Investors driving bank’s focus on financial performance: Ken Henry

Major shareholders are forcing banks to put financial performance before other concerns, according to NAB.

NAB chairman Ken Henry. Picture: Hollie Adams

Major shareholders in financial institutions are forcing companies to put financial performance before other concerns, according to National Australia Bank chairman Ken Henry.

Speaking on a business panel in Sydney yesterday, Dr Henry, a former secretary of the Treasury, said the focus on financial returns above all else was “frustrating” for both companies and regulators.

“A lot of investors in Australia are in a long journey,” Dr Henry said. “Many of them are very close to the starting line on that ­journey.”

Dr Henry said there was an “insufficient appetite” for including any non-financial metrics as part of the incentive plan for executive remuneration.

“It’s not just frustrating for boards or other investors, it’s also frustrating for regulators,” he said. “I think the debate is going in the right direction.”

The comments come as Kenneth Hayne’s royal commission into the banking and financial services sector reveals shocking and systemic misconduct, where executive remuneration has benefited from years of drawn-out rip-offs from customers. Wealth manager AMP this week admitted to misleading the corporate regulator after charging thousands of customers for fees without providing a service.

The Australian Prudential Regulation Authority, which regulates the banks, recently revealed a crackdown on bonus payments after finding the way lenders paid executives failed to punish bankers for bad behaviour and encouraged excessive risk-taking.

APRA chairman Wayne Byres revealed a major international investor told him it disliked banker pay being tied to issues such as staff engagement and customer satisfaction. Mr Byres said he was disappointed when CBA received a first strike against its remuneration packages in 2016 as a result of the inclusion of non-financial targets.

Dr Henry appeared to be critical of shareholders pressuring companies to unreasonably increase returns.

“We all know what our cost of capital is. We know what we have to do to keep shareholders happy,” Dr Henry said.

Insurance Australia Group chairwoman Elizabeth Bryan said the primacy of shareholder returns was no longer appropriate. “That no longer serves. That’s no longer legitimate,” she said.

“We’ve got a remuneration system that is designed back to the old paradigm that we’re just about making shareholder returns.

“That’s what everyone had been pushing for but now it’s being questioned on all sorts of fronts — by regulators, by the public, by the leading investment analysts. It will take a lot of unpicking and unravelling to get from where we are to where community expectations currently are,” Ms Bryan said.

“It’s a journey we’re going to have to face.”

Dr Henry said conversations with global investor Blackrock were the “easiest” and “most aligned” conversations to have.

Pru Bennett, managing director and head of investment stewardship at BlackRock Australia, said many of the pay structures of Australian chief executives were not aligned with “shared values”.

“Most of them are focused on relative total-shareholder-return or an earnings measure. There are some that introduced non-­financial measures but they’re often a small proportion,” Ms Bennett said.

“I think there needs to be a rethink around remuneration structures so they are more aligned with the long-term interests of the broader community,” she said.

At the four largest banks, almost 55 per cent of the $212 million in pay their 151 top managers earned last financial year was made up of bonuses, according to an analysis of banks’ regulatory disclosures.

Outgoing Commonwealth chief executive Ian Narev took home a $12.3m pay packet in 2016, the year the lender was found to be using outdated medical definitions of heart attacks to deny legitimate life insurance claims.

Following allegations that CBA breached anti-money-laundering legislation more than 50,000 times, APRA launched a review of the bank’s governance and culture in a bid to see whether the bank incentivised staff to ignore regulatory compliance.