SIMPLE "NUDGE" WILL MAKE COMPANY DIRECTORS MORE COMPLIANT

Written on the 23 March 2015

SIMPLE "NUDGE" WILL MAKE COMPANY DIRECTORS MORE COMPLIANT

A SERIES of business experiments conducted by QUT behavioural economists has shown simple changes in communication techniques could boost compliance levels of company directors facing liquidation.

Commissioned by the Australian Securities and Investments Commission (ASIC), participants in the study could play for real money within simulated business environments.

QUT's Queensland Behavioural Economics Group (QuBE) report, Improving Communication with Directors of Firms in Liquidation, compiled suggestions for "nudge" techniques to increase compliance.

QuBE professor Uwe Dulleck (pictured) says the aim was to test the effectiveness of subtle communication techniques to encourage company directors to abide by legal obligations when reporting to liquidators.

"Nudge techniques are increasingly being used by regulatory bodies overseas such as tax offices and the Behavioural Insights Team in the UK," Dulleck says.

"In Australia almost 10,000 companies became insolvent in 2012-2013 and there are quite a lot of processes for directors to go through to comply with their nominated liquidator's requirements.

"We already know that people are not able to process complex information quickly and effortlessly. This problem is compounded when faced with the stressful and emotionally draining situation of a compulsory liquidation."

The experiment placed non-compliant directors into two main categories, directors who struggle to comply because they are overwhelmed or lack financial skills and directors who intentionally go into liquidation to withhold assets for private use.

The team experimented with letter design to tap into the psychology of the recipient, with recommendations based on the outcome.

"Participants were then given some information about what they had to supply to the liquidator and some options for how they could do so," Dulleck says.

"We found that 20 per cent of participants chose to receive legal or accounting help. This group was 30 per cent more likely to provide accurate information during the compliance process than those who did not choose to receive legal or accounting help.

"We also found that just reversing the order of the letter currently sent to unintentionally non-compliant directors, who would most likely be overwhelmed by 'cognitive overload', got more of their limited attention by stating the actions requested by ASIC first, followed by the rules and penalties."

Dulleck says another effective technique includes telling directors that compliance rates were usually high, to appeal to their need to conform to society's standards.

For intentionally non-compliant directors the most effective nudge would be to remain unclear about punishment, which appears more threatening.

He says experiments should be the first step for designing compliance communication, because they control a variety of environmental factors that affect behaviour which are difficult to interpret in real world settings.


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