Westpac: There can be no excuses for failure to manage risk

Westpac’s woes are just the start as watchdogs employ increased powers.

Westpac chief executive Brian Hartzer.

The message could not have been any clearer if it were planned. On Wednesday last week, as the chief executives of the top 100 companies prepared to gather for the ­annual Business Council of Australia speech by Scott Morrison, the government’s money laundering agency dropped a bombshell.

Westpac, Australia's oldest and third largest bank, was being prosecuted for 23 million breaches of financial reporting requirements, including hundreds of payments to pedophiles and child porno­graphers in Southeast Asia.

The traditional end-of-year address to business leaders was completely overshadowed by the Prime Minister’s remarks earlier in the day that the Westpac board should “reflect deeply” on the ­offences and demonstrate accountability.

In less than a week Morrison was granted his wish. Westpac’s chief executive, Brian Hartzer, was removed on Tuesday, chairman Lindsay Maxsted brought forward his retirement and director Ewen Crouch announced he wouldn’t be standing for re-election at the shareholder meeting in two weeks.

And with that Westpac becomes the fifth major financial services firm to be decapitated in just over two years in an orgy of bloodletting across the top of the financial services industry. Since August 2017, five chief executives and four of their chairmen have been punted. Ian Narev at the Commonwealth Bank, Craig Meller and Catherine Brenner at AMP, Chris Kelaher and George Venardos at IOOF, and Andrew Thorburn and Ken Henry at ­National Australia Bank. Only ANZ remains intact and, after being queried by investors this week, it rushed out the statement that it believed it had found “no material issues to date” in its dealings with Austrac.

Veteran corporate crime fighter Graeme Samuel has not seen anything like it and warns that worse is to come. “What we are seeing is the revelation of poor corporate governance across Australia,” the former chairman of the Australian Competition & Consumer Commission says.

“We are focusing on the financial services industry at the ­moment because of the Hayne royal commission. But we also have the interim report of the aged care royal commission detailing the horrific treatment of people in the system.”

Samuel says both industries highlight a malaise in corporate Australia and he predicts there will be more scalps and prosecutions to follow Westpac as newly ­emboldened regulators start flexing their increased powers and ­resources.

“It’s really important we broaden out the scope because something is wrong with corporate Australia that this has been ­allowed to occur,” he says.

Corporations can’t say they haven’t been warned. For years they have faced growing pressure from ever bigger and more mainstream investors to deal with so-called environmental, social and governance issues, dismissed by old-guard executives and directors as soft and a distraction from the pursuit of profit.

The Australian Council of Superannuation Investors, a peak body for $2.2 trillion in local industry superannuation and offshore pension funds, played a critical role this week in forcing Westpac to take some accountability for the Austrac scandal. At a meeting with chairwoman Louise Davidson and representatives of some of the member funds at its headquarters in Lonsdale Street, Melbourne, Westpac’s Maxsted was left in no doubt. Unless heads rolled, the funds would use their votes to threaten the re-election of directors and even a potential second “strike” against the remuneration report that would trigger a vote to spill the board.

The Future Fund conveyed the same message.

“There is a growing understanding of the financial impact that ESG issues can have on a company and the importance of addressing them,” Davidson says. “As long-term investors, my members have an interest in those that others with shorter-term ­investing horizons do not.”

The industry funds that ACSI represents, such as the $180bn AustralianSuper, Hostplus and CBUS, represent a new type of capital steward to those that dominated the corporate landscape even a decade ago, says Allan Fels, Samuel’s predecessor at the ACCC and a consultant on governance issues in Australia and China.

“They are not from the establishment,” Fels says. “In the old days the directors of the big investors were from the top end of town. They were part of the club that ran companies. But the industry funds are their own people and they have room to throw their weight around.”

With boards largely populated by representatives of employer groups and trade unions that sponsored the creation of the funds, their superior returns and untroubled appearances at the royal commission have seen them sail past retail funds — think the AMPs and Colonial First States that used to dominate funds ­management and superannuation — as the country’s biggest group of ­investors. Australian Prudential Regulation Authority figures for the September quarter show ­industry fund assets hit $747.4bn, nudging ahead of self-managed super at $746.2bn.

Their increasing inclination to do so was highlighted this week when proxy adviser Ownership Matters advised its clients, including the industry funds, to vote against the re-election of Katie Page, chief executive of Harvey Norman and wife of founder and executive chairman Gerry Harvey, in favour of independent activist Stephen Mayne.

Harvey Norman scored a second strike on its remuneration ­report but the founder’s shareholding was enough to block a spill motion and Mayne received only 10 per cent of the vote.

Fels says the new political environment has also had a significant bearing on the scrutiny and pressure companies are under. In quick succession, Morrison, Josh Frydenberg and Home Affairs Minister Peter Dutton — to whom Austrac reports — ramped up the rhetoric of Westpac “giving a free pass to pedophiles” and ­demanding the board and management be held to account. They wanted heads on spikes

“The Coalition has stopped protecting the banks,” says Fels. “In the past the Coalition has ­defended the banks and that has been part of protecting the industry. The Coalition voted against a royal commission 26 times before it relented and regularly praised their role in seeing Australia through the global financial crisis and funnelling credit to industry and housing. That has changed. The government has paid quite a high price for putting up a defence of the banks in the past and it has ­decided it is not going to do that any more. It is not to be the PR for them.”

If CBA’s $700m fine for 53,000 breaches of Austrac reporting ­requirements last year didn’t cause corporate Australia to sit up and pay attention to these issues, perhaps Westpac will. A report by the Australian Securities & Investments Commission last month put these issues at the top of the agenda and found there is still a long way to go for Australian companies. Among its findings were that all too often management was ­operating outside of board-­approved risk appetites for non-­financial risks, particularly com­pliance risk.

“Boards need to actively hold management accountable for ­operating within stated risk appetites,” ASIC said.

The corporate regulator also said material information about non-financial risk was often buried in dense, voluminous board packs. It was difficult to identify key non-financial risk issues in ­information presented to the board. And it said board risk committees should meet more regularly, devote enough time and be actively engaged to oversee material risks in a timely and ­effective manner.

“Just as the global financial crisis was the watershed moment for banks to focus and mature financial risks — particularly credit and liquidity risk — we believe that now is a watershed time for companies to significantly improve their focus on non-financial risks,” ASIC chairman James Shipton said in a recent speech to company directors.

“Globally, there is an increasing appreciation of the need to recognise the impact that these ­issues can have, individually and collectively, on the longevity and profitability of a company.”

But people are far from settled on how to address it. Elmer Funke Kupper, a former ANZ executive who went on to run wagering giant Tabcorp and then the Australian Securities Exchange, says papers prepared for board committees can run into hundreds of pages, testing the limits of directors’ ability to absorb information and identify issues.

“There is something wrong when hundreds of pages of documents are served up to directors every month and something like this (the Westpac Austrac breaches) gets missed,” Funke Kupper, who himself was investigated and cleared in an AFP probe, says.

He says boards need a different approach. It would include more time for boards to think about risk issues and discuss them with management, and more direct contact for directors and executives with the regulators to understand the risks they face before they detonate in public.

“It is not like they (directors) are bad people. It is something in the process that needs to change, something in the conversation.”

As it stands, there has been a huge increase in compliance ­departments, particularly at the banks, as they struggle to deal with a deluge of legislative reform and regulatory zeal. In responding to the Austrac claim, Westpac pledged to double the number of people working in its financial crime detection and prevention unit to 750, as well as commissioning independent reviews and tying up huge staff resources to deal with the fallout.

Samuel has other ideas. Last year he co-authored a review of CBA’s compliance failures at Austrac alongside director Jillian Broadbent and former APRA chairman John Laker. It chronicled how CBA’s failure to properly monitor and report on how its ­intelligent ATMs — with high cash-deposit limits — were being used by underworld figures ­exposed flaws in CBA’s risk management, audit and board process, which were the three levels of ­defence that should have pro­tected it.

Samuel says the findings in that report provide a template for how big companies could conduct their own governance, culture and accountability audit.

In fact, he says ASIC, which has had its budget restored and has been granted new powers and penalties to combat corporate crime, should insist on the top 200 companies using the CBA report as a ­template to do their own review of governance, culture and ­accountability.

Those compliance failure reports should be published, providing regulators, ­investors and others a ready reference, a guide to problems and a means to hold them to account.

It’s not the worst idea, as events of the past two weeks have shown.