Under the law and practice of corporate governance, the board of directors is the keystone of corporate accountability. Yet, in large, modern corporations with extensive management hierarchies, authority is widely dispersed among senior managers below board level. In a recent article, we argue that this structure creates persistent challenges for corporate accountability and highlight how a recent Australian regulatory development seeks to address those challenges. Known as the Financial Accountability Regime (FAR), this development provides a useful model for reassessing how corporate law in the U.S. and other countries conceptualizes and addresses the accountability of corporate managers.

The Challenge: The Limits of Traditional Accountability Mechanisms

The traditional corporate governance focus on boards of directors presupposes that boards and the company systems they oversee are capable of promoting desirable corporate conduct and addressing misconduct. Yet, boards of large corporations are generally comprised of professional independent directors who serve part-time and are less informed than senior management. This significantly limits a board’s knowledge of and influence over the corporation. Board oversight is further complicated by the size and complexity of management structures, which generally involve an intricate and diffuse allocation of responsibilities. The result is what policymakers and commentators have frequently described as a corporate “accountability gap.”

A Novel Response from Australia

Australia’s FAR regime represents a novel approach to overcoming these challenges. It originated in bank-accountability frameworks which were introduced following the Global Financial Crisis (GFC) and sought to mitigate systemic risks associated with senior manager misconduct in regulated banks. While FAR also has a finance-sector focus, it differs from these earlier frameworks in at least two important respects. First, FAR extends to a much broader range of financial organizations, covering large and small banks, general insurers, and pension funds. Entities subject to FAR currently comprise almost one-third of the market capitalization of Australia’s leading S&P/ASX 50 equities index. Second, Australian lawmakers designed FAR to operate as a new, general mechanism for addressing corporate misconduct among financial institutions (and not simply as a prudential mechanism to address systemic risk).

FAR is not, therefore, a niche prudential or accountability framework.

FAR departs from general corporate law by creating a bespoke accountability regime built around the organizational realities of large firms. The regime imposes duties of honesty, integrity, due care, skill and diligence, and compliance with law on “accountable persons” within regulated organizations. Three further features of FAR are central:

• Broad scope. FAR identifies “accountable persons” broadly, through a mix of prescriptive definitions that capture common management roles and functional definitions that stress substance over form to capture other persons exercising senior-management authority. This enables the regime to capture all senior corporate personnel responsible for significant operational, risk, or control functions – not merely top management.
• Responsibility mapping. Regulated entities must prepare accountability statements and maps that allocate specific responsibilities to individuals and document reporting lines. These requirements are designed to reduce ambiguity and enable regulated entities and regulators to identify which managers were responsible for business areas where misconduct occurs.
• A multifaceted consequence framework. FAR combines traditional regulatory enforcement with mechanisms such as remuneration adjustments, breach self-reporting obligations, and manager disqualification powers. This multi-pronged approach seeks to disperse the enforcement burden and embeds accountability within organizational processes rather than relying solely on external enforcement.

Broader Corporate Governance Implications

FAR is not a wholly surprising development in Australia. For some time, Australian law has imposed mandatory legislative duties of care and loyalty on directors that can be enforced by the corporate regulator. FAR essentially extends mandatory public accountability deeper into corporations in the broader financial sector.

Yet, we argue that FAR is more than a niche Australian development. Theoretically, FAR’s regulatory reach into corporate management reflects an increasingly accepted view that the management and operation of large corporations are matters of public concern. This perspective aligns with developments in corporate governance norms that emphasize lawful and responsible conduct and recognize the social impact of corporate behavior. For those who are inclined towards this theoretical perspective, or who at least interested in its potential implications for corporate governance norms and regulation, FAR is a novel case study.

FAR also responds to a longstanding practical challenge in corporate governance. In a 2020 article, professors Ronald Gilson and Jeffrey Gordon observed a “recurrent pattern in which boards composed of talented and successful people fail to monitor effectively the corporate managements they are charged with overseeing.” To overcome this issue, Gilson and Gordon propose an approach to board structure and composition based on the private equity model of appointing highly motivated, well-informed directors with an intimate understanding of a corporation’s business.  FAR, however, represents an alternative response to the potential shortcomings of the monitoring board, augmenting its role with a mandatory system of senior-manager accountability. FAR is particularly relevant as regulators worldwide grapple with recurring episodes of corporate misconduct and questions about company culture. The central insight is that effective accountability may require regulatory tools that engage directly with how authority and responsibility are distributed inside large corporations.

Finally, FAR showcases some novel and potentially significant accountability techniques and strategies. They include the use of responsibility-mapping requirements to identify responsible individuals and the imposition of sanctions that interact with market mechanisms such as disqualification penalties that preclude offenders from serving as managers again.

Conclusion

FAR represents more than a sector-specific reform. It is an experiment in aligning legal accountability with the operational realities of modern corporations. By combining targeted scope, responsibility mapping, and integrated enforcement mechanisms, FAR offers a new way of thinking about management accountability in large organizations. For governance scholars and policymakers, FAR invites a shift in focus and emphasis, highlighting the potential for regulatory initiatives that look beyond the board of directors and into a corporation’s internal management structure.

Tim Bowley is an adjunct associate professor, and Steve Kourabas is an associate professor, on the Faculty of Law at Monash University. This post is based on their recent article, “Corporate Governance and Executive Accountability: The Broader Relevance of Enhanced Accountability Measures in the Financial Sector,” forthcoming in the Australian Journal of Corporate Law and available here.