Social responsibility and sustainability Assignment 2022

Social responsibility and sustainability
task 3: Royal Commission into
Misconduct in the Banking
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Table of Contents
Introduction................................................................................................................................3
Sustainability theory and framework specific analysis..............................................................3
Ethical approach understanding from the theoretical perspective and business context...........5
Business decision making and diverse stakeholder’s interest inclusion....................................7
Legislation concerning social responsibility and ethical conduct..............................................9
Social Responsibility..............................................................................................................9
Ethical Conduct......................................................................................................................9
Reference..................................................................................................................................11
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Introduction
In the earlier time the company’s primary goal was based on the profit making reality. This
approach then was revised to focus on the wealth maximisation of the shareholders of the
business (Benn and Dunphy, 2013). Both of these approaches are more or less myopic in
nature as the business was following one kind of responsibility and stakeholder’s interest.
Then in the later year a more holistic and key stakeholder approach based business governing
approach developed which would be more responsible in its working and sustainable in
functioning.
In this report The Royal commission that focused their research and findings on the banking
sector misconduct in the commonwealth of Australia provided recommendations on the basis
of the governance, culture and remuneration, has been consulted to develop this holistic
report (royalcommission.gov, 2019). In this report those aspects would be discussed based on
the further research on those subjects. This report considers unequivocally that the principle
responsibility of financial miss-conduct in the financial service industry lies on the people
who are controlling and managing that entity. However this report also through light on other
aspect of a financial institute management and financial advice generated based on those
aspects.
The reports takes into account the role of the organisational culture, the way it is governed
and also simultaneously look into the remunerations, incentives, compensation practices
within the organisation along with the risk associated with the business conduct, compliance
and regulatory risk associated (royalcommission.gov, 2019). Taking note from the
commission report this report is aiming to address the business sustainability, business
responsibility and ethics, stakeholder interest specific decision making, and the principle and
legislation specific discussion on the business responsibility and the sustainability specific
practices (Benn and Dunphy, 2013).
Sustainability theory and framework specific analysis
One of the important sustainability frameworks for the businesses would be the triple bottom
line framework. This is an important accounting framework that is developed in a holistic
approach and not just focusing on the profitability aspect or the one bottom line of the
business. In this triple bottom-line framework there are three Ps that are the profit, planet and
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people (Schulz and Flanigan, 2016). This framework is focusing on the business activities
which would influence the sustainability factor of the business. One of the important benefits
of this approach is that the business in this approach is not only focusing on the shareholder’s
value maximisation or profitability aspect but also the greater environmental and social
values.
The people aspect of this model takes into consideration the larger stakeholder’s of the
business, namely the staffs, surrounding community, suppliers, distributors and so on. Their
well being, welfare and supporting them would be an important responsibility of the business.
On the other hand the planet aspect focuses on the ecological impact of the business and
minimising that negative impact would be an important responsibility for the business
(Schulz and Flanigan, 2016). The business also has to be financially viable and they have to
manage the financial health along with long term profitability, as without the sound financial
position the business would not be able to fulfil other responsibilities.
This theoretical framework can be understood from the CBA or the Commonwealth Bank of
Australia’s perspectives. In recent times, there were few incidents that influenced the APRA
for the Prudential Inquiry on the CBA from the perspective of accountability, culture and the
governance of the banking group (apra.gov, 2018). The report highlighted the non financial
risk associated with the working of CBA. This risk factor would be negative for the
profitability and long term financial health of the banking group and thus is impacting one of
the important bottom-line for the sustainability of the business.
Further the report cited the complacency, risk reaction approach, inability to learn from the
mistakes and experiences. It becomes insular, excessive, collaborative and collegial
environment of working that influence the scope for constructive criticism. These are some of
the important cultural issues in the organisation which are increasing the risk factors
(apra.gov, 2018). In this process the customers were also getting negatively influenced and it
impact the people centric sustainability issue.
The Royal commission also dealt with the non financial risk factor. In the context of the CBA
this report stated that the prudential inquiry showed that the lack of capability to manage this
non financial risk from the compliance and the operational risk perspective was significant.
The report has recognised that the global financial crisis has influenced this kind of financial
organisation to employ more and more resource for the financial risk management but for the
non financial risk the lack of attention is evident (royalcommission.gov, 2019). Thus the
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focus on the profit or economic sustainability management using the triple bottom-line
framework is too narrow and does not have the holistic approach of management. In this
context both the report has highlighted that the better risk management framework is to be
developed where statement for risk appetite would be an important consideration (Tricker and
Tricker, 2015). In this appetite statement the inclusion of the non financials risk in an
effective way and it is highly recommended from the perspective of the holistic material risk
assessment. This approach would be highly beneficial for the economic or the profit centric
sustainability perspective.
The Royal commission has stated in their report that the operational, regulatory, compliance,
conduct risks are some of the misconducts which are more difficult than detecting the
financial risk in a financial organisation (royalcommission.gov, 2019). Thus only focusing on
the financial risk assessment centric sustainability management is limited. The Prudential
inquiry has found that the accountability is unclear with lack of urgency, bureaucratic and
complex decision making process, just on paper operational risk management approach,
compliance function’s lack of resource, and ineffective framework for remuneration
(royalcommission.gov, 2019; apra.gov, 2018). Thus all of these risk making factors need to
be dealt with properly focused strategies. The Prudential inquiry and the Royal commission
report both have recognised the importance of developing the ‘non financial risk committee’.
This development needs to be done at the Executive level of CBA. Therefore this
recommendation is implied for other businesses also.
Ethical approach understanding from the theoretical perspective and
business context
The normative business theory states that the ethical approach of functioning of business is
related more to the right and wrong approach assessment which are further related to the
general morality (De George, 2011). In this normative approach of assessment of ethical
behaviour the assessment is based on the fact that it must bring good life for the human being
and the approach of behaving in a particular situation. The traditional theories in this regard is
developed by following the modernist approach where the scientific and more rational
approach is followed to bring the inclusiveness, comprehensiveness at the time of explaining
to the society, human being and the nature (Crane et al., 2019).
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In the traditional theories there are two different branch of ethical approach, one is the
consequential and another one is the non consequential. The consequential theory focuses on
the result of an action whereas the non consequential theory focuses on the basic character of
the individual or the principle of a decision making (De George, 2011).
The above theoretical and ethical approach discussion later in the business world translated
into certain procedural, policy centric ethical framework to follow. One of the important
ideas is the ethical approach decision making and business leadership approach (Crane et al.,
2019). In this approach the ethical approach can influence the business conduct through a top
down approach and also inspires other to follow the same path in the organisation. The next
framework is the governance of the corporate and the compliance mechanism developed
within the business. A better corporate governance system which has appropriate checks and
balances inbuilt in it is useful for the better ethical approach delivery.
On the other hand the compliance mechanism developed in the organisation is more
important to conduct the business as per legislation. On the other hand one of the important
ethical approaches is to remain responsible in their working and fulfil their responsibility to
the society. Thus the corporate social responsibility policies and activities adopted by the
organisation is also a significant step in the ethical approach of business management (De
George, 2011). Apart from that consumer safety, proper standard of labour management and
employee relation is also important part of the business ethical approach.
In the current business case CBA accountability factor was missing, and people in the
executive committee did not own the key risks associated with the business (apra.gov, 2018).
This shows that the ethical approach of working was lacking at individual level and there was
no proper procedure in the organisation for following the ethical approaches. The top
leadership was also not following the ethical approach as the decision making process in the
organisation was more bureaucratic types with less flexibility to consider the ethical
approaches. In the organisation too much collaborative and collegial environment persisted
that made it limited to have some constructive criticism of some organisational activity and
approaches. This approach is likely to help in continuing the wrong doing without having a
relook at it (apra.gov, 2018).
The Prudential inquiry and the Royal commission have both stated that this non financial risk
factor was overlooked in CBA which have a strong impact on their business and the
customers. The non financial risk is not directly measurable unlike the financials risk. Thus
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assessment of this aspect from the ethical working perspective must be done through the non
consequential approach as discussed above (Crane et al., 2019). Considering that the
principle behind all of those decisions must be scrutinised to understand the unethical
working approaches. The above theoretical discussion has found out the importance of the
governance approach and the compliance process in the organisation. The Royal commission
has found out that in CBA compliance related issues has been highlighted by the audit
department and in 2016 it was a ‘red’ rating (the highest rating) (royalcommission.gov,
2019). But the audit report was not provided to the audit committee. This is showing lack in
the governance structure. In the committee meeting the members did not challenge the
management on the issue of effectively managing this highly rated compliance issue
(royalcommission.gov, 2019). One of surprising revelation is that the committee members
did not ask for any audit report copy also. All of these are showing as an example of broken
governance and compliance system in the CBA group. Thus on the ethical ground the
organisation was not able to follow the proper conducts.
Business decision making and diverse stakeholder’s interest inclusion
In this report the theoretical approach of Carroll and Buchholtz related with the stakeholder
management can be considered. In their book “Business and Society: Ethics
and Stakeholder Management”, detailed discussion on the stakeholder management approach
has been done (Carroll and Buchholtz, 2014). The five question based approach can be
applied in this report to understand the need for information and the management of the key
stakeholder of any business. The first question here is dealing with identifying the
stakeholders. In case of CBA the key stakeholder was the regulatory agencies, customers,
shareholders and general public as the external stakeholder group.
On the other hand the audit committee or the executive board are the other important
stakeholder for the management to have proper information to manage them (Fassin, 2012).
The next question deals with the important stake that the key stakeholder possesses. This is
the stakeholder’s interest assessment. The general interest of the regulatory agencies,
customers, shareholders and general public in the CBA is not similar. The regulatory
agencies, customers and general public have lower interest though the customer’s deposit is
in the bank and thus they have higher interest than the others among those three. On the other
hand the shareholders have one of the highest levels of interest in the organisation as their
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investments are in stake. Similarly the internal stakeholders have higher level of interest in
the business as they are responsible for effective functioning and they also benefit from here.
The next question addresses the challenges and opportunity that these stakeholders provides
to the company. The regulatory agencies, customers, shareholders and general public have
different types of power which can influence this aspect (Carroll and Buchholtz, 2014).
Regulatory agencies, customers, shareholders have higher level of power on the basis of the
legislation, consumption and investment respectively. The regulatory agencies can penalise
the CBA for their misconduct whereas the customer may decide not to use their banking
services and shareholder may withdraw their investment. In these entire scenario CBA would
face the financial, operational and management challenges (Fassin, 2012). The general public
have lower level of power but they can voice their opinion now through the online media
which would damage the brand image. On the other hand the internal stakeholders also
having higher level of power to control any misconduct and improve governance.
In this series the next question addresses the firm’s responsibility for their key stakeholders.
CBA have legal compliance responsibility towards the regulatory authority. Better, safe and
secure service delivery, ethically managing the wealth of the customers is important
responsibility. The shareholder’s economic interest and their wealth maximisation is also
important responsibility of the management. The philanthropic responsibility of CBA is
towards the general community (Carroll and Buchholtz, 2014). On the other hand for the
internal stakeholders it is the safe working environment, their economic interest, proper
support and resource delivery for their effective working, ethical responsibility of upholding
their independent working is important responsibilities.
Considering all of the above aspect, the fifth and the last question aim to address the action
needed and strategy development required for this and the stakeholder management. CBA
needs to develop effective compliance system through their internal governance process
improvement (Tricker and Tricker, 2015). The internals stakeholder must be provided with
the required information which was not available earlier as seen in the earlier section’s
analysis. This would not only be assisting the internal stakeholders in improving their work
but also improving the compliance. For these internal stakeholders proper remuneration must
be set to improve outcome in terms of the ethical working. The situation of conflicting
interest needs to be avoided for these internal stakeholders.
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On the other hand the space for constructive criticism needs to be developed within the
organisation. In addition the customer ethical working approach, constant and transparent
communication of CBA’s working approach and their wealth position needs to be
communicated (Freeman, 2010). The shareholders’ must also be provided correct assessment
of the CBA group to improve their informed decision making process. An effective internal
control system and transparent communication process is also to be developed to the
shareholders to show proper risk management approach (Tricker and Tricker, 2015). In case
of the general public or community philanthropic activity, proper crisis management
approach based PR communication strategy; community engagement approach needs to be
adopted.
Legislation concerning social responsibility and ethical conduct
There are legislations that are present in the Royal Commission report that tend to address the
aspects of social responsibility, ethical conduct as well as sustainability practices.
Social Responsibility
Australian Small Business and Family Enterprise Ombudsman Act 2015 (Cth): The key
regulation that tends to address the aspect of social responsibility involves the Australian
Small Business and Family Enterprise Ombudsman Act 2015. The small businesses tend to
contribute to 35 percent of total production. They contribute significant in terms of revenue
generation and employment generation. However the rates of survival of the small businesses
are low. The survivals of these small businesses are of importance for the growth of the
economy and create social balance. The economic contribution of these small businesses is
significant. Almost 95 per cent of the businesses that were actively functioning within
Australia in 2011 were small businesses, so ensuring that the survival of these businesses is
important for the social balance. This act has dual role of assistance and advocacy. The act
takes into concern the existing legislations dealing with small businesses and family
businesses. This ombudsman allows providing advice to the ministers regarding small and
family business enterprise (Atkins and Charlton 2019).
This act also ensures that national strategies are developed that can help in sustaining these
businesses. So there is significance contribution on the part of the legislation for socially
contributing to the promotion of small business and family enterprise. This act directly
involves itself in benefiting the small businesses. There is provision in this act to provide
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direct assistance to businesses that can be categorised under small and family enterprise. The
functions of the other agencies are not to be duplicated according to this ombudsman. The
ombudsman functions by transferring the call for assistance to the relevant state or territory
agency (Forsyth, 2016). Thus they function to benefit the society by promoting businesses in
the grass root level by the means of planning, advisory and direct guidance. This in turn has
direct significance to the financial market.
Ethical Conduct
Competition and Consumer Act 2010 (Cth): The ethical conduct of the businesses operating
in Australia is being managed by competition and consumer act 2010. This act is applicable
to all businesses including the financial sector operating in Australia. The key elements of
this act involves promotion of healthy competition which contributes positively to the
business environment, ensuring fair means of trading and also touches the aspect of rights of
the consumers. The legislation is executed by the body called the Australian Competition and
Consumer Commission. The second schedule of this act is set for the purpose of the
protection of the consumers’ right within Australia (Connolly et al. 2012). The protection of
the rights of the consumers in a business is one of the key ethical necessities that are met
through this legislation.
The Australian Federal court takes the responsibility of defending the cases that comes within
this act. The provision of this act plays a vital role in ensuring that ethical trade practices are
being practiced by businesses in Australia. The Part IIIA of the act ensures that some vital
services are made accessible. The Part IV of the Act tends to deal with the aspect of trade
practices that are unethical in nature and needs restriction. This section also addresses the
codes for different industries within the economy. Part VII deals with the different
authorisation, clearances and notification. The surveillance of the prices of the goods that are
present in the market is also done under this act. This surveillance ensures that the prices of
the product are not unethically hiked by the businesses. Part IX of the schedule provides
power to the tribunal to review decisions made by Australian Competition and consumer
commission (Schaper, 2010). The aspect of regulation in telecommunication has been
addressed in this section as well.
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Reference
apra.gov. 2018. APRA releases CBA Prudential Inquiry Final Report and accepts
Enforceable Undertaking from CBA. [online]. Available at: https://www.apra.gov.au/media-
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Atkins, S. and Charlton, P., 2019. Chartered secretary: The banking royal commission final
report: Culture and governance implications. Governance Directions, 71(2), p.65.
Benn, S. and Dunphy, D., 2013. Corporate governance and sustainability: Challenges for
theory and practice. Routledge.
Carroll, A.B. and Buchholtz, A.K., 2014. Business and society: Ethics, sustainability, and
stakeholder management. Nelson Education.
Connolly, E., Norman, D. and West, T., 2012. Small business: an economic overview. Small
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Crane, A., Matten, D., Glozer, S. and Spence, L., 2019. Business ethics: Managing corporate
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De George, R.T., 2011. Business ethics. Pearson Education India.
Fassin, Y., 2012. Stakeholder management, reciprocity and stakeholder
responsibility. Journal of Business Ethics, 109(1), pp.83-96..
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Freeman, R.E., 2010. Strategic management: A stakeholder approach. Cambridge university
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royalcommission.gov. 2019. Royal Commission into Misconduct in the Banking,
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Schaper, M.T., 2010. Competition law, enforcement and the Australian small business
sector. Small Enterprise Research, 17(1), pp.7-18.
Schulz, S.A. and Flanigan, R.L., 2016. Developing competitive advantage using the triple
bottom line: A conceptual framework. Journal of Business & Industrial Marketing, 31(4),
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