Corporate Governance: Misconduct, Ethics, and Regulation in Finance

This report analyzes corporate governance failures in the Australian banking and finance industry, focusing on the findings of the Royal Commission. It identifies and explains three key forms of misconduct, including scandals related to financial planners, foreign exchange trading, and inappropriate lending practices. The report then delves into the reasons behind unethical behavior and bad corporate culture, citing conflicts of interest, lack of transparency, and regulatory failures as contributing factors. It proposes recommendations for regulators to prevent future misconduct, such as implementing best practices in hiring, incentivizing ethical behavior, and establishing robust control mechanisms. Finally, the report critically examines the role of corporate culture regulation, arguing that it is essential for fostering ethical business practices, ensuring transparency, and protecting stakeholders. The analysis highlights the need for a written code of conduct, consequences for unethical actions, and checks and balances to improve governance within financial institutions.

Corporate governance assignment

Corporate governance
Answer – 1
The year 2015 was a very ominous year for the NAB. The bank was engulfed into a lot of
controversies pertaining to financial planners. The National Australia Bank was said to have
paid millions of dollars under the table as compensation to its clients from the year 2009 to
2015. The employees of the National Australia Bank leaked such information and claimed
that the bank was engaged in unacceptable practices. One of the employees even stated the
presence of a noxious, fraught and unscrupulous culture within the bank. The National
Australia Bank was also involved in foreign exchange trading scandals and this also created a
lot of chaos for the bank. The NAB’s employees who were hired to offer financial advice to
the clients too executed and supported the bank in conducting these malpractices and
therefore, upon their identification they too were banned by ASIC.
Macquarie Bank was also involved in impairment in foreign exchange trading. ASIC
discovered the involvement of Macquarie Bank’s traders in a lot of scandals. Therefore, the
bank was asked to compensate for the same by means of donating $2 million towards charity.
Westpac faced a lot of controversies pertaining to bank bill swap rate and the country’s key
interest rates. The bank was also sued for determining if the client meets the lending criteria
for the home loan through an automated process. One of the employees of the aforesaid bank
was also sentenced to jail for lending millions of funds to senior citizens through fraudulent
activities. Few Westpac bankers were also seen to have leaked the credential information of
the clients’ orders to foreign exchange traders and this is why ASIC instructed Westpac to
compensate by means of donating $3 million to Financial Literacy Australia. The bank failed
to pass on benefits to its clients that they would have received from package deals that
include credit cards, home loans, and transaction accounts. Hence, the bank initiated the
refund of $65 million to not less than 220,000 clients pertaining to the failure of passing on
benefits.
The three are considered as the worst forms of misconduct because such misconduct leads to
removal of people faith from the banking system. Further, the act was worst because the
scandal involved continuance of extracting fees from the accounts of the people who died, to
a charge of fees for no service. Such practices give an indication of the misconduct they have
in their mind. The banks are a place where people deposit money with utmost faith and are
2

Corporate governance
such acts are continued that will lead to grave issues1. Further, it represents the greedy nature
of the banks and the manner in which the executives performed the operations. In all the three
cases, the officials were connected in the scandal thereby striking the fact that such dishonest
means tend to erode the people faith in the system of banking2
Answer – 2
2.1
The main reason the Commission provided for the unethical behavior and bad culture are as
follows:
• The level of interest conflict was high as there was immense movement in terms of
personal goals and the deficiency in terms of ethical remuneration structure was missing. It
was the main reason that leads to unethical behavior.
• Secondly, the separation of duties was absent when it comes to the provision of financial
advice and the marketing of financial products. When the duties are not separated it leads to
conflict and in the due course of action attracts unwanted behavior. The sales/marketing of
the product when left to operate without any regulation leads to major differences3.
• The level of transparency was missing when it comes to financial products. The
employees to attain a big advantage provided services and product to the client that were not
suited to them. Hence, the transparency together with the greedy nature of the employees led
to the downfall. The information transparency was missing and it was one of the major
loopholes that caused the fraud4.
1 Carroll Connelley (ed), Aspects of leadership, Ethics, law and Spirituality (Marines Corps
University Press, 2012)
2 Sytse Douma (ed), Economic Approaches to Organizations. (London, 2013)
3 Patrick , Ulrich, ‘Managing natural resources – Are family firms different from other firms’
(2018) 1 Corporate Governance and Sustainability Review
4 Rob Bauer (ed), Corporate environmental management and credit risk (Maastricht
University, 2010)
3

Corporate governance
• Further, the parties defied laws, as well as regulations that govern the operations of the
financial service industry. It was witnessed that the parties defied the laws and acted as per
their own benefits. Further, the laws were not stern and the parties were not held accountable
for the same.
• The greedy nature of the parties was one of the prime reason because the parties wanted
the reward and this was done with the aid of selling the wrong product. In short, personal
greed took a leap and led to the downfall5.
Going by the situation, it can be said that the individuals, as well as institutions, were mainly
in search of reward and the same was accomplished by providing wrong products to the
consumers.
2.2.
The Regulators should define the best practices that lead to avoidance of unethical behavior.
Certain best practices lead to avoidance of unethical behavior and helps in structuring the
corporate culture:
Hire right – The regulator should lay a policy of selecting the correct people so that it
provides a huge difference in organizational ethics. The organization must ensure a series of
steps such as background check, screening of the purchase tools and interviews so that the
selection of the best candidate is done. It must be ensured that the organization follows the
cultural and social norms for the best practice and adhere to the regulator's viewpoint.
Incentivize the correct thing – The regulators should inform that the correct thing should be
incentivized. This means that the employees should not run for rewards. Hence, it is the need
of the hour that the introduction of new policies should be done whereby the organization
should allow the best practice 6. Quality checks should be done by the regulation that helps
in ensuring the best practice. Moreover, the incentive must be set for the correct product that
will aid in the ethical course of activity7.
5 Patrick Velte (ed), ‘Impact of auditor and audit firm rotation on accounting and audit
quality: A critical analysis of the EC regulation draft (2012) 1 Journal of Governance and
Regulation 7-13.
6 David C. Hay and W. Robert Knechel, ‘Meta-regression in auditing research: Evaluating the evidence on the
big n audit firm premium’ (2017) 36 Auditing: A Journal of Practice & Theory 133-159.
7 Domenico Campa (ed), ‘An assessment of corporate governance reforms in Italy based on a comparative analysis of
earnings management’ (2014) 14 Corporate Governance 407-423. https://doi.org/10.1108/CG-06-2012-0048
4

Corporate governance
Ensuring control in place – The regulators must provide guidelines whereby the organization
can implement proper control in place. This will help in ensuring proper audit and ethical
course of conduct. The regular audit must be done and submitted to the regulator that will aid
in incentivizing the individuals that act in an unethical manner8. This will help in catching
issues that might occur due to accident and mitigate risk. Once the reporting mechanism
happens, it will lead to a proper course of conduct and aid in proper decision making9.
2.3.
Corporate culture should be regulated because once regulated the business ethics comes into
foreplay. Once the corporate culture is regulated it will lead to the determination of what is
wrong and what is right. It will enable the business to conduct the operations in an effective
manner and enables the rules are followed. When corporate culture operates under the ethical
guidelines leads to the betterment and avoid risks. People do business when trust exists and
this can be done when the business is regulated in nature. A business is well known for the
dealings when done in a fair and ethical manner. Hence, a fair course of dealings can happen
when there is proper regulation. In the absence of regulation, the business might function in
an unethical manner and hence might fool the customers. This will put the stakeholders and
customers at high risk10. Unethical practices happen in many forms such as treatment of the
customers in a wrong manner, improper treatment of the employees and false practices. A
business practice that projects the wrong side of the information enters the wrong book of the
customers and this hampers the goodwill. This impacts the bottom line of the business. The
business enters into unethical practices for the major reason of profit and hence, it is the need
of the hour that regulations must apply to the business so that the conduct of operations
happens in a fair manner11.
8 Michalis Bekiaris (ed), ‘Economic crisis impact on corporate governance & internal audit: The case of Greece. Corporate
Ownership & Control’ (2013) 11 https://doi.org/10.22495/cocv11i1art5
9 Velte above n 12
10 Carroll Connelley (ed), Aspects of leadership, Ethics, law and Spirituality (Marines Corps University Press, 2012)
11 Shuili, Du, ‘Maximizing business returns to corporate social responsibility (CSR): The role of CSR communication’
(2011) 12 Management Review 8-14
5

Corporate governance
Regulation involves compliance with certain rules. It determines the scope of action needed
to proceed ahead. When the business is regulated it will ensure that certain rules and
regulations will be adhered to and this will create better transparency. In the absence of
regulations, the business might function for the lust of money and dupe the customers.
However, the presence of regulations will ensure that the operation of the company abides by
the rules framed and any contravention might lead to punishable offense. If the corporate
culture is regulated the employees and management will interact in a positive manner and no
suspicious activity can be traced. The presence of corporate regulation determines the scope
and extent of the practices12. This creates pressure on the management to work in tandem and
provide a result free from any malpractices.
Answer 3
Yes, a royal commission with wider term of reference will be in a better position to
investigate into the misconduct and unethical behaviour. An oral code of conduct cannot
overwrite the benefits of a written code of conduct. A written code of conduct can help the
person and top-level executives of an organization in understanding the type of behaviors and
activities are accepted in the same. The workers and the management can determine the type
of conduct is expected by an entity13. A written code of conduct will also make the employees
aware of the consequences they might have to face in the course of violating the company’s
code of conduct14. For example, sharing of client’s credential information is strictly
prohibited in the company’s code of conduct and if the same is done by an employee may it
be intentionally or unintentionally, the consequences are to be borne by him no matter what.
Reinforce Consequences for Unethical Behavior
An employee who is engaged in unethical activities shall be held responsible for bearing the
consequences of the same. An employee must be fully aware of the consequences of his
actions that he will have to deal with. The management must conduct necessary training for
their new and old employees from time to time so as to give them an idea of the company’s
code of conduct. The employee must be made aware of the cost that he will have to pay to
12 Heemskerk, E. M. The social field of the European corporate elite: A network analysis of interlocking directorates
among Europe’s largest corporate boards’ (2011) 11 Global Networks, 440-460.
13
14 Carroll above n 45
6

Corporate governance
pertain to policy violations by the management of the company through regular training on a
code of conduct15.
Create Checks and Balances
The responsibilities must be segregated between employees based on their skills and
experience. A system of checks and balance must be developed so as lower the chances of
unethical and unacceptable practices to take place. The policies must be regularly updated so
that the organization can tackle the occurrence of any unpleasant situations. The functioning
and soundness of existing mechanisms must be tested by the organization by means of
conducting an annual audit16.
Hire for Values
The human resource team of an organization must hire candidates based on their skills,
expertise, degree, knowledge, experience and ethical values. Employees must be chosen
considering the requirements of the job vacancies as well as on the basis of their moral
values. The interviewer can evaluate the ethical values of an individual by means of giving
him certain situations where he has to choose between performing ethically and unethically.
Asking how he will manage things out in such a complicated scenario will allow the
interviewer to read his mind and determine his morality. This will ensure the recruitment of
ethical employees in an organization.
Answer 4
Yes, it is time that the corporate law, as well as corporate governance should be regulated in
the industry. It will bring about a better course of conduct and helps in framing an ethical
society. The ethical culture and corporate governance of the renowned Australian
organizations are bought into the spotlight by the Royal Commission. The investigation done
by the Royal Commission has revealed the negative side of the Australian banking industry.
Many Australian banks are seen engaged in a lot of mishaps and malpractices which sheds
15 William K. Balck, Epidemics of “Control Fraud” lead to Recurrent, Intensifying Bubbles and Crises (Working paper,
University of Missouri-Kansas City, 2010)
16 Hikaru Murase (ed), ‘Reputation of low-quality big 4 and non-big 4 auditors: evidence from auditor switches of former
Chuoaoyama clients, (2013) 2 Journal of Governance and Regulation 7-23.
7

Corporate governance
light on the fact that there has been the prevalence of weaker corporate governance in the
same17. The ethical culture of the Australian Banking, Superannuation and Financial Services
Industry is also very disappointing. If there would have been the presence of a stronger and
generous ethical culture and corporate governance in the Australian Banking,
Superannuation, and Financial Services Industry, then the same would have never engulfed
into such controversies. The culprits were not just severely penalized for their malfunctioning
but they also earned a bad reputation due to which the same might need a forever time and
efforts to gain back the trust of its client18.
Both the management and the employees of the companies were seen engaged in bluffing the
clients by whatever way possible. This signifies the presence of ineffective corporate
governance in these companies system. The companies investigated by the Royal
Commission were the largest and oldest ones in Australia. Most of the companies were found
guilty and this sheds light on the efficiency of the non-investigated ones. There are high
probabilities for the companies to be also involved in malpractices that are not yet
investigated by the Royal Commission19.
The Royal Commission in its investigation in Australia’s oldest and well-doing companies
realized that in most of the cases, the CEOs and the Board of these companies were totally
unaware of the underlying significant issues, internal controls, and such other essential
information. The internal control mechanisms and the policies of the companies were
violated very often and the same has not been documented anywhere in the same. This
signifies that these companies had an insignificant level of accounting functions and that their
employees were more interested in acting against the policies of the same20.
The activities that are criminal in nature and that are done with full intention are to be
charged with criminal offenses. The Royal Commission is keen to incorporate legislation and
regulations around culture so that in future if something is undertaken by the employees of
17 Roach, L, Auditor Liability: Liability Limitation Agreements (Pearson, 2010)
18 Pilbeam, K Finance and Financial Markets (Palgrave Macmillan, 2009)
19 Philip, Kruger, ‘Corporate goodness and shareholder wealth’ (2015) 115 Journal of Financial economics
20 Ronald , Benabou (ed), ‘Individual and Corporate Social responsibility’ (2010) 11 Ecnomica 1-19
8

Corporate governance
the company that qualifies the criteria of criminal offense then these culprits are to be
regarded as criminals and they will put to deal with severe consequences and not just a few
penalties.
The necessity to have workers health and safety legislation was acknowledged and initiated
in the year 2012. The directors were compelled to take safety measures by minimizing the
level of risks so as to safeguard the well being of the workers after the implement of WHS
legislation. The same emphasis is put on initiating legislation pertaining to cultural
accountability so that the directors initiate measures in the best interest of its employees,
customers, and society at large.
The Royal Commission should consider the reform of the Australian corporate law and the
corporate governance model that can bring a major influence on the corporate culture. The
Royal Commission is laying huge emphasis on the prevalence of corporate culture. It is a
very diverse and confusing term. Different people might take this concept differently. In this
respect, the board might focus on its people risk. People risk is nothing just the attributes and
morality of the individuals21. Most of the scandals are due to unethical standards incorporated
by the employees of an organization. A greater level of people risk signifies a higher level of
impact on the entity’s financial performance and reputation. Therefore, in this regards the
seniors of the company must incorporate a written code of conduct and such necessary
measures so as to manage its people risk effectively.
The regulators and the financial institutions are the ones who can resolve the problems of the
public. The government has been reducing the ASIC’s funding by $28 million since 3 years
in a row now and this is why the regulators are not appropriately funded. The regulators are
the ones chose to resolve the grievances of the public while the financial institutions chose to
consider them as isolated examples and settle the same with the public on one to one bases.
People risk must be determined by means of applying such mechanisms that can unveil the
real side of the employees22. This will help the management of the company to learn the
actual ethical values held by an employee. The management must always learn about the
consequences it may face due to the level of people risk present in the company. This shall
help the management to take appropriate measures and decide the level of code of conduct in
21 Toukabri Mohamed (ed) , ‘Corporate social disclosure: Explanatory theories and conceptual framework’ (2013) 3
International Journal of Academic Research in Management 208-225.
22 Mohamed above n 212
9

Corporate governance
order to minimize people risk and subside the consequences arising out of the same. It is vital
that the reform of the corporate law is needed because it will help in delivering the
expectation and moreover, there will be no presence of the fraud23. The corporate governance
model should further be enhanced so that any flaws can be dealt with in an appropriate
manner. This would ensure strong regulation and ensure abidance by the laws and
regulations.
23 Heidi Hylton (ed), ‘Corporate governance: An examination of U.S. and European models (2013) 11 Corporate
Ownership & Control 347-351. https://doi.org/10.22495/cocv11i2c3p3
10

Corporate governance
References
Carroll Connelley and Paolo Tripodi, Quantico, Aspects of leadership, Ethics, law and
Spirituality (Marines Corps University Press, 2012)
David C. Hay and W. Robert Knechel, ‘Meta-regression in auditing research: Evaluating the
evidence on the big n audit firm premium’ (2017) 36 Auditing: A Journal of Practice &
Theory 133-159. https://doi.org/10.2308/ajpt-51572
Domenico Campa & Ray Donnelly, ‘An assessment of corporate governance reforms in
Italy based on a comparative analysis of earnings management’ (2014) 14 Corporate
Governance 407-423. https://doi.org/10.1108/CG-06-2012-0048
Heemskerk, E. M. The social field of the European corporate elite: A network analysis of
interlocking directorates among Europe’s largest corporate boards’ (2011) 11 Global
Networks, 440-460. https://doi.org/10.1111/j.1471-0374.2011.00315.x
Heidi Hylton Meier & Natalie C. Meier, ‘Corporate governance: An examination of U.S. and
European models (2013) 11 Corporate Ownership & Control 347-351.
https://doi.org/10.22495/cocv11i2c3p3
Hikaru Murase, Shingo Numata & Fumiko Takeda, ‘Reputation of low-quality big 4 and
non-big 4 auditors: evidence from auditor switches of former Chuoaoyama clients, (2013) 2
Journal of Governance and Regulation 7-23.
Michalis Bekiaris, Thanasis Efthymiou, Andreas G. Koutoupis, ‘Economic crisis impact on
corporate governance & internal audit: The case of Greece. Corporate Ownership & Control’
(2013) 11 https://doi.org/10.22495/cocv11i1art5
Patrick , Ulrich, ‘Managing natural resources – Are family firms different from other firms’
(2018) 1 Corporate Governance and Sustainability Review 43-58.
Patrick Velte, ‘Do women on management board increase fair value relevance?, (2017)
1Corporate Governance and Sustainability Review 6-16
Patrick Velte, Markus Stiglbauer, ‘Impact of auditor and audit firm rotation on accounting
and audit quality: A critical analysis of the EC regulation draft (2012) 1 Journal of
Governance and Regulation 7-13.
Philip, Kruger, ‘Corporate goodness and shareholder wealth’ (2015) 115 Journal of
Financial economics 304
Pilbeam, K Finance and Financial Markets (Palgrave Macmillan, 2009)
Roach, L, Auditor Liability: Liability Limitation Agreements (Pearson, 2010)
11

Corporate governance
Rob Bauer and Daniel Hann, Corporate environmental management and credit risk
(Maastricht University, 2010)
Ronald , Benabou, and Jean, Tirole, R, ‘Individual and Corporate Social responsibility’
(2010) 11 Ecnomica 1-19
Shuili, Du, ‘Maximizing business returns to corporate social responsibility (CSR): The role of
CSR communication’ (2011) 12 Management Review 8-14
Sytse Douma, Hein Schreuders, Economic Approaches to Organizations. (London, 2013)
Toukabri Mohamed, Ben Jemâa Olfa and Jilani Faouzi, ‘Corporate social disclosure:
Explanatory theories and conceptual framework’ (2013) 3 International Journal of Academic
Research in Management 208-225.
William K. Balck, Epidemics of “Control Fraud” lead to Recurrent, Intensifying Bubbles
and Crises (Working paper, University of Missouri-Kansas City, 2010)
12