Culture and governance will take centre stage this week as the AMP board continues to grapple with the gravity of the royal commission, and Commonwealth Bank of Australia faces a landmark report into its culture and governance.
AMP is a mess. It is facing three class actions, a board in tatters and massive reputation damage after the royal commission found senior executives should face criminal prosecution for misleading the corporate regulator.
By Adele Ferguson
At AMP’s headquarters in Circular Quay the wait was on for a sign of either black smoke or white smoke, to indicate the future of the incumbent chair Catherine Brenner.
Her journey over the past few weeks has been both embarrassing and painful as she hung on for dear life. But the die has been cast.
It will be a recurring theme throughout the royal commission as each institution is filleted.
It is also a dominant theme in a report commissioned by the Australian Prudential Regulation Authority (APRA) into CBA last September following the Austrac money laundering scandal.
The aim of the inquiry was to be a “circuit breaker” to repair CBA’s “badly damaged” reputation after a series of scandals.
It seems almost a quaint wish of APRA’s given all that has come out in the first few weeks of the royal commission.
What we have is an entire sector under the blowtorch and battling serious reputational damage as the audience lay witness to AMP lying to the regulator, CBA awarded the “gold medallist” for charging fees for no service, planners caught taking fees from dead people, NAB caught false witnessing documents, client impersonation, inappropriate advice, Orwellian protection policies and a witness cutting short his testimony after collapsing.
CBA will feel the torch this week when the APRA-commissioned report is released.
The panel, consisting of former APRA chairman John Laker, company director Jillian Broadbent and former Australian Competition and Consumer Commission chairman Graeme Samuel, were asked to investigate CBA’s organisational structure, its “matrix reporting structure”, which ring-fences different divisions of the bank, culture and governance, risk management and compliance, financial objectives, remuneration and accountability.
It considered how issues of concern are escalated and whether there is a culture of fear of reprisals if bad news is raised.
In the case of CBA’s financial planning scandal, whistleblower Jeff Morris reported the misconduct to ASIC and CBA, while former chief medical officer Ben Koh used the bank’s internal whistleblower policy to report wrongdoing in its life insurance division. Both whistleblowers were punished for speaking up and finally went to the media, to me, believing the misconduct was being covered up.
It is understood that some of its findings will be applicable to all companies, boards, senior executives, auditors, lawyers and chief risk officers about the way they do business.
In Australia boards have too often become a sinecure for people who have reached retirement age. The AMP and CBA boards, past and present, are no exception.
CBA is going through board renewal with Andrew Mohl, a former AMP CEO set to retire at the AGM, along with Brian Long, a retired partner of Ernst & Young. AMP is facing forced board renewal from shareholders, politicians, the media and the public.
Part of the problem is there is still too much of the old boys’ club. It is getting better, but there is still a long way to go. Hopefully, the APRA report into CBA will look at this.
After all, if culture starts at the top, there needs to be proper debate about what a good board looks like.
Boards with high profile directors might sound good in theory but it doesn’t count for much if they are too complacent or conciliatory.
But “where is the top?” Australia Post chairman John Stanhope in 2016 asked a group of business leaders at a lunch speech. “When I said the tone is set at the top, obviously the board behaviour has got to be the right behaviour but … you can’t be looking to a non-executive director who meets eight or nine times a year to set the tone,” he said.
It is an interesting point. How can a director who meets a few times a year set the tone? Even more so when directors are on multiple boards as well as juggling other work commitments. How do they have enough time to vigilantly protect staff, customers and shareholder interests?
Is it more diversity? More time spent? Better risk management? A greater oversight of remuneration structures? Greater agility? Or something else?
Right now the board is responsible for overseeing the tone and culture of a company. It is also responsible for ensuring that a company meets all necessary compliance and risk management requirements, has the right senior management in place and remuneration policies.
An organisation that has the wrong leadership, culture and remuneration structure won’t stop misconduct. Nor will more compliance help.
What we do know is an organisation that is obsessed with financial performance and remunerates staff accordingly, influences behaviour. As we have seen at the banks and AMP, they created a culture that put profit before people, shareholders before customers. The more revenue staff generated, the bigger the bonus. There needs to be genuine measures for rewarding good behaviour.
Reserve Bank governor Philip Lowe called it as it was after the CBA money laundering scandal, which followed a series of other bank scandals. Lowe accused the banks of a short-term profit mindset and cultural collapse. “The desire for short-term profit has meant not enough attention is being paid to risk management, trust has been strained, banks know that,” he said.
With the various atrocities coming out in the royal commission, the public is reeling from a trust gap. It prompted APRA to launch a public inquiry into CBA’s culture and governance.
It felt it necessary as CBA had been involved in so many other egregious scandals, including the financial planning scandal which sparked a senate inquiry that called for a royal commission into the division, the Bankwest scandal and the CommInsure scandal, which found the bank was putting profit before sick and dying people.
The media investigation revealed that CBA was selling life insurance policies with outdated medical definitions, which made it difficult for legitimate customers to successfully make a claim.
At the time the inquiry was launched it was seen by some as an attempt to stave off a royal commission into the sector.
Now the royal commission genie is out of the bottle.
Until now the banks have been safe in their oligopolistic cocoon, secure in the knowledge that they have most Australians tied up with their home loans, credit cards, deposits, superannuation and so on.
But the world is changing.
The financial system has been exploiting the masses for years by clipping the ticket at every level. The government forced even more money down their neck through superannuation. Customers were ripped off blind through poor advice and faced little protection due to regulatory capture.
Where it all ends is still to play out, but change is coming.