Don’t gamble on governance: learnings for directors arising from the NSW Casino Inquiry

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This article was written by Moira Saville and Cathy Graville.

In February 2021, the Report of the Inquiry under section 143 of the Casino Control Act 1992 (NSW) ("Report") was tabled in Parliament.

The key recommendations of the Report relate to the suitability of Crown Sydney Gaming Pty Ltd ("Licensee") to continue to hold a gaming license and of its parent company, Crown Resorts Limited ("Crown"), to be a close associate of the Licensee, following findings that Crown: (i) facilitated money laundering; (ii) disregarded the welfare of its China-based staff leading to their arrests and putting them at risk of detention; and (iii) continued commercial relationships with junket operators who had links to organised crime groups. 

While the Report did not make any findings as to whether the directors of Crown or the Licensee breached their directors' duties, the Commissioner's observations are a timely reminder of the corporate governance issues set out below.  

An entity's risk appetite should be set, communicated and monitored by the board

The Commissioner emphasised that the board is expected to determine what risks the entity is prepared to accept in pursuing its strategic objectives (i.e. its risk appetite), which in turn sets the parameters within which management is expected to operate. The risk appetite statement must articulate the board's expectations in specific instances of non-compliance such as the processes by which matters are escalated, and consequences of breaching the risk appetite. 

The importance of the board setting, communicating and monitoring its risk appetite is illustrated by the findings made by the Commissioner in respect of the detention of Crown employees in China who were part of Crown's VIP International business (who was responsible for identifying and developing relationships with international VIP gamblers, and encouraging them to visit Crown casinos in Australia).  In October 2016, 19 Crown employees were arrested in China and subsequently pleaded guilty to assembling a crowd to engage in gambling, resulting in 16 employees being sentenced to fixed terms of imprisonment.

In the period February 2008 until the arrests, Crown's risk management policy did not refer to its risk appetite, or specify how the risk management framework worked to support the identification of material risks to ensure Crown was operating within its risk appetite.

Crown conceded that the failure to escalate important developments in China to the risk management structures and the board resulted in a small group of senior management effectively setting Crown's risk appetite in relation to operations in mainland China.

The Commissioner found the board failed in its "fundamental responsibility" to set, monitor and communicate its risk appetite, noting it was inappropriate for a casino licensee to communicate its risk appetite informally.

Incentive structures should align to an entity's risk appetite, culture and values

In relation to the arrests in China, the Commissioner also found that the basis on which the board provided incentives encouraged management to take inappropriate risks in the pursuit of strategically important business.  Senior executives of Crown were awarded incentives based on the achievement of VIP turnover growth and market share, and staff received bonus payments or commissions from Crown based on turnover targets (including turnover of VIP customers).

The Commissioner's finding emphasises the importance of ensuring remuneration structures align to the entity's risk appetite, culture and values, as well as its strategic and financial objectives.

Boards should have a majority of independent directors and challenge management where appropriate

The Commissioner emphasised that the boards are increasingly expected to be not only responsible for governance but also to act as a "challenger" of the business, including with regard to decisions made by executives and management.

The Commissioner endorsed the view that a majority of independent directors on the board diminishes the likelihood that a singular experience, skillset or perspective will dominate decision-making and skew outcomes away from the best interests of shareholders and the entity as a whole.

The separation of the roles of CEO and Chair also serves to separate the Board from management in order to promote scrutiny in relation to the management of risk.

The Commissioner criticised one director of Crown for becoming a member of the VIP working group in a manner which meant he became part of management.  As a result of being a member, the director was better placed than his colleagues to understand what was happening in China prior to the arrests and was aware of information indicating the Crown employees were at risk, but failed to bring it to the other directors' attention.  The Commissioner noted that his membership in the VIP working group had the inevitable consequence of blurring the lines of reporting.

In addition, the same director was involved Crown's budgeting process in circumstances where the figures he was reviewing would ultimately be presented to the Board (of which he was a director).  The Commissioner noted her analysis in relation to this director demonstrated the real dangers of taking on multiple concurrent roles, exposing the director to conflicts of interest.

Providing confidential information to shareholders

The Commissioner also made findings as to the arrangements by which the confidential information continued to be shared with the major stakeholder in circumstances where he was no longer a member of the Crown board, and where he was an ultimate beneficial owner of the parent company and a subsidiary of that parent company had a major shareholding in Crown.

Under the arrangement, each director or officer was required to act carefully and consider, among other things, whether disclosure was in the best interests of Crown and whether it was improper. The Commissioner found that there was "no doubt" that the individuals providing information to the major shareholder did not give consideration to those matters, concluding that the major shareholder took the view and behaved in a manner consistent with the view that he was still in control of Crown.  The major shareholder's powerful personality, time critical requests, his venting of frustration when his requests were not met "all fed into a regime of Crown's corporate operatives kowtowing to him".

The Board needs to be well informed in relevant areas

The Commissioner found a very significant deficiency of the corporate character of Crown and the Licensee was its lack of understanding and knowledge of the anti-money laundering and counter terrorism finance regulatory landscape.  The Commissioner found that the context in which Crown operated meant that every director should have a deep understanding of the anti-money laundering landscape and legislation, and strive vigorously to be ahead of the agile and flexible steps taken by money launderers.

This finding emphasises the importance of board members to ensure they are well informed, particularly in areas that are known risks associated with the context in which an entity operates.

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