If ever you find a job is too big for you, you probably get a friend or an expert to help.
In business, if a department of, say, ten people is not keeping up with its work commitments and making more and more mistakes, a good manager will add three or four extra staff, probably skilled, to improve performance.
Balancing workload with resources is Management 101.
Might it be that the directors of the big four banks have been overloaded and unable to do the job they were being asked to do, which was to govern their institutions?
Overloaded, unable to cope
The scathing Australian Prudential Regulation Authority report into the Commonwealth Bank reads as if the bank’s directors were unable to cope with the constant round of scandals, and frequently dropped the ball as a result.
It concluded diplomatically that the bank’s governance practices were “below mature practice”.
In other words, the directors need to lift their game – a lot.
If they wanted to lift it to “mature practice” where would they look?
My submission to the commission looks at how the leading banks in Canada are well governed, managing not to get themselves into the sort of mess that Australia’s leading banks have done, yet remain just as profitable and strong.
Canadians do it better
Australia and Canada have almost identical political and economic systems. They are two of the largest countries in the world by area, but sparsely populated, with 24 million people in Australia and 36 million in Canada. Both are blessed with abundant natural resources whose exports dominate their economies. Both have similar Westminster-style governments with a two-house federal parliament, plus state and provincial governments. Both legal systems derive from those of the United Kingdom.
Their banking systems are also similar, with the “four pillars” dominating in Australia (and New Zealand) and the “big five” dominating in Canada, in each case controlling more than 75% of the nation’s banking assets.
Many of the financial metrics of the two sets of banks are also comparable, including average net income, return on equity, total assets, and tier 1 capital.
Their bank boards are different
But to date the biggest Canadian banks, while not angels, have largely avoided the scandals that have plagued the biggest Australian banks for a decade.
I reckon the differences in corporate governance have a lot to do with it.
My research comparing the latest (2017) annual reports from the nine banks finds:
The boards of the largest Canadian banks are 60% larger than their Australian counterparts (an average of 14.4 directors, compared with 9)
Directors in Canadian banks have been in their roles on average 55% longer (average tenure is 7 years, compared with 4.5)
The boards in the largest Canadian banks therefore have an average of 100 years of experience of directorships in their banks, whereas Australian banks have only 40 years – a 250% advantage
Canadian bank boards are more diverse not only as regards female participation (37% vs 31%), but have broader experience in industry, many having been chief executives. Australian banks are top-heavy with ex-consultants with mainly legal and accounting experience
While total remuneration is higher for Canadian boards (because there are more directors), Australian directors are on average paid some 40% more.
In short, the boards of Australia’s biggest banks are smaller, less experienced, and have less diverse experience than the boards of Canada’s biggest banks.
This would suggest that there is a “governance deficit” in Australia’s bank boards.
Ours could be 50% bigger
Their directors do not have the time, bandwidth or experience to take on the demanding roles of properly governing huge institutions that are vital to the Australian economy. To be comparable with Canadian banks, Australian bank boards should be at least 50% bigger.
Of course, it would be difficult to conclude firmly that board size and composition are the only (or even the main) reasons why Australian banks have been so much more prone to misconduct than Canadian banks.
It might also be the regulatory regime.
In Australia there are “twin peaks”: the Australian Prudential Regulation Authority and the Australian Securities and Investments Commission. In Canada there is only one: the Office of the Superintendent of Financial Institutions.
It would be unfair to conclude that our twin peaks system has failed. The execution has been woeful, as the Royal Commission has discovered. If implemented properly, twin peaks might well be the best model for dealing with the misconduct in the four pillars.
The question needs research, funded and conducted objectively rather than by the banks or regulators.
The case for beefing up our bank boards to the kind of size needed to do the kind of job they have, seems overwhelming.
- ^ Royal Commission (financialservices.royalcommission.gov.au)
- ^ overwhelmed with scandals (www.theguardian.com)
- ^ very costly mistakes (www.afr.com)
- ^ report into the Commonwealth Bank (www.apra.gov.au)
- ^ submission (financialservices.royalcommission.gov.au)
- ^ dominating in Australia (financialservices.royalcommission.gov.au)
- ^ dominating (www.bankofcanada.ca)
- ^ twin peaks (www.researchgate.net)
- ^ Office of the Superintendent of Financial Institutions (www.osfi-bsif.gc.ca)
- ^ CBA's board needs to take ultimate responsibility for the bank's failings (theconversation.com)
- ^ Banking Royal Commission's damning report: 'Things are so bad that new laws might not help' (theconversation.com)
Authors: Pat McConnell, Visiting Fellow, Macquarie University Applied Finance Centre, Macquarie University