“But where does all this leave members? The chief executive and board responsible for this disgrace are gone – but with not a hint of regret or apology to be found. I simply can't find any accountability”. (Professor Stephen Taylor UTS Business School AFR Opinion 13th Dec 2017).
The new Board have recently said it
(Statement from the CPA Australia Board 9th February 2018) . Therein lies a problem with an often unstated and unwritten foundational principle of corporate governance - accountability.“is of the view that there is no basis to take legal action against CPA Australia’s past directors”
The recent Independent Review of CPA Australia quite specifically avoided recommending any legal action as its scope was limited
(CPA Australia Independent Review Final Report 30 November 2017. p.18)“to make recommendations for improvement” and not “intended to provide legal advice or develop evidence for the purposes of any legal action”.
It is hard to believe that such a major scandal in a very large professional accounting organisation can escape accountability but that seems to be the case.
(Professor Stephen Taylor UTS Business School AFR Opinion 13th Dec 2017).“...some of the governance and decision-making highlighted in the final version (of the Independent Review) can only be described as utterly appalling and a massive condemnation of those involved”.
So let’s see what lessons can be learned in the midst of this.
These lessons challenge some of the accepted corporate governance ‘standards’, practises and de rigueur paradigms (skills based director selection, gender balance, relevance of the Corporations Act/law where the regulator is seemingly inactive and legal redress is cost prohibitive, independent directors, the gaming and relevance of reporting and accounting standards etc.). The fact that we are dealing with a professional accounting membership organisation that professes integrity as its hallmark and is, along with CAANZ, highly influential is setting accounting and financial reporting standards means we really are looking at a Pandora’s box of concerns.
Part One. As Individuals We Need To Take Responsibility
Perhaps the most obvious lesson to learn is the way human individual responsibility can be lessened by using terms such as the Board, the leadership, the culture, the membership, the management, the senior executive, the divisional councillors etc.
A company is an artificial person and needs flesh and blood people to take individual responsibility to look after it. Certainly some have greater obligations placed upon them such as the Board and senior management and quite rightly need to be accountable for their decisions and behaviour. More on that below. But really we all as members need to take some individual responsibility for our own actions and behaviour in allowing what has happened at CPA Australia to occur over a long period of time.
Many of us have been disengaged, uninformed, apathetic, disinterested. We allowed significant constitutional amendments to pass with votes of just 200 and 300 out of a membership of 160,000. We saw what was occurring yet either acquiesced or kept quiet or allowed ourselves to be bullied and intimidated. That it was the media who really ‘got the ball rolling’ in exposing this rather than we members is a defacto indictment of our ‘silence’.
As CPA members we need to seriously think about what we could (and should) have done differently. Even now, after all that has occurred and been exposed, the vast majority of the CPA Australia membership are still seemingly disengaged and disinterested. I have quoted before Alexander Solzhenitsyn's advice to anyone (no matter where they are in terms of power or influence) when dealing with wrongdoing is to ‘not live the lie’ but rather speak for the truth in their own way in their own space.
(Solzhenitsyn A Documentary Record 2nd Edition Penguin Books 1974 p.371)“……..but by rejecting the lie, and by refusing to participate personally in the lie. Everyone must decisively stop cooperating with the lie everywhere he sees it himself… In breaking with the lie, we are performing a moral act, not a political one and not one that can be punished by criminal law - but an act that would immediately have an effect on our way of life.”
That well may sound all high-falutin and a bit ‘over the top’ for members of an accounting organisation but however you want to express it that’s the reality of what did not happen at CPA Australia for nigh on a decade. Have we ‘misaligned’ our strong ethical obligation “to act in the public interest” such that we have not applied it to ourselves and our own professional membership organisation?
So taking individual responsibility for our own actions and behaviour is a big part of this lesson. For any organisation, company or association it seems that member engagement is the critical glue that is needed to hold it together and on course. CPA Australia has not had that ‘glue’ for a long time, and we are now paying for it.APES 110 Code of Ethics for Professional Accountants.
Section 100.1 “A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest. Therefore, a Member‘s responsibility is not exclusively to satisfy the needs of an individual client or employer”.
Part Two. Let’s Not Hide Behind Group Terms
The other part of this lesson is the way we can remove individual responsibility from those who carry the major responsibility by using group names such as the board or the management. It is individual human beings who make up the board and the management and we mustn’t lose sight of that when we look at the decisions and behaviours that have occurred at CPA Australia.
So, when we read the Independent Review Panels’ Final Report into CPA Australia, and they say, for example, on page 56 & 57 in relation to the CEO’s termination payment as per below, we need to consider who these board members were when these decisions were made.
It was not just the Board in summary but it was individual people who comprised the board. So, for example, when it says on 7 October 2016 the Board unanimously approved an increase in the CEO’s notice period from two to three years it was each of these directors individually who approved this.“The former CEO’s contractual termination payment was adjusted in the following circumstances:
1 December 2014: The Board approved the amendment of the CEO’s termination provisions with immediate effect to reflect a two-year notice period for either party.
24 February 2015: A review of the former CEO’s employment contract by CPA Australia’s external advisors was addressed to the Board. The review was intended to provide a high-level assessment of the employment agreement, dealing with the extent to which the agreement provides terms and conditions consistent with ordinary commercial expectations in Australia. The review stated that the two-year termination payment was significantly above the anticipated range.
7 October 2016: The Board unanimously approved that CPA Australia’s and the former CEOs mutual notice period be increased from two to three years. This decision was made in an in-camera session of the Board (without the CEO present).
20 October 2016: The former CEO was informed in writing that the mutual notice period between CPA Australia and the former CEO has been increased from two to three years.
The Board decisions and papers do not provide any further background on the decision to extend the notice period. This reflects very poorly on the former Board, given the size of the termination payment being well above any comparable benchmark”.
President/Chairman - Tyrone Carlin. Who at the time was also Deputy Vice Chancellor of Sydney University. Director since 2011
Deputy President - James Dickson. Director since 2010.
Deputy President - Deborah Ong. Who at the time was a partner of PwC in Singapore. Director since 2013
Director - Richard Alston. Who had been a Federal Minister from 1996 to 2003. Director since 2014.
Director - Michelle Dolin. Who had been CEO of Government Employees Superannuation Board (WA) from 2003 to 2011. Director since 2014.
Director - Martin Hourigan. Who at the time was Group General Manager for The Just Group (Premier Investments). Director since 2016.
Director - Jennifer Lang. Who at the time was Director, Strategic Treasury and Procurement at CBA. Director since 2016.
Director - Richard Petty. Who at the time was Professor of Management at Macquarie Graduate School of Management. Director since 2006.
Director - Sharon Portelli. Director since 2015.
Director - Kerry Ryan. Who at the time was on board of The Retail Food Group Ltd and the Richmond Football Club in Melbourne. Director since 2007.
Director - David Spong. Who at the time was Aust and NZ CFO and Director for Ericsson. Director since 2014.
Director - Graeme Wade. Who at the time was Chairman of the National Basketball League. Director since 2006.
This is so important I would emphasise it by saying when you consider the above unanimous board decision to approve in October 2016 (less than one year prior to the CEO’s termination) the three year termination contract for the CEO (resulting in the past CEO Alex Malley receiving a $4.9 million payout on termination) we need to remember that it is each of the individual board members listed above making the individual decision to approve this. And it would appear this contract was made as watertight as possible to prevent any legal challenge on any grounds, such was the unanimity and certainty of the board members.
I do not believe that to be the case mind you but more on that with one of the later lessons.
The same applies for all the decisions and actions referred to in the Independent Report as 'by the Board' (per above) or by 'CPA Australia' such as on page 57 where it says
The same could be said especially in the latter example (of the incorrect s.202B directors remuneration disclosure) of the management which in this regard probably needs to cover at least the below-mentioned given what was said below , and perhaps others of the Business Effectiveness Leadership Team pictured on page 50 of the 2016 Annual Report.“the initial disclosure (of directors remuneration, which is incorrect) does not reflect well on CPA Australia given its leadership role in the accounting profession”.
CEO - Alex Malley
CFO - Adam Awty
COO - Jeff Hughes
General Counsel - Craig Laughton
Here is s.202B of the Corporations Act, and I ask readers to consider how difficult is this to understand? I have placed in bold the items that seem pretty clear but somehow it confused the CPA board, management and even the auditor.“Due to the rarity of schedules requested and disclosed under section 202B, CPA Australia advised the Review Panel that they sought external advice from their auditors on the content”. (Independent Review Final Report p. 57 at 22.214.171.124)
Is this (as the Independent Review Panel said) a poor ‘reflection on CPA Australia' (see above quote) or is it rather a reflection on specific individuals in the leadership (as well as the auditor) of CPA Australia?“s.202B
(1) A company must disclose the remuneration paid to each director of the company or a subsidiary (if any) by the company or by an entity controlled by the company if the company is directed to disclose the information by:
(a) members with at least 5% of the votes that may be cast at a general meeting of the company; or
(b) at least 100 members who are entitled to vote at a general meeting of the company.
The company must disclose all remuneration paid to the director, regardless of whether it is paid to the director in relation to their capacity as director or another capacity”.
We mustn’t ‘generalise away’ individual responsibility for decisions by using group terms.
The CPA Australia annual reports clearly affirm and highlight the leaders and the responsible positions they hold individually and as a group. So much so that the President and Chairman of CPA Australia James Dickson in a statement to members on 16 June 2017 listed all the directors individually (23) of CPA Australia during Alex Malley’s tenure as CEO (refer the attached spreadsheet listing all the directors from 2007 through to 2016 from the CPA Australia Annual Reports) saying they[
He then widens the circle of affirmation by listing other members saying'have all unanimously endorsed his performance over time'.
“The composition of our Board has come through Representative Councils, which over the period of time of Alex’s tenure has totalled around 75 individual and independently minded members”.
I am not so sure such a ringing endorsement is warranted after reading the Independent Review Panels Final Report into CPA Australia but it does rightly attribute individual responsibility that could easily be lost in using the broader terms (which the Independent Review Panel intentionally did in its report) of board, management or representative council.
So, the obvious first corporate governance lesson that can be learned from the CPA Australia saga is that it is individual people who are responsible.
Thus when we read or hear about the performance of companies and boards and management (be it positive or negative) let’s go to the annual report or the company’s website and just check out who the individuals are behind these terms. Let’s put the individual onus of responsibility back onto the leaders of our companies, organisations and associations.
Obvious perhaps but it is worth refreshing our perspective to remember corporate governance is about individual ‘flesh and blood’ human beings looking after an inanimate artificial ‘person’ that has often been used to provide privileges and protections to ‘various venal people down the ages…’ and in so doing ‘often infuriating the rest of society’.
It is difficult to read such words without thinking about CPA Australia.
If individuals are not held accountable in corporate governance then who is?