Its Time to Replace Toxic Governance with Good Governance

Abstract

The Australian financial system is exposed to the same toxic governance practices that caused the financial crisis in 2008. The US Government’s 2011 commission of inquiry into the crisis concluded that a “key cause” was “dramatic failures of corporate governance and risk management”. However, the Australian Prudential Regulatory Authority enforces US practices that become particularly toxic with Australia law. A shared source of toxicity arises from corporate constitutions providing directors with absolute power to corrupt themselves, their firm, and in the case of prudentially regulated institutions, the financial system and so the real economy. The solution is to amend constitutions to separate the power to govern from the power to manage while engaging with stakeholder constituencies to empower them to become co-regulators. A fundamental problem is that regulators, governance rating agencies and experts who formulate governance codes have not identified the objectives of good governance and so do not know where to head. Parliament is required to give direction. Good governance requires organizations to act ethically and fairly while minimizing harms, inequities, costs and risks on society by improving their self-governance. Self-governance is found in nature to allow creatures with little intelligence to reproduce in dynamic, complex unknowable environments. The paper describes how the laws of nature can be used to design the constitutions of organizations to follow the compelling success of simple creatures. The paper concludes that a Parliamentary inquiry is required to rectify the commitment by regulators, governance codes, and practitioners and their professional bodies to toxic governance.

Keywords: Conflicts of interest, Co-regulation, Ethics, Science of Governance, Self-governance

JEL Classification: B41, D21, D22, D63, G30, K12, K22, K23, L14, L20, L50, M14