Post Hayne – Lessons

Ex-NAB CEO, Andrew Thorburn made a prescient comment at the Banking Royal Commission
“In my personal and professional experience, most transformation opportunities come out of pain … ‘pain’ not ‘Hayne’,” Thorburn said.

Anyone who pretends that emotional intelligence is a ‘soft’ skill has never managed a bullying claim, told an employee that their position is The recently-departed NAB CEO, Andrew Thorburn made a prescient comment at the Banking Royal Commission which continues to resonate throughout the financial services sector and beyond: “In my personal and professional experience, most transformation opportunities come out of pain … ‘pain’ not ‘Hayne’,” Thorburn said.

Thorburn, who resigned at the end of February receiving his contractual entitlement of $1 million but forfeiting a reported $23 million in unvested deferred awards, was answering a question posed by Counsel Assisting, Mr Michael Hodge QC: “I’m interested in understanding why you think it took a Royal Commission to provide that kind of critical self-examination?”.

Indeed, painful self-examination lies at the core of what banks, superannuation funds and other parts of the financial sector are contemplating post-Hayne: what are the crucial points of exposure in our governance, culture and ethical decision-making systems that would be revealed if we were subject to the same level of public scrutiny as that which occurred at the Royal Commission?

The intention by the Federal Government to implement swiftly the recommendations of Commissioner Hayne’s report released on February 4, the increased enforcement activity of regulators APRA and ASIC (currently investigating CBA among others), and new legislation covering corporate crimes (up to 15 years’ imprisonment for individuals and penalties of up to $525 million per civil violation for companies), is driving behaviour meant to achieve significant change.

Chairmen, CEOs, CFOs and company secretaries are saying – albeit only privately – that the greater attention from the regulators is uncomfortable and unrelenting. One bank CFO mused that how the content of meetings and decisions were recorded from now on was taking up undue focus. People are worried about how a decision, even a single word in an email, might be (mis)interpreted “years from now in a Court case”.

In public, however, no-one is prepared to complain about the regulators’ new modus operandi taking their cue from ANZ Chairman, Mr David Gonski, who was reported recently as saying that only a “fool” would disrespect the regulators.

At Board level, key topics of conversation in the open meeting, and especially during in-camera sessions, include oversight of non-financial risk, the increased level of Board scrutiny now required, the quality of information received from management, the oversight of corporate culture and whether management is being sufficiently “held to account” by the Board, and executive remuneration and incentives.

The historic 88% strike against the NAB remuneration report at the company’s 2018 AGM is not something any Board wants to experience, or in the case of NAB, to repeat, given a second strike could precipitate a Board spill.

Directors are highly focussed Hayne’s statement that “the task of the Board is overall superintendence of the company, not its day-to-day management. But an integral part of that task is being able and willing to challenge management on key issues, and doing that whenever necessary”.

An experienced Director of listed companies and superannuation funds commented privately on Hayne’s advice: “The world has changed and executives are just going to have to get used to the greater scrutiny. Boards are asking more questions and that’s only going to continue.”

In response, Boards are exploring additional methods of oversight such as new Board committees like the NAB Board’s proposed “committee for customer outcomes”. This will involve more reporting for Management. Other companies are appointing “transformation officers”.

But the reach of Hayne goes much further than the sectors his Royal Commission examined. Companies throughout the ASX, university Councils, private companies and even not-for-profit organisations, are looking to Hayne to examine their own behaviour.

Since early 2018, my listed company and superannuation Board clients have been asking me to examine Board behaviour against APRA’s report into CBA, as well as the outcomes of the Hayne Royal Commission, as part of a Board Review engagement.

But in the interests of forming a sustainable response in the current climate, one might take note of what has become known as “Hayne’s Seven Principles”: obey the law; don’t mislead or deceive; act fairly; provide services that are fit for purpose; deliver services with reasonable care and skill, and; when acting for another, act in the best interests of the other.

Interestingly, Hayne’s list of proper behaviors echoes the commentary of another Royal Commissioner, Justice Neville Owen, whose 2003 report on the HIH Royal Commission, contained this simple question from the Socratic tradition: “Did anyone ask: ‘is this right?’”.

Sixteen years later, corporate Australia is again pondering similar ideas. Perhaps this time, the standards of behaviour and systems of accountability to create sustainable change and to restore public trust, will be put firmly in place for a new generation – no matter how painful the transformation.

Dr Ann-Maree Moodie is the Managing Director of Governance Australia and Asia where she conducts Board Performance Reviews of ASX100 companies and Boards of superannuation funds and NFPs.