Weekend Reading: Applying 'Systems Intentionality' — How to Guide the Corporate Conscience

By: Elise Bant, Professor of Law at The University of Western Australia

This piece first appeared in Starling Insights' newsletter on October 27, 2024. If you are interested in receiving our thrice-weekly newsletter, among many other benefits, please consider signing up as a Member of Starling Insights.

In a recent series of "Weekend Reading" articles discussing the challenges of what he terms 'culture risk governance,' Starling Founder & CEO Stephen J. Scott identified a range of hurdles standing in the way of identifying, assessing, and thus remediating, inappropriate risk cultures. These hurdles directly interfere with the abilities of those charged with governing and regulating corporate actors to do their jobs effectively.

As Scott notes, the Australian High Court has recently taken a huge step towards a more practical, and principled way to diagnose and address risk cultures. In Productivity Partners Pty Ltd (trading as Captain Cook College) v Australian Competition and Consumer Commission, Justice Gordon and Justice Edelman endorsed the view that corporations think and act through their real-life (embedded or deployed) systems of conduct, policies, and practices.

'Systems Intentionality'

This is the view expounded in my model of 'Systems Intentionality'. The model arose from an observation that Common law jurisdictions, following the example set by the English courts, employ an outdated framework for determining corporate liability. Despite evolving through court decisions and legislation, in the Common law tradition, the rules for attributing fault to corporations remain fixated on identifying specific individuals whose mental state can be attributed to the company.

This 'search for a single culpable individual' approach may work for small, hierarchically structured companies, where decision-making authority clearly resides with the board or key executives, allowing the courts to identify a 'directing mind and will'. However, it fails to address how modern corporations actually operate — through collaborative teams, across multiple departments and geographies, over extended periods. In these complex structures, corporate misconduct often results from 'systems of conduct' rather than any single individual operating with complete knowledge or full intent.

These systems of conduct 'manifest' (in the dual sense of revealing and enabling) corporate intentions, knowledge, and beliefs. Recognizing this provides the building blocks for understanding a wide range of corporate mental states and normative standards (such as recklessness and dishonesty) which are key to assigning corporate responsibility.

Importantly, this approach also explains how a corporation's 'culture' is revealed by the de facto and often unwritten 'policies' that operate at a relatively high level of generality. It is this culture, rather than any proverbial 'Tone from the Top', that prompts the design and day-to-day operation of more granular systems of conduct and practices as witnessed 'on the ground'.

As Australia's distinctive Corporate Culture provisions expressly recognise, cultures that prompt or encourage misconduct can function organisation-wide or, perhaps more commonly, in a manner that is more specific to certain departments, business units, or corporate functions throughout the corporation. Regardless, rather than viewing misconduct events as outcomes of wayward individuals, misconduct is a problem of the corporation as a whole. 

So how does the analysis work, and what does it suggest for culture risk diagnosis and remediation?

Practice is policy

In the case before the High Court, a college that provided vocational education training services decided to remove certain protective student withdrawal processes. These processes had operated to safeguard unsuitable or unwitting students from enrolling in the college courses and incurring, as a result, substantial debts.

From the 'systems liability' perspective (the term favoured by Justice Edelman), the very existence of these procedural safeguards manifested corporate knowledge of the risk that third-party recruiters, used by the college to boost enrolments, would engage in unfair practices to enrol unwitting or unsuitable students. 

Indeed, the fact that recruiters did engage in misconduct was notorious in the industry. In that light, the safeguards were patently necessary to protect vulnerable students from the risk of falling victim to recruiter misconduct. What is more, they were patently effective, leading to up to 50% of students withdrawing from their courses before census date, and thus before incurring their student debts. This effectiveness, however, undermined college and recruiter earnings. 

Subsequently, the college elected to remove those safeguards. Through a systemic lens, this change manifested the college's intention to increase profits at the expense of the known cohort of students vulnerable to recruiter misconduct. Following the removal of these safeguards, students stayed enrolled, and college (and recruiter) profits skyrocketed. Just as intended. 

As Justice Edelman explained (at [247]):

By focusing its case against the college at the level of the system, it was unnecessary for the ACCC to establish that any individual person chose agent misconduct or unsuitable enrolments as a means to maximising profit. It was enough that [by removing the safeguards] the college employed a system which adopted, as its means to increased profitability, an increase in unsuitably enrolled students or students whose enrolment was the subject of agent misconduct.

The case provides a powerful new means of understanding how corporations think and act. 

And it does so in ways that are of huge significance diagnostically, both for governance and liability purposes. Adopting my analysis, Justice Gordon explains in detail the indicia of systems of conduct, how these may be shown to exist and operate, and how they bear on assessments of corporate intentions and knowledge.

This guidance is vital for understanding how systems of conduct can be shaped and reformed. In other words, it shines light on how directors, managers, regulators, and prosecutors might condition and rehabilitate corporate culture, in a practical and principled way.

It also spells trouble for those who oversee the development of unlawful and harmful practices.

In Productivity Partners, the college's Chief Operating Officer was found to be an accessory to the corporation's unconscionable systems of conduct. By supporting removal of the safeguards, he had knowingly facilitated the corporation to act in a culpable way, thereby becoming liable on his own, positional account. Directors in Australia, and those who advise them, have rightly started to take notice.

Responsibility & culpability

This shift to a truly organisational conception of corporate culture and responsibility has profound implications for all corporate actors as well as those who purport to mould and guide their activities.

Consider the recent ANZ bond rate manipulation scandal. One does not need to be an expert on the mechanics of this sort of alleged malpractice to know that bond rate manipulation demands highly coordinated conduct between teams of individuals. It is not the sort of thing that can occur accidentally. Rather, it must arise through a system of conduct or practice (or sets of practices) supported by explicit or tacit policies that favour profit over the law. 

On a systems liability approach, these systems of conduct disclose a high level of organisational knowledge and intention — the building blocks of significant levels of culpability, and hence liability. Productivity Partners suggests that, where these sorts of systemic malpractices are permitted, tolerated, and tacitly encouraged (which may be through means such as performance review, bonus and promotion processes), responsible officers face a real risk of being on the hook as accessories.

Conversely, having ethical, well-designed systems, policies, and practices embedded into a corporation's daily life, which are audited and updated regularly, manifests prudent and law-abiding corporate mindsets. Directors and managers who encourage and oversee this sort of corporate 'best practice' can and should be correspondingly congratulated — and protected where a true rogue element, or genuine 'bad apple', undermines or subverts what is otherwise a good company.

It is no accident that responsible systems design and maintenance is precisely what is identified and advocated by, for example, the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct (page 17):

[D]ue diligence is understood as the process through which enterprises can identify, prevent, mitigate and account for how they address their actual and potential adverse impacts as an integral part of business decision-making and risk management systems. 

'Due diligence' here can be taken as reflective of the prudent and responsible corporate citizen. And, importantly, in none of these guidelines is it adequate to have 'formal' policies and processes that meet the brief, while daily practices honour them in the breach. Rather, it is the corporation's everyday, real-life, or 'de facto' systems of conduct, policies, and practices that manifest (reveal and instantiate) its corporate intentions, knowledge and values. It is by these that corporations (and their governance teams) will be adjudged.

Coming back to ANZ and the recent allegations of market manipulation, commentators rightly point out that if true, ANZ must have a very significant culture problem indeed. Such market misconduct suggests that there must be pervasive, if informal, structures at work encouraging and permitting these more specific systems of misconduct to evolve and continue. And, as Productivity Partners shows, this is likely not just a problem of the actual positive systems of misconduct, but also the surrounding audit and remedial processes that should identify and require reform of the misconduct!

Corporate conscience

What Systems Intentionality tells us is this: in order to fix a broken culture, we cannot solely concentrate on individual directors, managers, or traders — or even wholesale management renewal and employee clean-outs. Rather, we must identify, remediate, and replace the systems of conduct, policies, and practices that led to the misconduct occurring, and continuing.

As shown by the Royal Commissions into the Crown Casino in Australia, and the Rolls-Royce bribery scandal in the UK, real reform of a criminogenic 'profit at any costs' culture takes many years, a huge investment, and serious oversight (often in the form of an independent auditor backed up by some sort of regulatory sanction mechanism).

In this context, it is disappointing that, rather than directly addressing and owning its problems, senior executives at ANZ have persisted in offering the usual exculpatory narratives of isolated 'bad apples' and denying that there is any widespread culture problem at the organisation.

Australia's prudential regulator, APRA, recently slapped an additional $250 million capital add-on charge for ANZ misleading the Australian government over its bond trading experience, and criticised it for failing to fix and having no clear plans for addressing non-financial risks. In response, ANZ's head of institutional lending, Mark Whelan, demonstrated an awareness of what is really involved in resolving these longstanding issues:

We started this four or five years ago, and we were leaning into it, I think, OK. We put a lot more resources behind it in the last 18 months, and we're making more progress.

There are six risk themes we're doing one by one, we'll have those in place. But then the game turns to, 'How do you embed it and improve it on an ongoing basis?' It'll never stop, to be frank… 

Even the best-designed and embedded systems of conduct, policies, and practices require oversight and renewal as the legal, commercial, and community contexts in which they are deployed change.

This is the simple truth, the reality, which comes from recognising (as the High Court of Australia has done), that corporations think and act through their systems. Simple, but not easy. Yet this is the new reality that must be confronted by all those who purport to guide the corporate conscience.

For more from Elise Bant, read her contribution to the 2024 Compendium here.

Elise Bant is Professor of Private Law and Commercial Regulation at The University of Western Australia, a Professorial Fellow at the University of Melbourne, a Fellow of the Australian Academy of Law, and consultant to HFW Australia.