The Wash Up from the Royal Commission. Part 3 in a 4 part series – “How Macquarie gave the big four a lesson in banking”

Part III in this four part series the “Wash up from the Royal Commission” looks at how the CBA, ANZ, Westpac and Macquarie fared at the RC and identifies five lessons which the big four banks can learn from Macquarie.

In October 2017, two months before the Royal Commission was announced, APRA commissioned an independent inquiry into governance, culture and accountability at CBA. This followed a number of incidents that damaged its reputation and public standing including the AUSTRAC anti-money laundering proceedings.

The overarching conclusion in the APRA report was that “CBA’s continued financial success dulled the senses of the institution”, particularly in relation to the management of non-financial risks. It also identified a number of cultural themes such as 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.

In May this year CBA said it would accept and implement all 35 of the report’s recommendations.

At the RC, CBA was represented by its Chairman Catherine Livingstone and CEO Matt Comyn. Ms Livingstone was appointed to the board in March 2016 and has been chairman since the beginning of 2017 and Mr Comyn was appointed in April this year.

Being new in a role avoids or at least minimises liability for past bank misconduct and makes it easier to apportion responsibility to predecessors. Mr Comyn praised Ms Livingstone whilst taking a shot at her predecessor David Turner. “Without wanting to cast aspersions on any former directors, I think the chairman is very different,” he said.

He told the RC that CBA has not had the right leaders in the past and his response to the question “Does CBA have the right leaders now?” was an equivocal, “We will see.”

Mr Comyn explained how he took the high moral ground in wanting to stop the sale of insurance policies that were of little or no value to customers only to be told by his boss at the time Mr Narev, to “temper your sense of justice.” Mr Comyn declined to go above Mr Narev’s head to the board believing it would have deferred to Mr Narev’s judgment.

Mr Comyn’s soft choice is a prime example of what APRA meant with the report recommendation “An injection into CBA’s DNA of the “should we” question in relation to all dealings with and decisions on customers.”

Ms Livingstone, who served under Mr Turner, threw her predecessor and fellow board members under the bus when she told the RC, “The previous board was too trusting of management and too willing to hand out bonuses despite scandals.”

Neither Ms Livingstone nor Mr Comyn enhanced their reputations at the RC. The “new kid on the block” defence can only hold for so long. The APRA recommendations provide the framework for what now needs to be done. Mr Comyn’s leadership team under the watchful eye of Ms Livingstone’s board, is now solely responsible and accountable for implementing the plan to redeem CBA’s reputation.

Shayne Elliott, who was appointed CEO nearly two years ago, was the least unimpressive of the big four CEO witnesses. He was relatively considered, measured and contrite. For instance, he offered a credible case for retaining some financial incentives for frontline sales staff.

He told the RC how he and his leadership team proactively reduced executive variable remuneration by around 22 per cent. For Mr Elliott what this meant in $ terms is that this year he received $5.25m which was a reduction of $950k from last year. Whilst ANZ executives might regard this as an important acknowledgement of their collective responsibility for poor outcomes, others would see it as confirmation that they are out of touch.

The fixed remuneration of Chairman, David Gonski and his board has been cut by 20 per cent. Mr Gonski was appointed to the board in February 2014 and assumed the chair three months later. Unlike his counterparts at CBA and NAB, he was not required to appear before the RC.

ANZ did not attract the attention of the RC to the extent CBA and NAB did but we still heard of a number of cases where ANZ’s conduct fell below “Community standards and expectations.” One example is the “Fees for no service” scandal which ANZ estimates could cost shareholders $421m.

A recent ASIC report dealing with how banks repay customers for misconduct such as poor financial advice or administrative errors named ANZ as the slowest bank taking an average of four years to identify a breach and an average of a further 213 days to report it to ASIC. ANZ has missed multiple deadlines for compensating thousands of customers who were wrongly charged fees. Mr Elliott blamed this on “technology.”

NAB and CBA were the main focus of the RC’s attention so maybe it had formed the view that any deep dive into Westpac would not elicit any conduct falling below community standards and expectations that had not already been identified at CBA and NAB?

But for Mr Gonski’s board and Mr Elliott’s leadership team it is more a matter of “There by the grace of God go I.”

Over at Westpac, things appear to be relatively benign – if you believe their leaders. At the RC, CEO Brian Hartzer claimed Westpac hasn’t had the large and significant issues that CBA has had. ‘We haven’t had that, we have issues and we’re dealing with them,” he said.

The Chairman, Lindsay Maxsted, has been around a long time having been appointed to the board in 2008 and assuming the chair in 2011. One is entitled to expect that he would have a pretty good handle on what was going on. Back in May 2016 he told AFR’s Joanne Gray, “There’s no culture problems in banks.” Instead, he backed the “Few bad apples” theory.


In light of these statements, it was surprising Mr Maxsted was spared the scrutiny of Commissioner Hayne’s counsel assisting.

Notwithstanding this, Westpac has a history of litigation against ASIC and back in 2015 ASIC declared that of the big four banks Westpac “appears most resistant to ASIC and the laws we administer.”

The previous comment about Westpac escaping the level of scrutiny applied to CBA and NAB holds for ANZ So too does the “There by the grace of God go I” conclusion.

As an aside, last week Gail Kelly, Westpac’s CEO from 2008 to 2015 expressed the view, “I wish I’d done more personally to identify some elements of poor practice,” she said. Ms Kelly’s involvement brings attention to the issue of clawback of long term incentives for senior leaders. Ms Kelly amassed 1.8m shares as part of Westpac’s executive bonus scheme. When she left, these shares were worth more than $60m. That is a lot of money in anyone’s language. Since then the share price has fallen by 30 per cent. Ms Kelly has lost $18m but shareholders have lost a lot more.

Macquarie Bank
In his brief appearance, CEO Nicholas Moore provided some of the most insightful and significant evidence in the entire proceedings. He revealed how Macquarie Bank addressed the same kind of challenges as faced by the big four but in a very different way and with very different outcomes.

In 2012, ASIC identified some misconduct and cultural problems within Macquarie’s private wealth division. An internal investigation was immediately commenced and as a result a number of people were fired including senior executives advisers, managers and people in the compliance function. Reporting was beefed up, new systems, processes and procedures were introduced and clients who had suffered were promptly compensated.

Unlike the big four banks, when Macquarie became aware that customers had been disadvantaged they fessed up, corrected the problem and paid compensation.

Macquarie is not part of the big bank homogeneous oligopoly. Three particular matters attracted my attention:

CEO Nicholas Moore is about to retire after ten years as CEO. During this period, no big four CEO has survived more than five years. Why is this so? I would say simply because he has delivered for his shareholders and customers.

Secondly, Macquarie has a planned succession for Mr Moore. What is most informative about Shemara Wikramanayake’s appointment is not her gender or cultural background but the fact that she has worked for Macquarie for 31 years. What are the chances of a big four bank appointing a 31 year “one team player” as its next CEO?

The third area that stands out at Macquarie is executive remuneration. Mr Moore made $18.9m this year, up from $18.1m last year. The bonus pool for executives this year was a staggering $100m. No wonder it is called the “Millionaire’s factory!” All this, yet no customer or public outcry. It is understandable that shareholders have not objected as the share price has increased 360 per cent in the last ten years. During this time, the best of the big four has been CBA with a 180 per cent increase with NAB coming in fourth at 35 per cent.

Five learnings for the big four banks from Macquarie
1. If you make a mistake, own it.
2. There is no conflict between the interests of customers and shareholders.
3. Paying big bonuses does not automatically lead to poor behaviour.
4. CEOs don’t need to be turned over every five years if you select the right person.
5. Often the best new CEO comes from within.

The phrase “homogenous oligopoly” has appeared regularly in this series. The RC has shown all big four banks face the same challenges in governance, culture and accountability. At the same time, Macquarie has shown them how it can be done. If the big four continue on the current path, it will be a race to the bottom.

I am reminded of a wonderful piece of advice from a mentor at NAB – “There is no point in being the best dressed corpse in the cemetery.” (thanks Errol!)


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