APRA’s CBA Enquiry on Board and Executive Culture Oversight Should Interest All Boards

On 28 August, APRA announced it would establish a prudential enquiry following a number of issues which have raised concerns regarding the frameworks and practices in relation to the governance, culture and accountability within the CBA group, and “have damaged the bank’s reputation and public standing”.

APRA has appointed Dr John Laker AO, Chairman of the Banking and Finance Oath, Professor Graeme Samuel AC, Professorial Fellow in the Monash Business School, and company director Jillian Broadbent AO to undertake the enquiry.

The goal of the enquiry is to identify any shortcomings in the governance, culture and accountability frameworks and practices within CBA, and make recommendations as to how they are promptly and adequately addressed. It would include, at a minimum, considering whether the group’s organisational structure, governance, financial objectives, remuneration and accountability frameworks are conflicting with sound risk management and compliance outcomes.

The purpose of the prudential enquiry is to examine the frameworks and practices in relation to governance, culture and accountability within the CBA group, so as:

1. to identify, in light of a number of incidents in recent years that have damaged the reputation and public standing of the CBA group, any core organisational and cultural drivers within CBA that have contributed to these incidents.

2. to assess, at a minimum, whether any of the following areas, or their implementation, are conflicting with sound risk management and compliance outcomes:

a. the group’s organisational structure, governance framework, and culture;b. the group’s framework for delegating risk management and compliance responsibilities;

b. the group’s financial objectives;

c. the group’s remuneration frameworks;

d. the group’s accountability framework; and

e. the group’s framework for identification, escalation and addressing matters of concern raised by CBA staff, regulators or customers.

3. to consider, where CBA has initiatives underway to enhance the areas reviewed under (1) and (2) above, whether these initiatives will be sufficient to respond to any shortcomings identified and, if not, to recommend what other initiatives or remedial actions need to be undertaken.

4. to recommend, to the extent that there are other shortcomings or deficiencies identified under (1) and (2) above that are not already being addressed by CBA, how such issues should be rectified.

The Australian Prudential Regulation Authority’s independent prudential enquiry into the Commonwealth Bank’s governance and culture will be of interest to remuneration committees.

Commonwealth Bank has been under significant scrutiny in recent years for behaviour in various divisions considered detrimental to customers and the community. The most recent incident, which would appear to have driven the enquiry’s announcement, has been the allegation that the bank has breached money laundering laws.

Although the Bank has previously expressed its belief the issues have been the result of a few bad apples rather than any systemic behavioural problems, APRA is concerned about the number of issues given the bank’s importance in the banking system and the community. It believes the review will uncover any “core organisational and cultural drivers” that might be at the heart of the issues the bank has experienced. The Commonwealth Bank has expressed its support of the review.

The enquiry will likely look at the measurement, modification and reward of behaviours that may affect the stability of the bank. The Commonwealth Bank will make an interesting case study because of the number of high profile issues that have occurred in recent times. The regulator will be able to investigate whether the Bank’s reward frameworks were rewarding (or punishing) behaviour in an effective or ineffective manner. There are some indications that APRA is already cognizant of the concept of “career earnings”, as well as the usual annual reward framework. Career earnings considers not only the explicit requirements of formal incentive programs, but also considers behaviours rewarded with annual fixed pay adjustments and promotion, and lower present value of earnings with the absence of fixed pay adjustments, development opportunities, and promotion. The beauty of a bank is that they have this data buried in their HR systems. It just takes some digging and very good math skills to put it together. While it is unlikely this enquiry will get enough into the weeds to explore culture and the present value of earnings, it may eventually be necessary to respond to APRA’s need to know.

The outcomes of this enquiry will be of interest to all of Australia’s banks, who use similar remuneration frameworks to that employed by the Commonwealth Bank and arguably have similar issues monitoring and managing the diverse sub-cultures within a large bank’s operations.

Given the bank’s position at the top of the Australian exchange and the trickle-down effect of remuneration practices from leading companies to smaller companies, any changes the Commonwealth Bank makes may also be applicable for other companies from a variety of industries. However, every company needs remuneration frameworks and practices that are most suitable for their situation – many of the findings will not be applicable. The trick is knowing which are the right ones to adopt. Remuneration committees would be advised to monitor outcomes for the potential applicability to their own situation. However, all boards should probably take an interest in the enquiry’s findings in regard to monitoring and managing culture in a large and very complex organisation.

© Guerdon Associates 2024
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