Inside the Perpetual Motion Machine: Regulating Indigenous Corporations

I were better to be eaten to death with a rust than to be scoured to nothing with perpetual motion.

King Henry IV. Part II. Act i. Sc. 2.

The quality and robustness of Indigenous corporations are crucial contributors to the capacity of Indigenous interests to develop the sustained capability necessary to achieve their objectives whether it is to run successful business enterprises, deliver services, or meet the cultural and social objectives of their members. Perhaps most importantly, the capability of Indigenous corporations is crucial to their ability to ‘hold their own’ in the never-ending competitive struggle amongst the plethora of competing interests in Australian society to influence policy outcomes.

Not only do the members of individual corporations have an interest in ensuring their organisations are effective and well run, but for Indigenous citizens there is a more widely shared generic interest in Indigenous corporations both being, and being seen to be, effective and capable of effectively representing their members’ interests and executing their aspirations. While most analysis tends to focus on the quality of Indigenous political leadership, the strength of the Indigenous corporate sector will play an enormous and perhaps decisive role over coming decades in determining whether Australia is able to shift from exclusion to inclusion in relation to its Indigenous citizens.

The policy space encompassing the governance of Indigenous corporations has a forty year history. The policy case for the establishment of corporate entities to represent Indigenous community interests can be traced back to Charles Rowley’s work for the 1976 Coombs Royal Commission into Australian Government Administration. Rowley argued that incorporation might act as a protective ‘carapace’ to minimise the incursion of the wider society into the lives of Indigenous community members, and allow space for individual community members to continue to live their lives according to their own aspirations and values.

The extent to which the concept of incorporation has achieved Rowley’s aim is debateable, but there is no doubt that it has been enthusiastically taken up by Indigenous citizens, not least because it is one of the institutions in the wider society which most aligns with Indigenous communal values. Incorporation also happens to be a primary vehicle for pursuing commercial opportunities (see this link to a fact sheet on the growth of Indigenous businesses) and for accessing a wide range of facilitative government funding programs.

Thus the Office of the Registrar of Indigenous Corporations (ORIC), which oversights and regulates corporations established under the federal Corporations (Aboriginal and Torres Strait Islander) Act 2006 (CATSI Act) administers around 2800 corporations across Australia. There are probably another 2000 Indigenous corporations, many with significant commercial and/or social responsibilities established under the national Corporations Act and various state based associations legislation, often characterised as ‘tennis club’ legislation. The regulatory oversight of these latter corporations is often inadequate either due to the risk based management approach adopted by ASIC which allows smaller corporations to ‘fly under the radar’, or the low key regulatory approaches to community associations taken in most states.

In recent years, the Commonwealth has adopted a policy approach of requiring Indigenous organisations funded under the Indigenous Advancement strategy at levels above $500k to incorporate under the CATSI Act. There are I think good reasons for supporting such a policy given the importance of sustaining effective organisations in the Indigenous policy domain.

Given the number of Indigenous corporations oversighted by ORIC, and the importance of effective regulation in driving good corporate outcomes over time, it was pleasing to see the Government release a review report last month by KPMG titled “Regulating Indigenous Corporations’ which examined the operations of ORIC.

The review had been commissioned in September 2016, and finalised in December 2016. It was released by the Minister on 5 July 2017 along with an announcement of a one off allocation of an extra $4m for ORIC (link to media release is here). Here is the link to the report. The Minister’s media release headlined the funding, but made no mention of the review until paragraph ten of a fifteen paragraph text.

Here is the totality of his comments on the review:

Minister Scullion also released a review into ORIC by KPMG which found it was doing a good job in a challenging regulatory environment. The review can be found here.

“The review identified a need for more corporate governance training for those who want to do the right thing as well as additional investigatory resources to address wrongdoing. The Government has responded to this by providing ORIC with an additional $4 million,” Minister Scullion said.

The overarching conclusion of the review was not only that ORIC is doing a good job in a challenging environment, but that there are significant opportunities to enhance ORIC’s contribution to better governance into the future.

The review was oversighted by a Steering Committee comprised of representatives of PMC, ASIC, the Department of Health, and a former Tax Commissioner. It is well argued and makes persuasive arguments for its recommendations. KPMG made 47 detailed recommendations and listed a number of further options for consideration.

This post aims to analyse the review and its handling and make a number of policy related observations. I recommend interested readers have a closer look at the KPMG report as I don’t have the space to comprehensively discuss each issue raised.

The first point to note is that the Minister’s media release also included an announcement by the Registrar that he was undertaking a further technical review of the CATSI Act to consider potential legislative changes, many of which appear to have already been canvassed by KPMG:

“To complement this process I will be conducting a review of the CATSI Act with the intent of providing advice to the Government on improving and strengthening the Act.”

Terms of reference for the review are available at oric.gov.au.

Complementing the terms of reference for the technical review is a 13 page Discussion Paper (link here) canvassing a range of specific issues / potential changes. The ORIC website indicates that the law firm DLA Piper has been contracted to undertake the technical review, and outlines some limited consultations planned in the NT and North Queensland.

While most of the proposals outlined in the Discussion Paper appear sensible and worth considering, there is a sense that we are in a perpetual motion machine where issues are reviewed to death without any guarantee of a final resolution. One senses that PMC have lost the capacity to assess and develop legislation, and may not have retained the grounded expertise to independently craft a well-considered amendment package in this area which is of central importance to the quality of outcomes in Indigenous affairs.

The second point worth noting is that by establishing this further process of technical review, the Minister has neatly attempted to sidestep any pressure to respond formally to the KPMG report. Yet the potential amendments to the CATSI Act relate to just one of the many KPMG review recommendations. The comments below will focus attention on some of the issues which in my view require a response from the Minister or his Department. 

Third, in section 2.2 on ORIC’s objectives, the review notes that ORIC continues to work off a Statement of Expectations issued by the previous Minister in 2008. While the Registrar had been provided with a draft Statement of Expectations in 2015, it had not been finalised. The suggestion (refer footnote 16) that the reason for this lack of follow through was because the KPMG review was pending strains credulity, not least because of the approximate 18 months between ‘early 2015’ when the draft Statement of Expectations was issued and September 2016 when the KPMG review was commissioned. The Minister appears not to support the use of Statements of Expectations, I suspect because they potentially constrain his capacity to more informally and ‘flexibly’ influence statutory bodies within his portfolio.

A fourth and related point in the same section relates to the KPMG review assessment that the working relationship between the Department and ORIC was less effective than with other agencies, and that this relationship had declined since PMC took responsibility for Indigenous policy (ie after the 2013 election). Later in the report (page 51) the review notes that the PMC actively excluded ORIC from key departmental processes. The losers from this absence of effective collaboration will necessarily be the Indigenous corporations who are served by the Registrar’s work. A core role of PMC as a central agency is to promote collaborative working arrangements across government, yet here is a public review identifying clear instances of the Department acting narcissistically rather than collaboratively. The lack of a formal response to the review means that these observations by the review sail blithely into the ether, without any formal explanation, accountability or cognisance that this requires remediation and should not occur into the future.

A fifth point made by the review in this same section was to canvass the possibility that the Registrar might utilise a small advisory panel to assist in stress-testing the more contentious policy issues. This is to my mind an excellent idea, and worth pursuing. It also provides a mechanism for greater Indigenous input into the role of ORIC and is potentially a better mechanism that the Minister’s announced approach of finding an Indigenous Registrar at some point in the next 12 months (refer page 52). The review’s suggestion that an existing group (presumably the Prime Minister’s Advisory Council) might fulfil the role appears less fit for purpose, but may be worth trying. Again, we have no response from the Registrar or the Minister to this idea.

A sixth point emerging from the review is that significant reductions in funding to ORIC have had severe impacts on its capacity to undertake its core functions. The tables on page 20 (which shows a significant reduction in examinations over the past nine years) and page 59 (which documents a 42 percent reduction in real terms in ORIC funding over the past ten years) tell the story. At the same time, as the Minister’s media release points out, the revenues of CATSI corporations have increased by 74 percent over the past nine years to $1.88bn and the assets under management have grown by 105 percent to $2.22 bn. The funding announced by the Minister of $4m appears to be one-off and not recurrent, so while it will go some way to address the funding pressure, it does not appear to address the ongoing structural issues identified by the review.

A seventh point to emerge from the review was a call for changes to ORIC’s regulatory strategy, in particular to increase the sharpness of its risk management in determining resource allocations (pages 35-37) and improving its stakeholder management to include peak bodies representing corporations established under the CATSI Act (pages 21-2). Both these suggestions deserve to be taken up, but we have no advice as to whether this will now be the case.

An eighth point relates to the abolition of the Indigenous Litigation Fund following the change of government in 2013 (see pages 47-8 and 58) which provided an assurance that the award of costs against the regulator following an unsuccessful prosecution would not have a significant impact on ORICs recurrent budget. The absence of the fund introduces greater risk aversion into decisions to initiate prosecutions by the Registrar. The Minister has made no response to this issue.

A ninth point to emerge is an implied critique from the review that ORIC and PMC have not been as transparent as is desirable. In relation to funding, the review recommends that consideration be given to ORIC’s annual funding being separately identified in the budget papers (page 59). Similarly, there is an indirect inference that ORIC has not managed its FOI processes as well as might be expected (see page 54). Given the contention that can emerge when regulators make decisions which directly affect corporations and their stakeholders there is a need for ORIC’s FOI and decision processes to be both efficient and beyond reproach.

The tenth point noted by the review (page 54-5) is that there are a range of technical issues relating to native title bodies (which are required to incorporate under the CATSI Act) where the Registrar’s powers might be strengthened. These seem sensible and are likely to emerge from the technical review of the CATSI Act being undertaken by the Registrar. Given the salience of native title in the future of Indigenous policy, it is of concern that the Minister’s (non) response to the review was entirely silent on these issues.

Finally, the review noted in its final observations (page 66) that there appeared to be merit for the greater use of independent directors on the boards of larger or more corporations. The review refrained from suggesting this be mandated, deferring to the widespread view that directors ought to be Indigenous. In my view, there is an overriding benefit in many corporations utilising independent directors, (who will normally be in the minority) and increasingly, there will be individuals with appropriate skills who are also Indigenous. Indigeneity should not be used as an argument against the use of independent directors, especially where corporations are operating in highly complex fields such as native title or delivery of complex human services. We ought not to confuse the two issues.

In conclusion, I would observe that my short summary identifying eleven key issues is not necessarily comprehensive. There is much else in the report for those interested in the issue of Indigenous corporate governance.

It will be apparent that I consider that the Minister and his Department have dropped the ball in the way they have handled this report. The strategy appears to be to hide behind a funding announcement to avoid addressing the raft of substantive issues which will be of crucial importance to the quality of Indigenous corporate governance over coming decades, and to gloss over the criticisms which go to the heart of the way the Department of Prime Minister and Cabinet operates. This is not good public policy and not good public administration. The public, and particularly Indigenous citizens, deserve better.

Given that Senate Estimates hearings are scheduled for October, here are a number of questions related to these issues which interested Senators might ask the Minister:

What was the cost of the KPMG review? Which program funded this review?

What is the projected cost of the DLA Piper technical review of the CATSI Act?

Is the $4m in funding one off, or recurrent? Will it be paid in a single year or over the forward estimates? What is the source of the funding: is it from the PMC departmental cost allocation, or is it from the IAS or some other program funding source?

What does the Minister intend to do to remedy the ongoing structural funding shortfall currently experienced by ORIC?

Will the Minister ensure that ORIC’s funding is separately identified within the PMC budget papers going forward?

Will the Minister reinstate the Indigenous Litigation Fund abolished in 2013?

Why has the Government not provided a comprehensive formal response to the KPMG review? When will a final response be made available?

Why did it take so long to release the KPMG review?

Why has the Minister not finalised a Statement of Expectations for the Registrar of Indigenous Corporations since coming to Office in 2013?

Has the Minister finalised Statements of Expectations for other portfolio bodies for which he is responsible? Please list the entities and bodies in your portfolio and the dates statements of Expectations were issued?

What level of responsibility does the Government take for any future regulatory lapses by ORIC given its failure to date to address the substantive issues raised by the KPMG review?

Answers to these questions will go a long way to highlighting just how serious the Government is about improving the governance of the thousands of Indigenous corporations which form the backbone of the Indigenous sector in Australian public policy.

The approach adopted to date in relation to this report is the antithesis of substantive transparency, and in my view fundamentally disrespects Indigenous citizens (and taxpayers generally) who have a right to understand what the Government is doing in areas which will play a crucial part in shaping the nation’s relationship with its Indigenous citizens into the future.