Financial System Inquiry chair David Murray has warned ASIC and the government against focusing on culture at the expense of the “clarity of the law” and tougher penalties.
Speaking at a Governance Institute of Australia event in Sydney about the role of ASIC, Mr Murray said ASIC needs to be “a bit careful” when it comes to culture.
Mr Murray framed his remarks by providing an example of thieves failing to tell the truth – something that amounts to theft, and a breach of the law, rather than a failure of culture.
Culture, Mr Murray said, is derived from leadership behaviour, systems in an organisation, and “symbols and signals that we see every day”.
“In having a culture we have to understand that we can have a very good business model or a bad business model. And you can have an effective culture or an ineffective culture,” he said.
Mr Murray pointed out that the mafia is an organisation that has a very bad business model but a “very, very effective culture”.
“So it’s not possible to look at culture in isolation of other things,” he said.
Referencing his former role as the chief executive of the Commonwealth Bank, Mr Murray related an example where accounting procedures were preventing the company from investing in an extremely profitable line of business.
“There’s a set of beliefs driving a whole lot of things. The trick is to understand what those beliefs are and to understand when they create unproductive outcomes, illegal outcomes, legal outcomes, and straighten all that up,” he said.
Any discussion of culture cannot be limited to ethics, he added.
“What is needed, in addition to an understanding of ethical behaviour, is to understand the limits of each person’s role, the limits of role relationships, the policies and procedures of an organisation and the rule of law,” Mr Murray said.
“And all of those things will be influenced by the leader behaviour, the systems of an organisation and the symbols and signals that we send.”
As a result, Mr Murray admitted to being “a bit disappointed” to discover that ASIC is currently asking firms to explain their ‘cultural framework’.
“If ASIC asked me as a firm to explain my ‘culture framework’, I would have to send ASIC all of the policy manuals, all of the standard operating procedures, I’d have to find some psychiatrist to give a report on my personal behaviour and send that along as well.
“I’d have to set out the organisational structure, the limits of roles, the limits of role relationships. I’d have to set out our understanding of how the law works, which could be different from what ASIC thinks. And ASIC would then have to go through all of this and figure out what the culture is.
“So I think culture is fundamental, but I think we stand a risk of it becoming the issue, not the clarity of the law, the enforcement of the law, and dealing with people with a much tougher penalty regime as [the Financial System Inquiry] recommended,” he said.
The belief set within the organisations that ASIC regulates will also be driven by their view of the belief set within ASIC, Mr Murray said.
“And if ASIC’s not allowed to do its role, people in the market will work out where the gaps are and they’ll drive a truck through them,” he said.
Mr Murray said ASIC must be given appropriate funding in order to give the regulator “a chance to work”.
“ASIC is not positioned to do its job as it is operating today. Therefore, the great opportunity we all have is we want to have greater trust and confidence in the financial system is to do something to enable ASIC to do its job properly,” he said.