Kenneth Hayne’s remuneration revolution at the banking royal commission

Commissioner Kenneth Hayne’s statement on executive pay should be obvious. In practice, it’s radical.

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Corporate Australia’s attitude to remuneration reports will change dramatically after royal commissioner Kenneth Hayne made what should be a blindingly obvious statement: that they serve to tell staff and external stakeholders what the board thinks of management.

In principle there is nothing revolutionary in Hayne’s statement, but in practice there is because rarely in the debate about pay statements is their role seen as a communications device.

In simple terms, if the board thinks management has made too many mistakes or not operated as the board would wish, then its pay should be slashed.

That tells junior staff what sort of behaviour the board is trying to encourage.

The proposition, when put like this, is obvious but how many boards actually make clear the remuneration report is an important communication tool?

Certainly the ANZ board of days past hasn’t seen it in these terms, which explains why in 2014 and 2015, by way of example, the overall staff bonus pool was below target while the lowest executive bonus for the first year was 112 per cent and chief Mike Smith collected 127 per cent, and in 2015 the executive bonus was 107 per cent and the chief executive collected 118 per cent.

That explains why Mike Smith took out circa $100 million from his days at ANZ but staff not so much.

More to the point, just what does the dual messaging tell staff about the sort of behaviour the board is trying to encourage?

Shareholders treat remuneration reports with a wider lens which is why votes against remuneration reports often go well beyond actual pay levels.

The report is also one of the few issues in which shareholders actually get to tell the board what it thinks of them.

The public debate at least is all around the scorecard, what measures you use to set executive pay rather than what messages that sends staff.

Hayne noted the rem report scorecards had an “aura of precision’’ around them which masks the actual judgment on issues “that really matter”.

CBA allocated 10 minutes or so to making these critical decisions on such fundamental issues as ­performance on non-financial risk issues.

The commission’s questions superbly highlighted just how corporate boards seem to miss the point entirely on just how they should be treating executive pay.

It’s more than a question of whether the total shareholder return target was beaten and goes more to how the executives went about their work.

What they did is one thing but how they did it is in some respects more important, so the executive who tells a client not to take credit card insurance because he or she couldn’t claim from it anyway is worth more than one who sells the product to boost sales numbers.

These sort of decisions are why board members earn the big bucks because of their corporate experience but strangely are not a regular part of the governance debate.

CBA chair Catherine Livingstone understood the principle but certainly hasn’t considered actually putting the words into effect.

Why would she keep secret the fact that she asked her predecessor David Turner for 40 per cent of his director fees because of what is generally regarded as woeful ­performance?

Turner declined the request and extraordinarily Livingstone left the task of communicating with Turner to one of his ­colleagues.

One presumes that was Sir David Higgins given he like Turner is based in the UK and also was appointed to the CBA board on Turner’s recommendation.

Assuming it was Higgins (Livingstone didn’t say) his feedback was Turner said no and he was also one of the few people on the planet who didn’t agree with the APRA committee report on CBA.

Turner’s response was “The board it described was not the board I was on.”

This says it all. So does the fact that Livingstone left it for someone else to approach Turner; if you want to claw back cash from a past chair then the present chair needs to get her hands dirty and actually follow through on the request by thumping the table.

Certainly on the way to rewriting history both Livingstone and her chief Matt Comyn went out of their way to say they regarded the APRA report as tough but accurate and said it has served as a valuable tool in changing the culture within the bank.

Catherine “Ms Detail” Livingstone didn’t score too highly in her appearance before the commission, with Rowena Orr winning the battle with consummate skill.

Her extraordinary decision to seek to set the record straight yesterday morning was quickly questioned when the relevant board notes didn’t reflect her challenges.

Livingstone didn’t take a backwards step at that point, reminding Ms Orr that the CBS chair was speaking under oath and just because the minutes didn’t reflect her challenges “didn’t mean they didn’t happen”.

This opened the door to questioning whether the board minutes were in breach of the law for not recording what was happening. The point being corporate Australia has some work to do to operate boards as the community would expect it too.

Livingstone couldn’t explain the messaging behind her appointment of Comyn as chief executive given that many of the major snafus at the bank occurred in his division.

Livingstone confided every bank executive in the world has had some sort of regulatory questioning mark hanging over their service, which doesn’t say a lot about bank executives.

It also doesn’t hold out much hope for Livingstone’s dream in five years’ time of running a bank which is supported by customer and community trust and less compliance issues to dominant board discussions.

Close eye on Craig

Former CBA finance boss David Craig is the head of the audit and risk committee on the Lendlease board. Based on her responses yesterday it seems CBA chair Catherine Livingstone should keep a close eye on his work and ask him plenty of questions.

In yesterday’s testimony without referring to him by name, Livingstone said she didn’t receive satisfactory explanations from him on the issue of Austrac negotiations and progress.

McCormack’s break

That overseas trip Mick McCormack was promising his wife when APA was taken over has now disappeared but company chair Michael Fraser may have to grant him a couple of weeks’ holiday instead.

CKI has suffered the full inconsistency of Australian foreign investment rules being approved for some deals and rejected for others for no apparent reason.

As noted previously, this time Treasurer Josh Frydenberg got it right not because of the Chinese connection but because too much control would have rested in too few hands on the east coast energy grid.

The fact the consortium leaders were Chinese was a pity because it clouded the issue when reality suggested if the ACCC could not see a way to block the deal its laws should be changed to give it the power.

Talk of a rival IFM bid seems a long way off certainly at anywhere near $11 a share if yesterday’s market action is any guide given the stock fell 1.8 per cent to $8.61 a share.