How class actions help address the cost of misconduct

There are many ways to quantify corporate misbehaviour and misconduct.

There is the $1.05 billion (and counting) that Australia’s six biggest banking and financial institutions have paid or offered to their customers as compensation for misconduct, such as charging fees for no service.^[1]

There is the 25 per cent-plus underperformance of Australian banking and financial services companies listed on the ASX since the Hayne Royal Commission was announced three years ago, costing shareholders tens of billions of dollars.^[2]

And there is the nearly $900 million that has been recovered for wronged investors through all shareholder class actions from 1992 to 2019 – admittedly barely a rounding error on an ASX market capitalisation approaching $2 trillion.^[3]

What none of these measures captures, however, is the human misery caused by corporate misbehaviour – the wiped-out life savings, the repossessed homes, the collapsed businesses, the broken families and, sadly, the lives lost.

Some of those damaged are the actual perpetrators of the misconduct. Even if we accept that people are inherently ethical, corporate cultures can become corrupted – sometimes quickly, more often slowly over time – when profit is put ahead of principle or, at worse, when profit becomes the principle.

Too often through the Hayne Royal Commission, we heard ‘that's just the way we did things’ justifications for poor behaviour. This is symptomatic of organisations with broken cultures, broken systems (such as misaligned remuneration incentives) and, critically, broken leadership.

Unfortunately, misconduct is not confined to the banks. In the past year, we have witnessed the systemic underpayment of our most vulnerable workers by blue-chip companies and we have watched some of most storied institutions struggle to accept, let alone manage, the impact of sexual harassment in the workplace.

It is unrealistic to expect we will ever eliminate misconduct within corporate Australia. There will always be bad actors. 

But there are means to influence and change behaviour for the better.

The first is through the regulators. The Hayne Royal Commission was as much of a wake-up call for the regulators as it was the for the companies they are charged with regulating.

Armed with additional government funding, stronger laws and a clear mandate to stamp our misbehaviour and protect consumers, the key financial and market regulators are actively cleaning up the mess exposed by Hayne and being much more vigilant in policing their patches.

The Australian Securities and Investments Commission’s ‘why not litigate’ policy demonstrates its new-found intent. As ASIC Commissioner Sean Hughes said post-Hayne: “… we recognise our important role in driving behaviours that will build and restore trust. We aim to do this by being a strategic and forceful regulator.” ^[4]

The second mechanism is through shareholder pressure. From the Future Fund and the powerful industry super funds down, we are witnessing institutional investors becoming much more active in venting their frustration with poor behaviour or governance and demanding accountability.

They are increasingly using the ASX’s ‘two strikes rule’ to vote against remuneration packages that are not aligned with the values of a company or its long-term interests.

And in situations where there have been egregious governance failures, they are exerting pressure on boards behind the scenes to ensure lessons are learned and changes made. As AMP conceded when it announced board and management changes last month, “these changes respond to feedback expressed by some major shareholders…”.

The use of voter power – or at least the threat of it – to effect cultural change will remain a test for shareholders. Will they continue to encourage companies to stick to their core values even when it goes against the company’s – and shareholders’ – short-term financial interests? The smart ones recognise that good corporate behaviour pays long-term dividends.

The third mechanism, which can be deployed when other safeguards have failed, is through shareholder class actions.

The biggest investors in Australian shares view class actions as an important mechanism for protecting shareholder rights and enhancing long-term value. These sophisticated investors regularly participate in class actions alongside so-called mum and dad shareholders.

The increase in the number of shareholder class actions in Australia in the past decade has, to a large extent, tracked the well-documented increase in corporate misconduct.

Even then, Monash University’s Professor Vince Morabito – considered by the courts as an authority on Australian class actions – finds that shareholders of only 34 companies filed class actions in the period from 1 July 2014 to 30 July 2019.^[5] That is a fraction of the approximately 2200 companies listed on the ASX.

Big business does not like class actions. Through the current Parliamentary Joint Committee proceedings, their paid lobbyists are arguing for tighter controls on the litigation funders who support class actions on behalf of victims, including shareholders misled and let down by the companies they invest in.

Despite the claims made by big business before the Committee, shareholder class actions do not target minor, unintentional breaches of an overly strict continuous disclosure regime; the scale of recent settlements, some running into hundreds of millions of dollars, demonstrate that these are serious transgressions with genuine victims.

Of all the responses to the misconduct exposed by the Hayne Royal Commission and elsewhere, surely diminishing the rights of victims and shareholders to take action to recover losses has to be among the most wrong-headed.

All of these factors – vigilant regulators, engaged shareholders and the possibility of class actions – act as safeguards against illegal, or simply immoral, behaviour by companies and their leaders.

Of course, the greatest safeguard is to do the right thing in the first place.

1. https://asic.gov.au/about-asic/news-centre/find-a-media-release/2020-releases/20-193mr-asic-update-on-compensation-for-financial-advice-related-misconduct/
2. https://www.spglobal.com/spdji/en/indices/equity/sp-asx-200-financials-ex-a-reit/#overview
3. Professor Vince Morabito, “Shareholder class actions in Australia – myths v facts”, November 2019 
4. https://asic.gov.au/about-asic/news-centre/speeches/asic-s-approach-to-enforcement-after-the-royal-commission/
   

5. Professor Vince Morabito, “Shareholder class actions in Australia – myths v facts”, November 2019