Commonwealth Bank’s financial success has “dulled” its senses, leaving it with a complacent culture that is dismissive of regulators, with a lack of accountability among senior executives and a remuneration framework that has no bite.
That is the damning conclusion of an eight-month investigation by Australia’s financial regulator and comes after years of rolling scandals at CBA.
The treasurer, Scott Morrison, said Apra’s report showed the bank’s remuneration structure was equivalent to “money for jam”, with senior executives still getting bonuses “even when things go wrong”.
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He said it was time for shareholders and boards to rethink the entire remuneration structure for senior executives and board members in Australia, adding the report needed to be “on the agenda of every single board meeting in this country”.
“It goes to the heart of what responsibilities of board directors are,” Morrison said on Tuesday. “It’s not a retirement job ... this should be a wake-up call for every director in the country, particularly those who are the custodians of the savings and share holdings of Australians.
“The report found … there was a complacent culture [in CBA], dismissive of regulators, an ineffective board that lacked zeal and failed to provide oversight, a lack of accountability and ownership of key risks by senior executives, a remuneration framework that had no bite and they were reactive, slow, and had underresourced systems and processes internally.
“I want to stress why the CBA is a sound financial institution, and that issue is not in question, that rap sheet that I’ve just read out from Apra is damning,” he said.
The report identifies serious shortcomings in CBA’s governance, culture and accountability frameworks, leading to conclusions such as:
- CBA has a poor track record in relation to accountability.
- The level of accountability observed falls a long way short of the standard set by its own delegations policy.
- Lack of accountability has been a characteristic of CBA for some time and has been a significant driver of recent missteps. This has manifested itself in a number of ways … such as a tolerance for “excuses” used across the group to explain away poor risk and compliance outcomes.
On remuneration, it found:
- Before 2016-17, it was extremely rare for CBA’s chief executive and group executives to have their remuneration reduced on risk grounds. It says their remuneration was based on extremely brief commentary from management, with a narrow focus on realised financial and reputational impacts.
- In 2015-16, for example, the reputational damage from the “CommInsure” scandal resulted in only a relatively modest remuneration adjustment for the chief executive and impacts on some lower level staff.
Apra has welcomed CBA’s pledge to adopt all of the recommendations from the Sedgwick report (April 2017), which called for banks to stop paying their staff bonuses linked directly to sales volumes and sales targets, and to rebalance the size of variable pay relative to fixed pay.
Apra has made 35 recommendations, including that CBA give priority to listening to customer complaints about systemic issues, and that it ensure chief risk officers have the necessary independence to provide effective challenge to the business.
CBA has acknowledged Apra’s concerns and offered an enforceable undertaking under which CBA’s remedial action in response to the report will be monitored. Apra has also applied a $1bn add-on to CBA’s minimum capital requirement.
Matt Comyn, CBA’s chief executive, has responded to Apra’s report by releasing a “video interview” on CBA’s website.
In the interview he is asked questions by the former business editor of the Australian Geoff Elliott, who left the paper in 2014 to join corporate communications practice.
Comyn says Apra’s report is a “confronting read”.
“I think it’s a very helpful road map for us for the future, and we are going to get on now with implementing the recommendations in full, which I hope will go towards restoring the confidence and trust in the Commonwealth Bank,” Comyn said.
He later held a dial-in phone conference for journalists with CBA chairman Catherine Livingstone.
Comyn replaced the former CBA chief executive Ian Narev in January after the Australian Transaction Reports and Analysis Centre launched civil proceedings against CBA in the federal court last year, claiming the bank had made “serious and systemic” violations of laws aimed at combating funding terrorism and crime syndicates.
A week later, the CBA board axed senior executive bonuses to limit the fallout from the money laundering allegations. A week after that, Livingstone announced that Narev would step aside in 2018, saying his resignation should provide certainty to the market.
On Tuesday, Morrison said some CBA board members and executives had already left the bank, but it was his “understanding” others would be leaving too.
Comyn said, during his phone conference with journalists after Morrison’s press conference, that a number of senior executives had left the organisation in the aftermath of the Austrac allegations, and he was in the process of appointing five direct reports.
“I can’t speak directly for the Treasurer’s comments, but I believe there are a lot of changes already underway and I wouldn’t like to speculate at this stage on any others,” he said.
