Westpac scandal report raises stakes for directors

Westpac’s release of the investigation into its handling of the ­­anti-money-laundering issues shows boards face new pressures.

Westpac’s release of the investigation into its handling of the ­­anti-money-laundering issues which led to action against it by financial crimes regulator Austrac exposes new pressures that boards face as businesses get more complicated.

Higher demands and expectations — both social and regulatory — on boards mean that directors must be prepared to commit more time to their directorship and bring specialist skills to the party.

Westpac’s recently appointed chairman, veteran banker John McFarlane, told The Australian on Thursday that directors have to bring an oversight to their organisation, including more focus on potential downside risks.

This provides a counterbalance to the inevitable optimism and bullishly-biased reporting which moves upwards in large organisations where negative and sceptical views are treated with suspicion.

“It is what it is,” he said, making it clear there was no point for an organisation in a highly regulated organisation like banking to wish that it was not so.

The Westpac board report, by a specialist advisory panel headed by former Boston Consulting Group executive and governance expert Colin Carter, energy regulator and former investment banker Kerry Schott and former Telstra chief executive Ziggy Switkowski, noted that “the way in which the Westpac board organised its general governance responsibilities was mainstream and fit for purpose”.

It also concluded the board of Westpac, its committees and composition, meeting frequency, participation of members and relevance of the agenda were “all as one would expect in a large listed company and overall governance at this level is good”.

“However, financial crime was a relatively small item within a very crowded risk and compliance agenda until 2017”.

It noted the Westpac Board Risk and Compliance Committee agenda “was often large” with typically about 35 to 40 agenda items and also around 40 meeting participants — including guest presenters and subject matter experts for specific items, “which made engagement with every issue difficult”.

The report pointed out that “overseeing financial crime risk is an important but small part of the board’s overall responsibilities”.

Westpac on Thursday acknowledged that, with the benefit of hindsight, and noting the board’s escalating focus in the area, “directors could have recognised earlier the systemic nature of some of the financial crime ­issues Westpac was facing”.

The report also raises questions about how boards can have a ­direct line of sight into organisations like Westpac which have a multi-brand strategy as well as a matrix management organisation model.

Boards in the past focused on issues such as corporate strategy, governance and compliance and potential financial risks.

Westpac, for example, has separate committees for audit, risk and compliance, nominations, remuneration and technology (an area which now also demands much more oversight from the board.)

But as the Westpac reports have noted and Mr McFarlane has acknowledged, there is an emerging important area of non-financial risk which needs to be addressed by boards.

Westpac’s report said “the board relies on information flows from management and it was the content of those flows that was poor. Information was (unintentionally) misleading and sometimes omitted”.

Mr McFarlane has moved recently to split the risk area into two distinct committees, with one focused on traditional financial and credit risks and a new one, the board legal and regulatory committee, to focus on areas of regulatory and legal investigations and remediation, including financial crime remediation.

This new emphasis at the top should in turn give these areas more weight within the board’s consideration

“Clear accountabilities for anti-money laundering compliance and reporting must be developed and enforced,” the Carter-Schott-Switkowski panel said.