Lawsuits outweigh regulation for big business

29 MAY 2014

Some Australian businesses are using environmental, social and governance reporting as a smokescreen to protect themselves from class action lawsuits according to CSU researchers.

Some Australian businesses are using environmental, social and governance (ESG) reporting as a smokescreen to protect themselves from class action lawsuits according to Charles Sturt University (CSU) researchers.

"Statutory regulation of many businesses has failed in Australia. We argue that some corporations act as 'amoral calculators' who make decisions based on purely a profit motive without considering their impact on broader society," said CSU business researcher Dr Dianne McGrath.

"It seems decisions by these companies to breach environmental, social or governance law are being based on the analysis of economic costs and benefits due to the low level of regulatory action and fines.

"Consequently, government regulations are failing to deter highly questionable actions by businesses that are driven by this 'amoral calculator' philosophy."

Dr McGrath and Mr Daniel Murphy from CSU's School of Accounting and Finance have won a Highly Commended Paper award from academic publisher Emerald, for their research published in a recent issue of the Sustainability Accounting, Management and Policy Journal.

In their paper, the CSU academics have shown that class actions have produced a form of private regulation where the financial penalties for guilty businesses far outweigh those offered under statutory regulations.

"For example, Australian paper manufacturer VISY was fined a record $38 million for cartel pricing through legal action by the Australian Securities and Investment Commission (ASIC). However, a subsequent class action extracted a further $120 million in damages," said Mr Murphy.

"And poker machine manufacturer Aristocrat received no financial penalty from ASIC, but a class action saw them have to pay damages of $145 million."

The research highlights the failure of government regulation to effectively deter corporate governance transgressions of big business.

"This failure has seen the rise of class actions as a civil remedy with sufficient financial impact to be an effective deterrent. We believe that 'amoral calculator' corporations will try to avoid large class action penalties by changing the level and nature of the environmental, social and governance reports that they issue," Dr McGrath said.

The researchers' comments arise from their studies of class actions issued since this form of litigation became available in Australia in 1992.
Media contact:

Wes Ward, 0417 125 795

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