- The APRA report into the CBA has sent Australia’s company directors looking for solutions, to make sure they don’t walk the same path as the bank.
- The Australian Institute of Company Directors says the prudential regulator’s report is a turning point for directors.
- Alison Kitchen, the chair of KPMG Australia, says the biggest single question for directors is: How do they know what they don’t know?”
The life of an Australian company director has just become a bit more complex and likely to tilt at a dangerous angle without warning.
The board rooms of Australia are now grappling with the fallout from investigations into the financial services sector, including the banking royal commission and the APRA (Australian Prudential Regulation Authority) investigation into the culture at the Commonwealth Bank.
The 111-page APRA report of the Prudential Inquiry into CBA, released in May, was described by Treasurer Scott Morrison as “required reading” for every board member in the country.
And Wayne Byres, the chair of APRA, said: “The findings of the report provide important insight for all financial institutions, particularly about the need to maintain a broad focus on all aspects of risk and stakeholder interest and not allow financial success to mask or detract from other important measures of an institution’s performance and risk profile.”
Auditors and consultants who talk to directors regularly say they’re getting anecdotal evidence of a sharp rise in the workload of boardrooms.
The directors are asking: “How much more do I need to do? How much more capacity have I got?”
The directors of ASX-listed companies now seem to spend more time dodging rocks, in the form of shareholder activism, including hostile annual general meetings and votes against remuneration reports setting the pay of senior executives.
Those with aspirations of becoming a director may be having second thoughts. Is the money worth it for the potential liability and the workload?
Angus Armour, the CEO of the Australian Institute of Company Directors (AICD), says the prudential regulator’s report is a turning point for Australian directors.
“The community should not lose faith in the work directors are doing across the public company sector, private businesses and not-for-profits,” he says.
“The Hayne Royal Commission and the APRA report are highlighting the challenges that big and complex organisations are facing and directors are wrestling with. The obligations and expectations on directors from the perspective of community expectation has become significantly more complex.”
The AICD says many of the issues raised by APRA are those that can, at times, face any board or organisation.
“For this reason, directors should carefully consider these findings in light of their own organisations, with a view to assessing whether change is necessary,” the AICD says.
APRA has endorsed a Remedial Action Plan in response to the 35 recommendations of the inquiry into the bank’s governance, culture and accountability.
And the bank has also cut $60 million from the pay of current and former executives.
The Commonwealth was hit with an additional $1 billion capital requirement following the inquiry which found the Commonwealth’s pursuit of success “dulled the senses of the institution”, particularly in relation to the management of non-financial risks.
The inquiry also found a number of prominent cultural themes: “A widespread sense of complacency, a reactive stance in dealing with risks, being insular and not learning from experiences and mistakes, and an overly collegial and collaborative working environment which lessened the opportunity for constructive criticism, timely decision-making and a focus on outcomes.”
The remedial plan hasn’t been made publlic but it does focus on strengthening governance, better customer and risk outcomes, and improving execution and delivering the bank’s plan.
The AICD says, among its recommendations following its analysis of the APRA report, directors should consider whether non-financial risks are being adequately considered and discussed at board level.
APRA observed that two key individuals on the CBA board had tended to stifle debate on the Risk Committee.
The AICD says directors must hold management to account, embracing the philosophy of “don’t tell me, show me”.
On executive remuneration, APRA said the bank’s Board Remuneration Committee had not provided clear guidance on its expectations of how managers should exercise their discretion when considering a reduction to pay for poor risk outcomes.
The AICD says directors should consider whether remuneration is being appropriately adjusted for poor risk and compliance and, conversely, for sound risk management.
How do they know what they don’t know?
Alison Kitchen, the chair of big four professional services firm KPMG Australia, says the report raises a whole lot of questions about the role of board and the role of internal and external auditors.
“The biggest single question coming out of that for directors is, how do they know what they don’t know?” she says.
“And they’re being pressured to work that out and find that out so that it doesn’t happen to them.
“We have been saying this is where a really good auditor can help directors as well as shareholders because, as an auditor, I have the privilege to go to board meetings regularly. I have the privilege under Corporations Act to ask for whatever I want from whoever I want anytime I want, in order to come up with my audit opinion.”
She says directors should question their auditor about what they’re seeing and feeling about the quality of staff, the vibe on the shopfloor, what they’re seeing and hearing in terms of the attitude, and customer behavior.
“You can pick up an awful lot of that as an auditor when you’re out and about in the business, sitting down with people and quite often talking to lots of different people about the same thing to verify information,” she says.
Deeply understand the business
Sarah Bartholomeusz, the founder of You Legal and the author of How to Avoid a Fall from Grace: Legal Lessons for Directors, says building rapport and trust with the executive team is important as a director.
“But don’t let that get in the way of your obligations to the company,” she told Business Insider.
“As a director you are responsible for thinking beyond the reports you are provided with, you need to deeply understand the business and each meeting be across the trends and changes within the business because as a director, you have to know. That is your job.”
Her checklist for directors:
- Are you holding the management team to account appropriately?
- Are you asking the management team to show you what they have been working on, and not just tell you?
- Is your board self-assessing its performance, as well as engaging externally where appropriate?
- Are matters of concern dealt with by management in a timely and effective way on each occasion?
- Legal considerations are important when making decisions but are you asking whether decisions are ethical as well? Using the organisation’s values as a starting point can be helpful when making decisions.
- Are you asking the management team to consider and report on new and emerging risks?