or
benefit is there in the actions of the company of high-pressure sales means.
Recommendations of the Royal Commission to safeguard the interests
of customers
The unhealthy sales culture is descriptive of the fact that while the company
considered the high sales as one of the chief necessities to compete in the industry, the means
adopted were unethical and were not on the lines on the social well-being at large. Some of
the chief recommendations of the Royal Commission for the insurance sector in which the
Freedom Insurance operates are listed as follows. The prime recommendation stated that the
insurance products are majorly associated with the poor sales conduct, which increases the
risks of poor consumer outcomes, and therefore the Final Report recommendations state the
prohibition of the unsolicited offer or sale of insurance products (Bulling, 2019). As further
recommended by the final report, the life insurance contracts be covered by unfair contract
term laws. The recommendatory move will facilitate the policyholders to challenge those
contracts, if the dodgy or old definitions of illnesses are used in the contracts. The
commission considered the same as one of the key issues in the industry. In addition, the
recommendation calls for the ‘a duty to take reasonable care not to make a misrepresentation
to an insurer,’ as against the earlier counterpart of ‘duty of disclosure (Osental, 2019).’ This
recommendation is on lines of amendments of the Insurance Contracts Act to be the
consumer insurance contracts. Further, it is recommended that the handling and the
settlement of insurance claims would fall in the ambit of the financial services. The said
recommendation has already sent shockwave in the insurance sector because till now there is
no oversight on how the claim made by the customers are handled by the insurance
companies. Thus, the recommendations are provided taking into consideration of the interest
of the customers at large and their social well-being, which is the base for the theory of the
utilitarianism. These recommendations pave the way for the future of regulation in the
industry, which is aimed at providing the transparent products and use of healthy practices in

ETHICS AND GOVERNANCE 7
insurance industry and an overall utility of the business operations to not only the
shareholders but also the other stakeholder, primarily the customers.
APES 110 Code of Ethics for Professional Accountants
As per the conceptual framework of the code, there have been prescribed five
principles to guide the conducts of the professional accountants. These are Integrity,
Objectivity, Professional skill and due care, Confidentiality and Professional Behaviour. All
of the above stated principles guide the professionals to maintain their conduct at an
acceptable level. The Part C of the code guides the members in business to exercise ethical
conduct to the members of the institute who hold the executive accountant positions in the
businesses, and are in a position to influence the policies and conduct of the members of
organisation as a whole (APESB, 2010). It must be noted that the greater the level of
hierarchical position of the accountant, the greater is his or her responsibility to act ethically.
Thus, the code renders the responsibility on the accountants in the business organisations to
encourage the ethical culture in the enterprise when in the position of the senior management
of the enterprise.
On application of the above principles on the case study of the Freedom Insurance,
the following points are noteworthy. As an accountant placed in the senior and executive
positions of the organisation Freedom Insurance, it is the responsibility of accountants to
guide to the formation of ethical sales and other business practices. The use of the aggressive
and forceful sales tactics to increase the revenues is a matter of concern for the accountants of
the Freedom Insurance. The said culture at the organisation undermines the basic principles
of the code namely the integrity, professional behaviour, and objectivity. In addition, the
members engaged in the insurance advisory sector must be careful of their practices in terms
of the dealings with clients, the nature of their engagement, and must follow the principles of
transparency. This is because it is the right of a reasonable customer to be aware of the terms
and conditions of the product offered, which is not possible on the calls. As the unhealthy
sales culture was employed consistently in the entity, the member should have seek legal
advice.
Some of the safeguards available to the members as listed in the code are stated as
follows. The organisation should conduct programmes for the employees in terms of sales
training and workshops. In addition, the policies and procedures must be devised to
implement and monitor the quality of employee performance. In addition, there is a need to

ETHICS AND GOVERNANCE 8
assess the leadership and thereby amend the company policies of provision of heavy
commissions and incentives to the employees. Further, the another safeguard is in the form of
establishment of appropriate disciplinary processes for the employees who engage in
unscrupulous means of sales to bear the highly competitive environment of the entity.
Conclusion
As per the discussions conducted in the previous parts of the report, it can be stated
that matter of ethical and moral conduct are an important consideration for the businesses of
today, whether the same is expressly mentioned or not. The work signified that the ethical
theories developed over the years are not only guiding for the individual conducts but are also
applicable for the business functions. The work shed light on the various aspects of the theory
of utilitarianism, which is one of the prime consequence based theories. The work explained
the various facets of the theory by taking into consideration the ethical case study of the
actions of the entity Freedom Insurance due to which the entity recently faced the heat of
enquiries by the Royal Commission. The work further highlighted the chief recommendations
proposed in the final report of the said enquiry, which are aimed at renovating the face of the
insurance and financial services sector of Australia, to enhance the quality of the services and
the confidence of the customers by promoting transparency and integrity.
The later section of the work also highlights the roles and responsibilities of the
accountants who are simultaneously the members of the professional body CPA Australia.
The work highlighted the points in the code, which urge the accountants to view the practices
employed by Freedom Insurance as unethical. This is presented together with the safeguards
available to such accountants that can be undertaken to preserve ethical culture at the
organisation and promote social wellbeing.

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References
APESB. (2010). APES 110: Code of Ethics for Professional Accountants. Melbourne, VIC:
Accounting Professional and Ethical Standards Board.
Australian Government. (2019). Final Report of the Royal Commission into Misconduct in
the Banking, Superannuation and Financial Services Industry. Retrieved from:
https://treasury.gov.au/publication/p2019-fsrc-final-report
Barrett, J.& Pandey, S. (2019). Australia vows to clean up financial sector after landmark
misconduct inquiry. Retrieved from: https://www.reuters.com/article/us-australia-
banks-inquiry/australia-vows-to-clean-up-financial-sector-after-landmark-
misconduct-inquiry-idUSKCN1PT099
Barry, N. (2016). Business ethics. UK: Springer.
Bulling, J. (2019). Royal Commission Report - Life Insurance and General Insurance. .
Retrieved from: http://www.klgates.com/royal-commission-report---life-insurance-
and-general-insurance-02-21-2019/
Han, M. (2018). Banking royal commission live day 51: ClearView, Freedom Insurance.
Retrieved from: https://www.afr.com/business/insurance/banking-royal-commission-
live-day-51-clearview-freedom-insurance-20180911-h157fh
Hollander, S. (2016). Ethical Utilitarianism and The Theory of Moral Sentiments: Adam
Smith in Relation to Hume and Bentham. Eastern Economic Journal, 42(4), 557-580.
Insurance Journal. (2018). Timeline: Australia’s Inquiry of Misconduct at Banks, Insurers,
Wealth Managers. Retrieved from:
https://www.insurancejournal.com/news/international/2018/11/29/510432.htm
Lyons, D. (2015). Utilitarianism. Wiley Encyclopedia of Management, 1-4.
Merriam Webster Dictionary. (2019). Ethic. Retrieved from: https://www.merriam-
webster.com/dictionary/ethic
Osental, D. (2019). Royal Commission recommends criminal or civil sanctions for insurers
Retrieved from:
https://www.insurancebusinessmag.com/asia/news/breaking-news/royal-commission-
recommends-criminal-or-civil-sanctions-for-insurers-123964.aspx

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Scalet, S. (2018). Markets, ethics, and business ethics. Oxon: Routledge.
Thomson, J. (2018). Banking royal commission shows how Freedom trapped customers in
unwanted insurance. Retrieved from: https://www.afr.com/chanticleer/banking-royal-
commission-shows-how-freedom-trapped-customers-in-unwanted-insurance-
20180912-h159ma