Companies behaving badly? - Product safety

On 13 July 2018, Australian Competition and Consumer Commission Chair, Rod Sims, delivered a speech at the 2018 Giblin Lecture on the poor behaviours the ACCC has seen from companies.

This is an edited extract of Mr Sims’ speech, with additional comment in relation to consumer product safety.

ACCC Chair, Rod Sims

ACCC Chair Rod Sims:

The title of my address today is ‘Companies behaving badly?’ and it is posed as a question. Not all companies, of course, behave poorly; hopefully the ones that do tend to be the exception, rather than the rule. The ACCC’s experience, however, would suggest that hope may be misplaced, and this concerns me and should concern us all.

My thesis today is that the appropriate corporate desire to maximise returns to shareholders too often results in behaviour that sees the customers of companies lose out, and that the incentives to behave this way currently often outweigh the incentive to put the customer first.

What is the problem behaviour?

It is often said that companies succeed by looking after the needs of their customers. I have been surprised over very many years, however, at the way in which many businesses often do precisely the opposite.

Recent (product safety) cases provide evidence:

Thermomixpaid penalties of over $4.5 million for making false or misleading representations to certain consumers, through its silence, about a safety issue affecting one of its products which the company knew about from a point in time
Variety retailer Daiso was fined $1 million in 2017 for selling thousands of non-compliant items, and its franchisee, Origo, fined $355,000 in 2018 for similar breaches
Woolworths was fined $3 million for making false or misleading representations on the safety of several products from its supermarkets, Big W and Masters stores
Samsung washing machines that were catching fire were only recalled after protracted negotiations
Online Dealz and its Director were fined $120,000 for selling unsafe children’s nursery products
Online retailer Ozsale paid penalties of $500,000 for selling non-compliant, flammable children’s nightwear
(Additional cases added)

You will observe that the list includes well known and respected major Australian companies who have admitted, or been found, to have breached our consumer laws. These same companies regularly proclaim they put their customers first.

Customers hearing this refrain have a right to think companies are hypocritical. This can make them question whether our market economy works in their interests.

Why is this happening?

A number of reasons are worth exploring.

In some cases company executives push the boundaries to achieve short-term growth targets. Some appear to ignore the risk of reputational damage over the longer term to achieve short-term gains.

In some markets poor firm behaviour largely goes ‘unpunished’

The strongest constraint on firm behaviour is the risk of losing sales. The larger the number of customers that ‘vote with their feet’ in response to poor behaviour by firms, the more firms will do to avoid engaging in such behaviours.

Poor behaviour must be visible to the consumer. Generally speaking, consumers are oblivious to misconduct unless they are directly affected by it. Further, misleading behaviour [and often unsafe products] by their nature are hard for consumers to detect.

It can be a race to the bottom rather than to the top

In well-functioning markets firms compete on their merits where firms that offer what consumers value displace firms that do not, but the opposite can occur if poor behaviour goes undetected and unpunished, as it can confer a competitive edge.

We have observed firms winning customers through misrepresenting their offers and employing high pressure selling tactics. In addition to hurting consumers, this type of behaviour hurts rival firms. In response to this conduct, rival firms can endeavour to protect their market share by improving the quality of their sales techniques or by employing the same questionable sales tactics to ‘level the playing field’.

Financial incentives are sometimes created without adequate safeguards

Companies use financial incentives to reward employees and agents who achieve or surpass sales targets. This is a legitimate and effective way of encouraging sales teams, especially in circumstances where it is not possible or is costly to observe effort. It can, however, have negative consequences when proper safeguards are not established to limit how staff or agents achieve their sales targets.

There are cost and benefits that companies must weigh up. The stronger the link between financial rewards and short-term outcomes, the greater the effort it is likely to encourage and the greater the risk of disreputable behaviours. Alternatively, the more auditing that occurs with clear and important consequences for bad behaviour, the less the risk. What is surprising is where some companies strike this balance.

Company loyalty can be too strong

Often it appears as if company executives feel their obligations to their company compels them to pursue profit to the maximum, even if their behaviour pushes too close to the boundaries of the law.

It also sometimes appears as if there is no other ethical standard being applied than adherence to some technical interpretation of the law.

So what can be done about businesses too often behaving badly?

I believe that the first step is for Directors and senior management to give more consideration to balancing short and longer term profit considerations, to the interests of their customers and suppliers, and to the reputation of their company.

So let me then turn to what governments and regulators can do to improve competition and outcomes for consumers.

Identify and shine a light on bad behaviour

Bad behaviour by a company can undermine its brand reputation. The greater the likelihood that bad behaviour will be exposed and made public, the more companies will do to guard against such behaviours

Regulators need to be proactive in identifying bad behaviour and be transparent about what they see; it is not enough to simply take enforcement action after breaches occur.

Increase penalties to deter bad behaviour

When the incentives for misconduct are strong, and the penalties for misconduct, given the likelihood of detection, are comparatively weak, it is easy to understand that company boards and senior management do not act strongly enough to ensure such behaviour does not occur.

So from our point of view, stronger penalties are a key part of the answer. (* Now increased – on 23 August 2018, substantial increases to penalties were passed).

Continually look for ways to increase our ability to identify and pursue bad behaviour

The ACCC has around 60 people dedicated to investigating potential breaches of our consumer law in all sectors and in all states and territories. This number has not changed much for many years, yet our economy has grown considerably.

We are continually looking for ways to improve our effectiveness in enforcing the Competition and Consumer Act. More important, we need to make hard choices so that we use our extremely limited enforcement resources most effectively. Clearly we are not able to investigate or deal with all breaches of the law.

There are some areas where our laws are weak. Perhaps the clearest examples are in relation to product safety and unfair contract terms.

You may be surprised to know that there is no direct prohibition on selling unsafe goods. The key deterrence to doing so is that if consumers get hurt you will likely have to recall the product, often at considerable expense.

Nothing erodes public trust in our market economy as companies selling goods with insufficient thought given to the safety of consumers.

Comment – Corporate culture and support for practitioners

Mr Sims’ analysis has some clear messages for business boards and management. He is not alone in this.

The Australian Stock Exchange is proposing new efforts be made by business on social responsibility. The current review of the ASX’s Corporate Governance Principles and Recommendations proposes instilling a culture across organisations of acting lawfully, ethically and in a socially responsible manner. The 4^th edition consultation draft says:

A listed entity’s ‘social license to operate’ is one of its most valuable assets. That license can be lost or seriously damaged if the entity or its officers or employees are perceived to have acted unlawfully, unethically or in a socially irresponsible manner.

Preserving an entity’s social license to operate requires the board and management of a listed entity to have regard to the views and interests of a broader range of stakeholders than just its security holders, including employees, customers, suppliers, creditors, regulators, consumers, taxpayers and the local communities in which it operates.

Security holders . . . expect boards and management to engage with these stakeholders and to be, and be seen to be, ‘good corporate citizens.’

Corporate culture needs to include real support for consumer safety. Australian/New Zealand Standard AS/NZS ISO 10377 Consumer product safety: Guidelines for suppliers makes it clear that product safety must be an integral part of any business. It also states that compliance measures should be promoted throughout the supply chain. Implementing this standard is one of the most valuable actions consumer goods supply companies can take to achieve and maintain their ‘social license to operate’.

My recently published white paper Consumer product safety in Australia: Challenges for practitioners and business managers details the support needed to effectively manage consumer safety in the current market. It emphasises the importance of support by senior management – by word, by deed and by adequate funding. The paper calls on business associations to step up on product safety. Associations have a key role to play.

The white paper also calls for new ways of thinking by government on consumer product safety.

Read more on the white paper in the blog article Paradigm shift needed for product safety in Australia.