ANZ CEO to the chairman of the board: Pay me less!

This ends our live coverage of day 67 at the royal commission. The hearings will resume tomorrow at 10am, with ANZ chief Shayne Elliott back in the witness box.

Next in line will be Bendigo and Adelaide Bank chairman Robert Johanson.

We’ve just learned that ANZ boss Shayne Elliott wanted the bank’s front line staff to be paid in part based on sales figures.

His reason?

The bank tried reducing the bonuses given to frontline staff and sales figures fell.

The payment of bonuses to front line staff for selling more home loans or credit cards has been raised as a key driver of poor customer outcomes.

Counsel assisting Rowena Orr has just read out parts of Mr Elliott’s letter to the Sedgwick Review into remuneration in the retail banking sphere.

Mr Elliott wrote to the Sedgwick review in February 2017:

“A number of performance objectives from the pilot have been incorporated into incentive plans for frontline staff in the FY17 financial year. Overall, sales numbers declined across deposit products, home loans, wealth management products and business products, compared to the same period prior to the trial. The district also performed worse on sales than the average across the entire branch network.”

Mr Elliott’s letter continues: “The trial highlighted the challenge of tracking and coaching performance for frontline staff in the absence of sales results and sales targets. That was something that your staff found frustrating as the loop was never closed. They could not be sure if they had successfully helped the customer. Data on customer feedback and processes are available but customer outcomes are unclear."

It adds: "The overriding conclusion is that there is a role for sales targets and that incentive plans that take into account [the] whole of role performance through a balanced scorecard approach are likely to be optimal…

"Is there a realistic alternative to setting any type of targets? Our view is that it would be very difficult to operate a commercial enterprise that has obligations to its customers, bankers, shareholders, community and regulators without some form of targets."

Mr Elliott has admitted that ANZ has been too reluctant to withhold deferred pay from former senior executives.

This year, ANZ cut how much it paid three former senior executives in unvested shares. One former executive had their deferred pay cut by 100 per cent, and two other senior executives had their deferred pay cut by 25 per cent.

It’s the first time the bank has done this in 10 years.

“And how many other senior executives at ANZ have had this type of consequence applied to them in the last 10 years?” Ms Orr asks.

“So if we are looking at equivalent level people, I - I think it's none,” Mr Elliott replies.

“Why is it that it has taken until the last financial year for ANZ to exercise this important power of withholding deferred remuneration?” Ms Orr asks.

“Well, I think it's a failing on our part,” admits Mr Elliott.

He admits that ANZ has not had a “good track record” of drawing a clear linkage between senior executives’ performance and their pay outcomes.

“When you are unclear as to why you granted somebody remuneration, it makes it much more difficult to consider why you should remove it. That is a failing on our part,” he says.

Ms Orr asks if the bank has ever considered cutting pay like this before now.

Mr Elliott says ANZ has considered it, but only in “very rare” circumstances of “gross misconduct.”

ANZ chief executive officer Shayne Elliott said it's in his diary to personally apologise to Robert Regan, a 72-year-old retiree who was granted a $50,000 loan he couldn't service to give money to people who were later identified as fraudsters.

We’re still going through ANZ’s senior executive remuneration report for this year. ANZ boss Shayne Elliott just revealed at the royal commission that he asked the bank’s chairman, David Gonski, to give him a pay cut.
Counsel assisting Rowena Orr has just taken Mr Elliott to an email he wrote to Mr Gonski asking for the cut. Here’s what Mr Elliott’s email says: “I will be making downward adjustments to the ExCo [executive committee] rem[uneration] recommendations at human resources committee. They mean the average percentage of target is 77 per cent for published execs. I feel it's very important that my own remuneration is at no higher than this. It's about unity, accountability and frankly credibility - externally but even more importantly internally. "I can't ask my people to be down 22 per cent unless my own rem reflects a similar number. I want you to reassess your recommended CEO rem as a result and have time to consider.”
The email is quite odd because it is a bank boss asking for a pay cut and we’ve seen that that is not always the case at this royal commission.  It was a bit perplexing, so Commissioner Hayne intervened to clarify the matter. Commissioner Hayne: "Am I wrong to infer that the suggestion you were repelling was that it should be higher?"
Mr Elliott: "No, the recommendation, I believe, was that it was going to be higher and I'm asking that they bring it down." Commissioner Hayne: "Yes. That's what I had taken it it to be." 

Mr Elliott confirms that this year four executives – including himself – had their bonuses cut for reasons related to “risk, compliance or conduct”.

“It was a recognition that we had not met the standards we had set ourselves for risk management, some of which has actually been publicly discussed here at this royal commission. So, for example, the failure to remediate issues on time would be a good example,” he says.

The managers' bonuses were cut to 60 per cent of “target,” he says.

But this was not made public in the bank’s annual report, and there has been a non-publication order against the executives’ names being published by the commission (except for Mr Elliott’s name).

Ms Orr wants to know why not make it public, given this would be a powerful to hold executives to account.

Mr Elliott says he understands the “attraction” of the idea, but would prefer not to go down this path.

“So I wish to retain their engagement and their motivation. That does not mean I do not hold them accountable when things have gone wrong," he says.

"But I think some sort of ritualistic public shaming of individuals would be of little value and, in fact, [could have] potentially significantly negative consequence in terms of attracting, retaining, motivating the very best people for the future,’ he says.

Commissioner Kenneth Hayne challenges him on that view.

Commissioner: "If you're accountable, you're responsible for what happened and responsibility carries with it the observation by the external viewer he/she did/didn't...?"

Mr Elliott: "Yes."

Commissioner: "... what was required?"

Mr Elliott: "So I see - look - I see merit in what you're saying. And I, with respect, I can understand that perspective to give a richer evaluation or - or a summation of how decisions were made or how to make linkages between the outcomes and performance. All I'm suggesting is that there could be - and I'm not being defensive - but there could be unintended consequences. And I would just want to think that through.

"And if I may, I - I think it's a reasonably well accepted - it may not be - but reasonably well accepted view that actually the regime of disclosing senior executive compensation has actually led to inflation in executive compensation."

Commissioner: "Well, there's an inevitable arm's race aspect to it?"

Mr Elliott: "Correct."

 

 

We've moved on to the matter of executive remuneration.

Mr Elliott concedes that with "financials easy for banks to understand" in contrast to "a good or a bad customer satisfaction outcome, leadership quality outcome", banks had "too often" weighted their remunation criteria towards purely financial outcomes.

Asked about how investors influence executive pay, Mr Elliott says shareholders have "a very, very significant voice" on pay cheques, "perhaps the strongest of all. I am struggling to think of a stakeholder group that has anywhere near the influence on remuneration structures as much as - and in addition as to the actual absolute amounts for some like myself as a chief executive."

Senior counsel assisting the commission, Rowena Orr, QC, as she quizzed ANZ chief Shayne Elliott.Credit: Internet

But does the "two-strikes-rule," which gives shareholders the potential power to spill corporate boards, prevent pay structures that seek good outcomes for customers and the community, rather than just for shareholders?

According to Mr Elliott, the "two-strikes rule” - which states that two votes in a row of 25 per cent or more of shareholders against a company’s remuneration report trigger a vote on whether to spill the board - is being used for “incorrect” purposes.

“It was, I think, the purpose was to talk about remuneration. People use it understandably to express views on all sorts of things to do with the company because they have no other real significant ways or any powerful ways," he says.

“If - if you second strike, there is an outcome, as opposed to opposition to general issues that are voted on at an AGM. So I am concerned that it is used for incorrect purposes, if you will. But I think it is shareholders expressing the need to be heard as well.”

Mr Elliott agrees executive pay at ANZ has not been properly calibrated.

“Has this incorrect calibration that we've been discussing, in your view, existed in relation to executive remuneration at ANZ?" Ms Orr asks.

"Yes, I believe it has,” he replies.

Mr Elliott says the evidence of this is the big changes in how pay packets are set across executives and the CEO.

He says executive pay should encourage behaviour that is “long term,” and he says there’s a lot of research showing good environment and sustainable goals are also aligned with financial returns.
The flipside is executive pay regime should discourage people taking “short term tactical bandaid solutions,” he says.

 

ANZ Bank featured heavily in a round of hearings that focused on regional and remote areas and financial issues for Indigenous people earlier this year. We’ve now heard about some of the changes the bank has made in response. ANZ has stopped “informal overdrafts” for some customers who receive certain Centrelink payments because these could cause “unintended harm” to customers. We heard in an earlier round that informal overdrafts – which allow customers to overdraw accounts even if they would have been rejected for a formal overdraft – charged interest rates of about 17 per cent. A year.
“While there was no ill intent as far as I can determine, we felt it better to put these safety mitigants in place, if you will, to try to ameliorate that risk,” Mr Elliott said.
ANZ has also committed to setting up a specialist phone line to help Indigenous customers, and it has re-worked some of its security questions. The bank has also agreed to an arrangement that limits how much money it can deduct for debt repayment from customers receiving government benefits to 10 per cent of these payments. 

The hearing has resumed, and counsel assisting Rowena Orr continues her grilling of ANZ chief Shayne Elliott over bank branch closures in regional areas.

Ms Orr: "It's problematic for the people of the community, isn't it, if they can't use the alternative of digital access to your banking services, because technology does not reach those communities in the way that it reaches us in metropolitan areas?"

"I accept that. And I think we should take it into account," Mr Elliott says, adding that the bank is "investigating different ways of servicing customers in these communities".

"I can't tell you what that will resolve - or what that will result in, but, for example, there are alternative providers who remain in these towns who provide different services that could provide bank - basic banking services for us," he said.

"Again, as an example, I am led to believe that some time ago ANZ had a relationship where pharmacists might be able to provide basic banking services, just like we do, until now, at the banker post services. So there are other alternative providers like that.

"We are looking at different solutions using technology, using what we would term a smart ATM, to be able to leave machines that can cope with most of what customers need in a town, etcetera. So we're looking at alternatives."

But he says there will likely be further closures in the next two years.

Asked whether ANZ would continue operating branches in legal or remote locations even if they weren't profitable, Mr Elliott squirms. 

"I have given this some thought, not alone, but with our team. It's not an easy topic. Unlike other people or other industries that get discussed in these terms, like telecommunications, for example, we do not have a monopoly, we have a relatively small market share.

"ANZs share of what we would consider traditional banking is around 15 per cent. It is problematic, I think, for us to consider any obligations to provide universal service to the community. I'm not saying we should ignore it, but I think it's - it's a very complex decision for us, because it imposes cost and risk to us that must be paid for and borne by somebody."

 

Social media users have dug into ANZ chief Shayne Elliott's comments on bank branch closures, especially in regional areas.

As counsel assisting the commission, Rowena Orr, outlined, ANZ has closed 55 branches in inner regional Australia, and 44 in outer regional areas, six in remote Australia, and four in “very remote” parts of the country.

Mr Elliott explained that with fewer customers actually going to their local branch to do their banking, even for home loans, branches were becoming increasingly "uneconomic".

Here's what some Twitter users had to say: