Corporate Governance and Ethics in Financial Advice Industry

The report discusses the issue of financial advice from a culture, governance and remuneration point of view. It assesses the effects on stakeholders using Carroll and Buchholtz’s 5 questions and provides an overall ethical analysis using Normative Theories of Ethics and sustainability approaches.

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CORPORATE GOVERNANCE AND ETHICS
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Governance 2
Corporate Governance and Ethics
The focus of this report will be to discuss the issue of “Financial Advice” (see pages 119-
135 of volume 1) from a culture, governance and remuneration point of view
The Commonwealth of Australia Royal Commission Misconduct in the Banking,
Superannuation and Financial Services, found three pertinent issues pertaining to financial
advice. According to the author, Commissioner Hayne, the financial advice industry is yet to
undergo a complete transition from an industry solely dedicated to selling financial products,
to a profession that offers financial advice (Hayne, 2019). Hayne’s scepticism is largely
because of evidential findings relayed to the Commission from a wide range of sources.
Despite an acknowledgement from sources within the financial services industry that
financial advice was not yet a profession, the people involved in seeking financial advice
would tend to disagree (Hayne, 2019). This brings to light the fact that customers seeking
financial advice have confidence it and in financial advisors.
Commissioner Hayne, in his inquiries, raised three issues he believed to be affecting the
provision of services in the financial advice industry. These are fees for no service, poor
service provision, and the undefined and often ineffective disciplinary measures taken against
financial advisers (Hayne, 2019). Hayne further links these issues to the financial advice
industry’s history, in an effort to contextualize them. The main takeaway from studying the
history of the financial advice industry is its propensity to prioritize sales over quality of the
services rendered. This is particularly why Hayne insists that the financial advice industry is
yet to transform into a profession (Hayne, 2019).
From a historical context, it is clear to see how the issues related to the financial advice
industry are related to culture, governance and remuneration. The sales culture, which was

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cultivated decades ago has ultimately spilled over to the current business system, and
influenced the behaviour of financial advisers (Hayne, 2019). Financial advisers continue to
be driven by the desire to earn hefty remuneration packages, which is directly linked to an
increase in sales. Remuneration packages for financial advisers have long been commission
based, characterized by hefty one-off payments and trail commissions for year thereafter.
This has led to issues with conflicted remuneration, which the Commission inquiry found to
effect on the quality of service rendered to customers, as most financial advisers are only
looking to make a quick sale (Hayne, 2019). This is evident in the huge, and in some cases
life-changing losses incurred by customers after the Global Financial Crisis.
The sales culture witnessed in the financial advice industry can be said to a direct result of
governance issues. Ultimately, any aspect of organizational culture is formed at the top,
reinforced at the bottom, and replicated in every level of an organization (Bowles, Bradley
and Knoll, 2019). This implies that at any given time new employees will emulate the culture
they have found to be existent in an organization. The longer a culture has been embedded,
the more difficult it is to uproot.
Hayne recommended a more customer-centred approach to service delivery in the
financial advice industry, one that upholds the best interest duty (Hayne, 2019). He also
suggested that financial advisers improve their professional standards through education and
certification (Lim et al., 2019). The effect of conflicted remuneration was also to be removed
if the quality of services rendered in the financial advice industry is to be enhanced (Lim et
al., 2019). These recommendations bare some similarity to those of Stephen Sedgwick, who
also noted the endemic that is the sales culture in the Australian banking industry (Rowe,
2017). In particular, conflicted remuneration was found to be a problem, with service
providers influencing customers to make risky financial decisions. Sedgwick’s findings

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revealed an interesting fact, that increased sales and remuneration influenced the choice of
leaders in banking institutions (Rowe, 2017). Middle management in particular, comprised of
individuals that were successful sales people. With such leadership in place, it is clear to see
why the sales culture is deeply entrenched in the financial services industry.
Although Sedgwick’s inquiry and findings were based on the banking industry, they can
also be related to the financial advice industry. This is because vertical integration has seen
various institutions in the financial services industry, including banks, merge with institutions
that offer financial advice. Hayne, in his report, also recommends the adoption of Sedgwick’s
recommendations when dealing with issues related to remuneration (Hayne, 2019). A total
overhaul of the existent culture is required if change is to be implemented in the financial
advice industry. A top-down approach to governance will be ideal, as financial advisers will
learn from their leaders, while also being aware of disciplinary actions against them in the
event of misconduct (Bowles, Bradley and Knoll, 2019).
Identify and assess the effects on the stakeholders affected by this issue using Carroll and
Buchholtz’s (chapter 3) 5 questions
Carroll and Buchholtz have largely based their studies on issues related to corporate social
responsibility (CSR). This term is multifaceted but commonly refers to the ethical, economic,
legal, and discretionary obligations that a business owes the society at any point in time
(Carroll and Buchholtz, 2018). Their latest work highlights the influence of stakeholders on
business outcomes. Stakeholders are individuals or groups that are set to be affected by the
policies, actions, decisions, goals, and practices of a given organization. Stakeholders can
also be defined as having varying stakes in an organization, either legal or moral (Carroll and
Buchholtz, 2018). They have a valued expectation they purpose to receive from an
organization. Legal stakes can either be a right to be treated in a certain manner or to receive

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protection for a specific right, or to be entitled to an asset. Moral stakes pertain to ethical
expectations of how one is to be treated or have their rights protected (Carroll and Buchholtz,
2018).
In this case the stakeholders affected by the issue of financial advice, include shareholders,
employees and customers. Industry regulators such as the Australian Securities and
Investments Commissions (ASIC) and the Australian Prudential Regulation Authority
(APRA), also have a stake in the financial advice industry.
All these stakeholders can be said to have legal stakes in the institutions that provide
financial advice. While shareholders may claim ownership to the said institutions, employees
are legally bound to provide certain services and receive remuneration, and also have certain
rights protected. Customers on the other hand, have a legal expectation pertaining to how
they should be treated. Morally, all stakeholders are expected to conduct themselves in a
particular manner in order to achieve the best outcomes for all. Ethics should be the basis of
the conduct of all stakeholders involve in this and any other industry. Employees, for instance
expect fair remuneration and equity in their treatment at the organization. Customers expect
fairness, transparency and confidentiality in the services provided to them by the
organization. The role of industry regulators is to ensure that that service providers within
this industry comply with the law in the course of their work.
Stakeholders can either pose a threat or improve how organizations are run. The
opportunities presented by stakeholders aim at enhancing the relationship between the
industry and its stakeholders (Carroll and Buchholtz, 2018). In the case of the financial
advice industry, there is an opportunity for shareholders, management, and retail staff to
engage in a cooperative relationship to ensure that their customers get the most favourable
outcomes. Given the problems plaguing the financial advice industry, it is evident that the

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management and employees of institutions in the industry have somewhat colluded to
provided unsatisfying services to their customers. In this regard, the same collusion could
work in creating better ways of serving their customers. Culture changes that favour
transparency on the part of financial advisers will enhance customer outcomes.
Challenges, on the other hand, refer to the threats organizations face as a result of varying
expectations from stakeholders (Carroll and Buchholtz, 2018). This could not be truer in the
case of the financial advice industry. This is demonstrated in Hayne’s findings, which
identified a prevalent sales culture in the financial advice industry. The implication of this is
that different stakeholders want different things. While customers are genuinely seeking
financial advice on how to manage their investments, shareholders and employees seem
keener on earning bigger bonuses. Thus, the stakeholders harbour varying expectations from
the industry, causing a threat to their future cooperation.
Organizations also bear responsibilities to stakeholders, which are mainly reflective of the
individual stakes that each stakeholder bears. An analysis of the responsibilities a firm owes
its stakeholders requires an understanding of the expectations of the said stakeholders.
Employees, for instance may expect fair remuneration for their efforts, but since their pay is
mainly commission-based, they have to rely on sales to earn decent money (Caroll &
Kuchholitz, 2018). The financial advice industry has thus far failed to negotiate a fixed pay
that is non-performance based for its employees. This has further aggravated the issue of
misconduct among financial advisers by enabling the sales-driven culture in most institutions.
Shareholders expect a good return on investment, an expectation they relay to their
employees frequently in the financial advice industry. Customers want fair products and
prices for the same, something they are clearly lacking in the current financial advice

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industry. According to Carroll and Buchholtz (2018), responsibilities to stakeholders can also
be viewed from the aspect of CSR.
The strategies to be undertaken by the management can only be addressed once an
organization has identified the responsibilities they have towards their stakeholders. Carroll
and Buchholtz (2018) identify several questions that inform decisions on the strategies to be
adopted by management. These include the kind of communication between them and
stakeholders, the extent of their collaboration, resource allocation, and the creation of
programs and policies (Carroll and Buchholtz, 2018). Strategies could be based on whether a
particular stakeholder poses a threat or shows potential for collaboration. This classification
gave rise to different types of stakeholders, supportive, non-supportive, marginal and mixed
blessing (Carroll and Buchholtz, 2018). From these, different strategies could then be
developed, including involvement, monitoring, defence, and collaboration.
In the case of the financial advice industry, the main issue that Hayne found was the
difficulty in uprooting the ongoing sales-driven culture from institutions. This implies that
some stakeholders, especially financial advisers and shareholders may fall in the
unsupportive or mixed blessing classifications. As such the industry should defend against
them or choose only to work with supportive stakeholders. Within individual institutions,
management should also cluster employees according to the opportunities or challenges they
present. Thereafter they should work with those willing to improve and follow the
recommended policies and regulations. Customers in the financial advice industry pose a
unique legal threat, and rightly so, given the losses some of them have endured in the past
decade. Financial advice institutions would require a lot of resources to mitigate this in the
event that legal action is taken against them. However, customers also seem willing to work
with managers and the industry in general to ensure better services.

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Include an analysis of what the financial institutions investigated reported in their
ASX Principles and Recommendations during the years before the Royal
Commission.
The ASX governance principles were created in 2003 to foster investor confidence and act
as a guideline for ASX listed institutions to fulfil the governance expectations of their
stakeholders (Asx.com.au, 2019). Its set of principles cover a broad scope of areas including
management, corporate responsibility and ethics, risk management, board, and committee
structure. Entities listed under the ASX were required to make public their corporate
governance statement. Entities are, however not required to follow all recommendations
although many choose to do so. The financial institutions investigated for issues related to
financial advice are Storm Financial and Commonwealth Financial Planning. Currently,
Storm Financial has its website managed by ASIC as legal proceedings against them
continue. In the case of Storm Financial, both its directors were found guilty of breaching
their directorial duties. They allowed their customers to be misadvised leading to losses and
as such failed in their fiduciary duty to their customers. This is despite reporting that they
engage in ethical and responsible decision making. Two employees of Commonwealth
Financial Planning were accused of providing inappropriate information to their customers,
consequently violating their rights as stakeholders.
Provide an assessment of diversity and inclusion of the boards investigated
The directors of Storm Financial included a couple who also were the main shareholders
of the company. Despite the presence of an executive committee and a company board, the
two directors were seemingly the sole decision makers (Hargovan, 2018). Even if the board
and executive committee was diverse, there was evidently limited inclusion of these diverse
characteristics in any decision making at the company. The directors, during legal

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proceedings, were found to be so controlling to the extent they stifled any form of dissent
from board members (Hargovan, 2018). The directors treated Storm Financial as their
personal company as is seen in how they went above the board in decision making and even
approved financial payments, which would otherwise have been denied.
Contrary to the situation at Storm Financial, the board at Commonwealth Financial
Planning is more diverse and inclusive. Although they have had several changes since the
time of the scandal, the board at Commonwealth Financial Planning remains to be diverse
and inclusive, especially the more. Some of the diverse characteristics in the board members
include the presence of more women in senior positions, race, and ethnicity considerations.
The board’s capacity to be inclusivity is evident in the revelations of complicity among board
members pertaining to the scandal.
Provide an overall ethical analysis using Normative Theories of Ethics, and sustainability
approaches
Much can be said about the ethical implications of the issue that is financial advice.
Normative ethical theories are concerned ethical actions, studying the extent to which they
are right or wrong (Fieser, 2019). They include virtue ethics, consequentialist theories, and
deontological theories. Virtue ethics focuses on the learning of good habits and rules and
unlearning of bad habits, both of which will ultimately influence someone’s behavior (Fieser,
2019). In the issue of financial advice, good virtues such as sincerity, justice, self-respect and
courage would certainly encourage good behaviour among financial advisers. A sincere
financial adviser would be transparent in the information given to customers and focus on
their wellbeing rather than self-interest. Bad virtues such as injustice, vanity, and cowardice
would encourage bad behaviour. Financial advisers are fuelled by a desire to maximise profit,

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which can be linked to vanity, while they are also unjust to the customers that require genuine
assistance.
Deontological or duty-based theories are more focused on obligations regardless of the
consequences of an action (Fieser, 2019). There are several classifications of duty theories,
including the rights theory, duties to oneself, to others and to God, the categorical imperative,
and prima facie duties (Fieser, 2019). Given the nature of the financial advice industry, duty-
based ethical theories are perhaps the most applicable. In the rights theory, for instance,
customers would be entitled to certain services including a guarantee that they will get value
for their money. The categorical imperative advocates that people be treated as an end as
opposed to a means (Fieser, 2019). Financial advisers, however, seem to treat people as a
means of amassing personal wealth, deeming their actions to be unethical. The prima facie
theory gives a list of duties such as reparation, fidelity, gratitude, justice, beneficence, self-
improvement, and nonmaleficence, which act as a guide to whether or not an action is moral
(Fieser, 2019). Financial advisers and other higher-ranking individuals in the industry failed
in their duties of fidelity, beneficence and self-improvement. In so doing, their morality was
compromised.
Consequentialist theories use outcomes to measure moral responsibility. In this case an
action is moral or right if it benefits the most people (Fieser, 2019). The classifications of
consequentialism include ethical egoism, ethical altruism and utilitarianism. In ethical
egoism, actions are morally acceptable if the outcomes are favourable to the person
performing the outcome (Fieser, 2019). In relation to the issue of financial advice,
shareholders, management and retail staff including financial advisers benefitted from
unethical practices at the expense of the customer. In ethical altruism, actions are morally

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acceptable if they are favourable to everyone other than the agent taking action (Fieser,
2019). This type of consequentialism is not applicable to the issue of financial advice.
The most relevant sustainability approaches that can be related to the issue of financial
advice are economic development and alleviation of poverty, and enhancement of corporate
governance. The problems seen in the financial advice industry in recent years, have caused a
variety of negative implications for different stakeholders. These include loss of investments,
income, and jobs. This denotes changes in the economic wellbeing of stakeholders especially
customers, some of who lost everything including their homes. These changes have also led
to cases of poverty for customers who lost livelihoods and jobs at the same time, especially
since all their money and assets were tied to their investments. Institutions in the financial
advice industry in turn lost the trust of their customers and the society in general. The issues
affecting the industry laid bare the cracks in the governance systems of several institutions.

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References
Asx.com.au, 2019. Corporate Governance Council. Chicago, Adventure Works Press.
Bowles, J., S, B. & Knoll, D., 2019. Culture and governance in financial services: KPMG,
Boston: Online.
Caroll, B. & Kuchholitz, A. K., 2018. usiness & Society Ethics, Sustainability, and. 10th ed.
New York: Cengage Learning.
Fieser, J., 2019. Storm without power: Low civil penalties for directors of Storm Financial.
Government Directions, 70(4), pp. 1-10.
Hayne, K. M., 2019. Royal Commission into Misconduct in the Banking, Superannuation and
Financial Services Industry, Chicago: Online.
Lim, M., Thoma, T., Robinson, N. & Lytas, K., 2019. Financial advice following the Royal
Commission, Boston: Online by KPMG.
Rowe, D., 2017. Sedgwick review of bank pay calls for major cultural change. Australian
Finacial Review, 6(3), pp. 1-8.