APRA’s continuing focus on risk management sees room for improvement in remuneration management and board behaviour

The Australian Prudential Regulation Authority (APRA) still has challenges in monitoring risk management effectiveness in regulated financial institutions. Ian Laughlin, the Deputy Chairman of APRA, gave some flavour of this in a speech recently.

An interesting point made by Mr Laughlin is that subsidiary boards need to be more robust when reviewing the remuneration framework for meeting APRA guidelines. For example, while it is entirely appropriate that the group sets certain aspects of strategy and various policies that cover the subsidiary, the board of the subsidiary cannot abrogate its responsibilities. It still needs to meet the standards of good governance, including APRA’s requirements. For example, before adopting a group remuneration policy, the subsidiary board would need to satisfy itself that the group policy was appropriate and effective in meeting regulatory requirements for the subsidiary’s business. It also would need to ensure that the policy is applied to senior staff of the subsidiary, not just to group senior management. As another example, it would be inappropriate for a subsidiary board to simply defer to the group board in the oversight of a major issue emanating from within the subsidiary without due consideration of the implications for the subsidiary by its board.

APRA generally emphasises board standards of skills, experience, governance and integrity. Based on his experience at APRA meetings with company boards over the last five years, Mr Laughlin indicated that his perception of boards is influenced by factors such as the extent to which a chairman dominates the board and other directors contribute and excessive deference to the CEO’s views. More than anything, Mr Laughlin’s views of the board are influenced by the way individual directors contribute to the discussion, the quality of their comments, the knowledge and understanding they demonstrate, their enthusiasm for the business and their role and their willingness to stand up for their position when challenged.

These observations would indicate that some APRA regulated boards are not undertaking effective annual board evaluations. These are matters that some boards could address at the next board evaluation sessions.

Mr Laughlin also noted that boards often seem to be on their best behaviour when APRA attends full board meetings and that such meetings sometimes appear to be too well orchestrated. He contrasted this with APRA’s relatively informal meetings with the chairs of the board and main committees, without management in attendance, which tend to be more open and free-wheeling. See Mr Laughlin’s speech HERE.

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