Key governance outcomes from the Victorian Royal Commission into Crown

Written by Diana Nicholson, Emma Newnham and Victoria Costa.

Background

On 15 October 2021, the Hon. Ray Finkelstein AO QC as Commissioner and Chairperson of the Royal Commission into the Casino Operator and Licence, delivered the report (An inquiry into the suitability of Crown Melbourne Limited to hold a casino licence) (“Report”) to the Governor of Victoria (“Victorian Inquiry”).

The key recommendations of the Report relate to the suitability of Crown Melbourne Limited (“Crown Melbourne”), a subsidiary of Crown Resorts Limited (“Crown Resorts”),[1] to continue to hold a casino licence. The Victorian Inquiry followed findings in the Bergin Inquiry (see our previous alert) that Crown: (i) facilitated money laundering; and (ii) continued commercial relationships with junket operators who had links to organised crime groups.

The Bergin Inquiry found that Crown Sydney Gaming Pty Ltd, another subsidiary of Crown Resorts, is not a “suitable person” to hold a gaming licence in NSW. Similarly, the Victorian Inquiry found that Crown Melbourne is not a “suitable person” to hold a casino licence in Victoria.[2] The Bergin Inquiry and its findings provide “critical context” for the Victorian Inquiry, which builds on the findings and similarly provides guidance on the importance of good corporate governance and observations on best practice.

The Overview of the Report provides the following succinct summary of the Commission’s finding:

“Within a very short time, the Commission discovered that for many years Crown Melbourne had engaged in conduct that is, in a word, disgraceful. This is a convenient shorthand for describing conduct that was variously illegal, dishonest, unethical and exploitative.”[3]

In this alert rather than focus on the facts that led to that scathing conclusion, we have drawn out a number of key themes and comments, which we think have general application. The similarities with parts of the Prudential Inquiry into the Commonwealth Bank of Australia and the Hayne Banking Royal Commission are striking – as are the findings that an intense focus on culture and the Board’s role in driving culture throughout an organisation and in oversight of management, do not seem to have found their way to Crown:

“…many senior executives involved in the misconduct were indifferent to their ethical, moral and sometimes legal obligations. Some were motivated by a drive for profit. Some simply did what they did because they could.”[4]

Best practice observations

1. Control of management: maintaining an independent board and independence of senior management

The Commissioner recommended amendments to the legislation regulating Crown Melbourne in order to: (i) prevent outside influence; and (ii) ensure the independence of the board and senior management. These recommendations were made in light of findings in the Bergin Inquiry that a major shareholder exercised varying levels of influence and control over directors, senior management and business operations.

The Commissioner concluded that the independent directors of Crown Melbourne were “ineffective” because of the extent and nature of the influence of the major shareholder. A number of directors showed “complete loyalty” to the major shareholder including acting on instructions from the major shareholder and regularly sharing confidential information from board meetings with the major shareholder with the effect that the major shareholder was able to direct the group’s operations to benefit their own interests.

It was noted that independent directors play an “important role” in influencing the decision making and conduct of the board as a whole, assuming they are free to be independent. Independent directors must be free to act in the best interests of the shareholders and the entity as a whole, and not be influenced by competing loyalties.

The Commissioner was particularly critical of the sharing of confidential information with the major shareholder, which was also a key issue in the Bergin Inquiry and resulted in certain undertakings aimed at reducing the major shareholder’s influence. The undertakings prohibited, amongst other things, entry into certain information-sharing arrangements, initiation of discussions other than through public forums and the seeking of any constitutional amendments that would impact operations or management of the company.

Key takeaways:

1. Boards and senior management should pay particular attention to their engagement with major shareholders and stakeholders, and the policies and procedures the company has in place in relation to conflicts of interests more broadly; and
2. in some circumstances, centralising management functions is not appropriate and it is important that independent directors of a subsidiary are also independent of the holding company.

2. Risk management: “a key component of corporate governance and a crucial responsibility of the board and management”

The Bergin Inquiry identified “significant failures” of risk management at Crown, including the failure to set, monitor and communicate its risk appetite, senior management making risk decisions based on profits and an ineffective and underutilised risk management framework. As a result of these failures, the Bergin Inquiry made a number of recommendations to reform Crown’s risk management framework.

Despite these recommendations, the Commissioner found more recent examples of inappropriate and illegal conduct by Crown Melbourne, which were attributable, in part, to ongoing deficiencies in risk management. The Commissioner reiterated the importance of an appropriate and effective risk management framework that provides processes and procedures to identify and escalate risks consistently with the company’s risk appetite.

Both inquiries placed particular emphasis on the board’s responsibility to determine an appropriate risk appetite that sets the boundaries for the company’s strategic and commercial operations. The Commissioner acknowledged risk is inherent in business, which is why companies must set clear strategic objectives that are communicated to, and understood by, all levels of the corporation. If decisions or conduct fall outside this risk appetite, the company must have a risk management process in place to respond to (and not just accept!) those deviations. The role of risk management in corporate governance, and the board’s responsibilities in relation to risk, has already garnered much attention in recent years (see the 2019 ASIC Corporate Governance Taskforce and the Hayne Banking Royal Commission). The focus on risk management in the Crown inquiries is a further reminder for companies to ensure they maintain a robust risk framework that adopts the learnings from these detailed reviews.

Key takeaways: The Commissioner had regard to recent observations that the board must be provided the right information and be prepared to challenge management in order to properly oversee and manage risk. A company’s risk management framework, especially for large corporations, should incorporate a number of different elements to address risk, including an appropriate and clear risk appetite, a risk committee with adequate resources to discharge their responsibilities, a risk identification and assessment process (such as a root cause analysis process) and a sound risk culture within the company more broadly.

It was noted that a company’s risk management process should also include procedures for escalating and responding to ‘red flags’ such as complaints or issues raised internally by staff or externally. The Commissioner criticised Crown for continuing to ignore warnings raised by bank relationship managers in relation to money laundering, which indicated at least a highly reckless attitude towards the matter by Crown. Red flags should be appropriately escalated to the board or a risk management committee to be assessed and responded to by the company.

Other practical risk management tips to assist in developing a robust risk culture include:

1. conducting appropriate due diligence on business partners;
2. ensuring risk management frameworks are written in plain English;
3. maintaining honest, open and cooperative relationships with regulators;
4. applying a common sense and practical approach to external expert advice;
5. being sensitive to the nuances of operating in foreign jurisdictions and setting an appropriate risk appetite for operations in those jurisdictions; and
6. implementing an effective risk appetite that is clear, appropriately balanced between risk taking and risk aversion, communicated to and understood by all levels of the company and consistently applied throughout the company.

3. Corporate culture: change needs to take place at all levels within a corporation, not just at the top 

The Commissioner identified corporate culture as an important element of corporate governance noting “without meaningful cultural reform…the choices and behaviour of employees and management…will not change”. Poor culture drives poor conduct, therefore without real cultural reform to address an existing toxic culture, problematic conduct and behaviour will continue unchecked.

The Bergin Inquiry and the Victorian Inquiry were both highly critical of Crown’s flawed corporate culture and identified that a culture fixated on, and motivated by, profits contributed to ongoing misconduct and illegal activities. The Commissioner again identified more recent failings by Crown Melbourne that indicated, despite the recommendations of the Bergin Inquiry, that a poor corporate culture persisted at Crown.

The Commissioner acknowledged the difficulty and time required to embed sustainable cultural change in a corporation – noting that it may take years for sustained change to occur. Unlike other corporate governance issues, culture cannot be prescribed or legislated as it is unique to a corporation and may even vary between different parts or departments of an organisation. The company itself is responsible for reviewing and identifying its own culture and any existing issues, responding to those issues and developing a plan to address and avoid those issues.

In considering what is the “right” culture for a corporation, four key elements were called out:

1. (compliance) creation of an environment that ensures adherence to basic norms of behaviour, such as compliance with the law, and that reinforces prudent decision making and considers the interests of key stakeholders;
2. (shared purpose) a shared sense of purpose within the organisation, which aligns with the values, incentives, structures, policies and procedures of the organisation and which takes into account broader societal expectations of corporations beyond profits;
3. (lead by example) directors and senior management should establish and illustrate the expectations of the organisation through leading by example; and
4. (manage and communicate) management must be able to appropriately manage and communicate with all levels of their organisation including by rewarding, incentivising and equipping their staff accordingly.[5]

Equally importantly, there are five elements that contribute to a toxic corporate culture:

1. (misconduct is the norm) normalising conduct that deviates from accepted standards of behaviour;
2. (neutralising harmful conduct) neutralising unacceptable behaviour may occur by denying harm or responsibility for such harm caused by the corporation’s conduct;
3. (facilitating toxic behaviour) ease of engagement in toxic behaviour, such as failing to provide adequate oversight of conduct or rewarding poor conduct or its consequences;
4. (obstruction of rule following) the corporation is unwilling to act in the face of misconduct or to redress harm caused by misconduct; and
5. (undue stress) imposing undue stress or pressure to perform on employees may also lead to misconduct in an effort to meet unrealistic or unreasonable objectives.[6]

Importantly, it was noted that good corporate culture has been shown to produce long-term benefits for a company. An ethical and appropriate culture creates positive outcomes for the company and its stakeholders in the long-term, because employees are likely to be motivated, committed and responsive to their environment. Strong culture aligns compliance and conduct with revenue generation.

Key takeaways: The Commissioner set out a number of practical steps to affect cultural change within a corporation. These include:

1. assessing and analysing contributing factors to the poor culture;
2. developing and implementing “an ethical and compliant tone at the top” that will flow through the corporation;
3. changing practical frameworks to reinforce the new culture; and
4. changing the values and practices of existing employees.

The Commissioner identified the last of these as the most critical, because a culture cannot be reformed by changes at the top alone. The values and practices of a corporation must be reformed in a systemic and sustainable manner and employees must learn and adopt these new values and practices as demonstrated by the leaders of the corporation. Of course, this will be most effective if employees trust management, and management lead by example.

References

[1] References to ‘Crown’ refer to either entity, or the wider corporate group, depending on context.

[2] The Perth Casino Royal Commission is currently inquiring into the suitability of Crown Casino Perth, another subsidiary of Crown Resorts, to hold a casino licence in Western Australia.

[3] Overview & Recommendations of the Royal Commission into the Casino Operator and Licence, [3].

[4] Ibid., [15].

[5] The Report – Volume 1, Royal Commission into the Casino Operator and Licence, p 125, [65] – [69].

[6] Ibid., p 126, [73] – [78].