How the Hayne Royal Commission findings could impact your manufacturing business

By in Opinion

This article was originally published in AMTIL’s AMT August/September 2019 edition here.

The great privilege of being a company auditor is having the ability to look under the bonnet of a business. This allows us to get to know its people, systems and culture, understand the key drivers of its success and see potential areas of risk and concern. It’s fair to say that we witness all types of businesses from innovative, successful businesses to those struggling with ongoing concerns.

The key issues we identify are found at a macro level in the leadership and culture of the businesses and organisations we audit. It is at the Board level (and/or with owners) of the business that culture and purpose emanate and set the tone for the ethics and culture, quality of systems, people, sustainability and successful performance of the business.

To support these assertions, consider the following quote from Warren Buffett, the American business magnate, investor, and philanthropist who serves as the Chairman and CEO of Berkshire Hathaway:

“Look for three qualities in a person to hire.
Intelligence, energy & integrity.
And if you don’t have the last one,
don’t even bother with the first two.”

A lack of integrity has been a key driver in business failures in Australia and around the world and you don’t have to look much further than HIH Insurance in Australia and the Volkswagen emissions scandal to understand how badly a lack of integrity or indeed not generating the right “tone at the top” can damage a company.

Greg Medcraft in his then role as ASIC Chairman and effectively the top corporate regulator in Australia in 2016 stated that “you cannot regulate culture, but you know bad culture when you see it” and subsequently he noted that culture can provide a signal of behaviours, incentive frameworks and practices that do not support good governance or ethical conduct.

The impact of governance and culture on Australian business has come to the fore in the past few years following the APRA Prudential Inquiry into the Commonwealth Bank and the Hayne Royal Commission into the Financial Services Sector.

You may wonder how an investigation into the financial services sector is at all relevant to the manufacturing sector and indeed you may well question whether governance and culture really does have an effect at the SME level for manufacturing businesses?

The great privilege of being a company auditor is being able to view under the bonnet of businesses, see how they really operate, get to know their people, systems and culture and understand the key drivers of their success and see potential areas of risk and concern. It’s fair to say that we witness everything from high quality innovative respectful successful businesses to those struggling with their going concern basis.

The key issues we identify, whether they be good or bad, are to be found at a macro level in the leadership and culture of the businesses and organisations we audit. It is at the Board level (and/or with owners) of the business that culture and purpose emanate from and set the tone for the ethics and culture, quality of systems, people and ultimately the sustainability and successful performance of the business.

To support these assertions, consider the following quote from Warren Buffett, the American business magnate, investor, and philanthropist who serves as the Chairman and CEO of Berkshire Hathaway:

So take a moment to reflect upon the key recommendations of the Hayne Royal Commission and consider how they could be applied to your business:

  1. Increased focus on high quality oversight and governance by the board
  2. Culture: Embedding the “Should we?” question into all key decision-making processes
  3. Greater implementation of risk management practices and its role in the organisation to be elevated
  4. Cultural change to support enhanced risk identification and remediation
  5. Accountability should be clarified and linked to (variable) remuneration

In the manufacturing context, it seems that all these recommendations would have relevance, especially if your starting point was safety.

The manufacturing industry has a relatively high number of work-related fatalities, injuries and illnesses compared to other industry sectors.

In Australia, from 2003 to 2015, manufacturing had the fourth highest proportion of fatalities according to industry type, representing 9% (275) of all worker fatalities.

Particularly concerning is that young workers (15–24 years of age) in the manufacturing industry recorded an injury rate 44% higher than young workers in the Australian workforce as a whole.

Safe Work Australia notes the manufacturing sector is the second most hazardous industry in the country, with an overall incidence rate of 20.9 serious workers compensation claims per 1000 employees. Work-related injury and disease cost the Australian economy over $60 billion annually, representing 4% of GDP.

For individual businesses, the cost of work place safety incidences is particularly high. Firstly, incidents can have a negative impact on the people, culture and vibe of an organisation. This can adversely affect productivity, timing of deliverables and client satisfaction. To properly address safety issues requires downtime from production, and unfavourable labour cost variances will occur.

Having risk management awareness starts with culture and practically can be implemented by, for instance, starting every meeting with a discussion about safety which empowers all Directors, management and employees to take responsibility for their own actions, to be accountable to and for each other and to minimise the potential for harm.

This fundamental culture of care for each other, for your business, your customers and your community is exactly the point of the Hayne Royal Commission; we are all connected and the results of our actions, and inactions, can have far reaching effects beyond the business and your workplace.

So the core messages contained in the Hayne Royal Commission in respect of risk identification and management, accountability, culture and vigorous Board oversight of management and operations is completely relevant to the manufacturing sector.

In this article I have highlighted how safety is the point of call for manufacturing businesses, but the flow-on effects to profitability and sustainability of business operations is clear and a fairly good incentive for you to address how you can improve your business based upon the findings of this Royal Commission.

Jeffrey is a Director of Audit & Assurance at mid-tier accounting firm William Buck in Melbourne.

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