“Accountability to whom? I think this is a really important question,” said Henry in response. “And a really important question, which I’m sure this commission is reflecting on as you prepare your final report, is to whom should boards be accountable.” “And how would you answer that question, Dr Henry?” persisted Orr. In the lengthy answer that followed, Henry opened up a corporate can of worms. Senior counsel assisting the commission, Rowena Orr. Credit:Webcast The former top economic bureaucrat to the Howard, Rudd and Gillard governments effectively made the case for a shake-up of the governance model that underpins big business boards in Australia.

By the "strict letter of the law," Henry explained, boards of directors were accountable to shareholders, who appoint the directors and supply risk capital. But he believed this model had reached its use-by date. The commission had heard tales that the people who were worst affected by corporate misbehaviour were the customers, he argued. And yet, the directors who ran the company answered to the shareholders. Loading “In my view, the public tolerance of that model of accountability has been pretty well eroded to zero. I would say that that is the principal reason – or anyway, one of the important reasons for a loss of trust in business,” Henry said. Henry’s remark has served as a flashpoint for a wider and long-running debate about director’s duties and “social licence,” which had already been given fresh fuel by the scandals uncovered by the royal commission.

Put simply, this is a debate about whether boards should focus solely on the interests of shareholders - a principle known as “shareholder primacy” - or whether other interests - such as staff, customers, the environment say, - should enter the discussion. And if companies already have these wider priorities, do the official legal duties of boards need to be widened, to explicitly take on community concerns, as well those of shareholders? The question has particular relevance after the Hayne commission's final fortnight of hearings have repeatedly forced banks to admit there were failings at the most senior levels of their organisations: the board table. Loading Replay Replay video Play video Play video Even if the royal commission doesn’t change the laws on boards' responsibilities, directors say it is at the very least a powerful wake-up call for those sitting around those tables.

The chairmen of Westpac, ANZ and NAB will have another chance to admit to organisational shortcomings when they face shareholders at what are likely to be feisty annual general meetings next month. Several superannuation funds are likely to oppose their remuneration reports in protest at their handling of repeated scandals. Fundamental question The series of admissions by banks at the royal commission raise a fundamental question for not just banks, but all big listed companies: do the boards have their priorities right? Henry said NAB had made a “monumental” shift towards balancing shareholder returns with customer interests, but his comments suggested the need for boards to explicitly factor in the community's interests. We don’t want companies to get confused so I think their duty should be just to the long term interests of shareholders. ACCC's Rod Sims

Others play down the need for change arguing most serious businesses already think about much more than their shareholders’ interests. Competition and consumer tsar Rod Sims is one of those who sees the legal obligation for directors sitting squarely with serving shareholders. He says that's a good thing. Sims tells Fairfax Media that the key is that those obligations are to the long-term interest of shareholders. ACCC's Rod Sims Credit:Alex Ellinghausen / Fairfax Media He says companies should have a single objective and leave multiple objective issues to governments.

“We don’t want companies to get confused so I think their duty should be just to the long-term interests of shareholders,” he says. He says broadening board responsibilities will create confusion and companies will “lose the power of what companies bring to society, and they bring a lot”. But Sims says looking after the interests of shareholders and customers are far from mutually exclusive pursuits. There can be consequences for companies - and by extension their shareholders - from a focus on short-term profits that ignores the needs of their customers. “Either those customers will go elsewhere or you’ll end up in the royal commission or there will be some regulatory imposition.”

The Corporations Act itself says a director of a corporation must discharge their duties "in good faith in the best interests of the corporation" and "for a proper purpose." The classical view of the idea that businesses should focus on shareholders' interests was expressed by the American free market economist Milton Friedman. "There is one and only one social responsibility of business - to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud," he wrote in 1962. Plenty of directors do not subscribe to this narrow view today. Elizabeth Proust says the narrow view of duty is outmoded. Credit:Dominic Lorrimer

Elizabeth Proust, who ended her term as chairman of the Australian Institute of Company Directors this week, says a view that a director's only duties are to shareholders is "outmoded." While she says directors have a legal duty to act in the company's interest, she says most realise that clearly means more than mere profit maximisation. “I think that most companies, whilst acknowledging that that is the position, also would agree that the future of their company means that they have to take into account much broader interests than that, which is customers, employees, suppliers, the environment and the broader community,” says Proust, a director of Lendlease and chair of the advisory board of Westpac's Bank of Melbourne. Given that boards already take these non-shareholder interests into account, she doesn't see the need for a change in the laws in this area. Company director Diane Smith-Gander Credit:Wayne Taylor

Diane Smith-Gander, a non-executive director of AGL Energy and Wesfarmers, says she supports a further discussion on the issue of directors’ duties, as Henry seemed to suggest this week. She notes that two government reviews have already looked at the question in the last decade, only to recommend no changes. “I think Ken is asking that we should have another look at this,” she says. “I support everything Ken is saying around having the conversation, I wonder, however, whether that conversation will land in a different place than where we are now. If you think about the best interests of the corporation, that gives directors a great deal of flexibility and options in terms of how they interpret that Diane Smith-Gander

"Because if you think about the best interests of the corporation, that gives directors a great deal of flexibility and options in terms of how they interpret that." The Governance Institute also undertook research in 2014 into “shareholder primacy”, the issue highlighted by Henry this week. As part of the study, many directors said they already considered other factors such as the environment, or the interests of customers and employees in their decision-making. Loading Even so, for the banks at least, there is a general acceptance that the balance between shareholders and customers’ interests has not been properly struck, and things need to change.

NAB’s chief executive Andrew Thorburn, ANZ’s Shayne Elliott, and CBA’s Matt Comyn all told the royal commission in the last fortnight that their institutions had effectively put profits before people. ANZ chairman David Gonski told shareholders last year that in order to win back trust, big businesses needed to respond by listening to community concerns, he said, and could not be "solely shareholder-focused organisations". He has previously argued Australia should adopt the German two-tier board model, where companies have a “supervisory” board and a “management board” which manages the company. Former NAB and Woodside chairman Michael Chaney, who now chairs Wesfarmers, highlighted an “obsession” with short-term profits as an underlying cause of the misconduct in a recent speech. Former NAB chairman and current Wesfarmers chairman Michael Chaney Credit:Philip Gostelow

“This unreasonable focus was undoubtedly a factor in giving rise to the sorts of unacceptable behaviours we have all read about in reports on the banking royal commission,” Chaney told Wesfarmers shareholders two weeks ago. “In endeavouring to satisfy market and press demands for short-term profit growth – to achieve what is called 'consensus forecasts' – management sought to motivate employees through incentive schemes and these led to some employees and agents bending the rules.” While commissioner Hayne has blamed “greed” as an underlying cause of banking’s woes, Chaney this week said in an interview that executives he dealt with at NAB weren’t greedy. Instead they were motivated by the desire to be seen as a good executive, adding: “that’s defined in our society by performing well in terms of share price and dividends”. The excuse I often get from company directors is that the quarterly reporting means it is too hard for them to focus on the long term, I think that’s pathetic Rod Sims

Others reject any attempt to put the blame on the financial pressure to perform. Sims, for instance, says this argument is a “cop out”. “The excuse I often get from company directors is that the quarterly reporting means it is too hard for them to focus on the long term, I think that’s pathetic,” Sims says. “I think they are in control of what they do and if not they should take control." As to Henry’s question back to Orr, that the royal commission may want to consider a re-think of director’s fiduciary duties, there is no guarantee that will be the case. Hayne’s interim report, after all, argued the case for simpler laws that were enforced better, not more legal obligations.