Lessons from the Royal Commission into Trade Unions - Reforming Union Governance

23rd December 2014

Undoubtedly the most important tasks for the Royal Commission into Trade Union Governance and Corruption over the next few months are, exposing the massive failure of governance of Australian trade unions that has allowed endemic corruption to flourish unimpeded and secondly, recommending radical reform to ensure this never happens again.

The Interim Report provides a very good summary of the current legislative flaws in the regulation of registered organisations but it is simply a precursor to further action. There will not be meaningful and lasting reform in trade union governance unless the Commission adequately addresses the basic structural flaws inhibiting transparency in the financial and operational management of trade unions.

Chapter 2 of Volume 1 of the Commission’s Interim Report describes the duties of officers elected to registered organisations, and the enforcement provisions under the Fair Work (Registered Organisations) Act 2009, whilst comparing the regulatory regime to the law applying to Australian company directors. Parts 3 and 4 of the Interim Report describes the use of ‘Fighting funds’ and ‘Slush funds’ by union officials to further their political and personal ambition. The Commission intends to cover the governance issues in detail in its final report, however it’s observations on this topic in the Interim Report are prescient. In particular, the Commission has already identified significant gaps in financial reporting obligations and significant differences in the enforceable duties of officers of registered organisation to those of company directors.

Whilst the Royal Commission continues its work, the Australian Parliament is debating the Fair Work Registered Organisations Amendment Bill 2014. This Bill proposes the establishment of a Registered Organisations Commission to undertake the investigative and supervisory role currently performed by the General Manager of the Fair Work Commission. Government’s love creating new bodies to redress failures in the system but invariably they duplicate bureaucracy rather than genuinely reforming or abolishing the offending parts of the system. This Bill is a perfect case in point and I will explain the reasons this Bill will not solve the problem of trade union corruption and poor governance.

Firstly, there is no longer any useful purpose served by registering an organisation under the Fair Work legislation that cannot be more effectively achieved under the Corporations Act 2001. Anyone can file a dispute, lodge applications and make submissions on almost every conceivable area of the Fair Work Commission’s jurisdiction. An employer or employee need only demonstrate an interest in a matter to be granted a right to be heard. Therefore this only leaves the residual task of issuing of Right of Entry permits, permission to undertake protected industrial action and the regulation of bargaining representatives. All of these functions are performed by the Fair Work Commission’s Full Bench and none of these functions require in any practical sense, separate registration of an organisation.

Continuation of the anachronistic form of registration of trade unions under the Fair Work (Registered Organisations) Act 2009 is pointless. Corporations limited by guarantee registered under the Corporations Act, already provide a proven and convenient legal structure in which trade unions may pursue their objectives. Thousands of membership based organisations operate under this legal structure and have little difficulty in complying with the more rigorous and transparent financial reporting requirements.

The Bill currently before Parliament does not impose any additional obligations or duties on union officials. Commissioner Heydon identifies a raft of gaps in the accountability of union officials to their members. The small fines that may be imposed for breach of the duties provide little disincentive to abuse of the privileges of office. Concluding his comparison between the duties imposed on company directors with those placed on officials of registered organisations, Comissioner Heydon quite rightly in my view, states “There is no reason why these principles (the laws regulating company directors duties) would not also apply to officers of a registered organisation”. See paragraph 42 of Chapter 2.1 of the Interim Report. This leads to the further issue of the willingness of regulatory authorities to pursue allegations of corrupt and improper conduct.

Duplicating the investigatory powers and resources already within in the Australian Securities and Investments Commission (ASIC) simply dilutes the available expertise and power to address corruption. Separation of regulatory authorities also creates the impression of unions being distinct and separate from the industry in which they operate. Unions should be viewed as part of industry regulation, not an exception to the rule of law governing trade and commerce. Transferring financial resources from the Fair Work Commission to a new Division of ASIC would make far more sense than establishing a new entity.

Finally, the Bill does not address the fundamental need for modern organisational governance and management structures, nor does it propose any requirements to fulfil basic quality management standards. Each of these topics would require considerable more space to elaborate than is available within this blog. However, I am sure that readers who have experience managing organisations as diverse as hospitals, employment and training services, charitable institutions, professional sporting clubs, post-secondary education institutions and publicly listed companies will understand the rigorous disclosure and scrutiny that is applied to businesses throughout Australia, all in the name of protecting the public interest. Unions currently stand alone in Australia exempt from the scrutiny that comes with such modern standards.

The Commission could do worse than consider the following reform of union governance:

All unions currently registered as organisations should transition to registered companies limited by guarantee within 18 months
Directors of the company must be subject to the statutory duties imposed under the Corporations Act 2001
The aims and purpose of the company limited by guarantee must be not-for-profit and all funds acquired by the company must be applied for the benefit of the membership
The right of representation of employees (members) before the Fair Work Commission in any industrial or employment matter, right of entry and bargaining representative rights should be subject to accreditation pursuant to an approved quality management standard
Articles of association should require the appointment of at least two independent directors and a company secretary qualified as a member of the Australian Institute of Company Directors
Boards of Directors comprising a majority of elected members, appointed independent directors and company secretary
Individual Directors may hold office for no more than 5 years
The Board may employ a chief executive and such other staff as is necessary to perform the functions and responsibilities of the organisation for the benefit of its members. The chief executive must be employed under a contract of employment for period(s) of no more than 5 years duration. The chief executive employment may be extended for further periods but only on majority resolution of the Board.
Political affiliations must be approved by a majority of members casting a valid vote at a general meeting of the company
Donations to political parties, participation in political forums and related activities of the company, its officers and employees must be approved by the Board and recorded in official Board Minutes published to all members.

You may also want to view the submissions on union governance published on the Royal Commission website. There is some interesting reading.