Record bank fine a turning point for executive accountability

Press/Media: Expert Comment

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AUSTRAC scandal Westpac’s $1.3 billion penalty comes as activist shareholders join active regulators in holding misbehaving corporates’ feet to the fire.

Westpac has just agreed to pay the largest fine in Australia’s corporate history – $1.3 billion plus the costs of the regulator, AUSTRAC. There is also the shame of having to admit 23million breaches of laws designed to preventmoney laundering; for failing to adequatelymonitor transactions that fitted the pattern of payments relating to child exploitation. The scandal has rocked not onlyWestpac but the entire sector,whichwas already reeling from the Hayne royal commission and the prudential inquiry into CommonwealthBank of Australia. Formany in the community it seems implausible that a large bank employing hundreds of risk, compliance and assurance experts could havemissed this.How is it possible that a bank can employ themost sophisticated data analytics for picking up credit card fraud, yet not be able to pick up transaction patterns that scream of paedophiles? The obvious difference is that the former is often a liability to the bank, but the consequences of the latter are felt by childrenmainly in developing countries. Canwe be hopeful for the future?There are reasons to think this scandal has been a turning point. First,we have an active regulator in AUSTRAC. It has been able to get a fine that ismaterial in terms ofWestpac’s profits and, therefore, hits shareholders. AUSTRAC has alsowon in the court of public opinion, adeptly using the scandal to raise the profile of this issue in the community. Arguably the reputational damage to Westpac far exceeds the $1.3 billion fine, and creates an environment ripe for change. Importantly, the scandal has occurred at a time of heightened executive accountability. The introduction of theBanking Executive Accountability Regime is a factor here.The regime establishes accountability obligations for banks, requiring them to take reasonable steps to, among other things, conduct businesswith honesty and integrity, andwith due skill, care and diligence. Individual executives are allocated responsibility for specific issues such as financial crime, and each accountable personmustmeet their accountability obligations or face the consequences. Itmay be difficult to applyBEAR legislation directly to this scandal because many of the infringements occurred before itwas enacted. Nevertheless, the spirit ofBEARwas very evident in the events of late last year – the departures of two boardmembers and a number of executives, including chief executiveBrianHartzer. No longer can executives and directors hide behind ignorance and group decision-making processes. It’s thejob of leaders to knowwhat’s going on, through the riskmanagement structures, and do something about it. If leaders are not capable of this, they need tomove on. The other fundamental change in the landscape contributing to this new era of executive accountability is the changing nature and role of shareholders. Increasingly, the community and shareholders are one and the same.We all hold bank shares through our super funds, and these funds have a long-term investment horizon. It’s notjust about flouting regulations for short-term profits anymore.The institutional investors, especially industry super funds, havewoken up to their power to influence corporate policy and are starting to exercise this power on our behalf. When theWestpac story broke late last year, itwas the institutional investorswho worked behind the scenes to get scalps and real consequences in the executive bonuses. The dayswhen executives can still get their bonus despite shocking lapses arewell and truly over. Let’s face it,money talks. And reviewing theWestpac remuneration report suggests that people throughout the organisation are having their feet held to the fire.The days when ‘‘top performers’’ in sales and profits could get awaywith all kinds of compliance breaches are long gone. In July this year, the bank produced a Culture, Governance and Accountability Reassessment Report that outlines a comprehensive transformation program designed to address a non-financial risk culture described as ‘‘immature and reactive’’.This admission is in itself a massive breakthrough and an important step towards reform. The program is indeed a bold one.The cynicswill say this isjust another attempt to paper over the cracks and pacify the prudential regulator.Butmaybe it is different now.We are in an environment where directors and executives have never beenmore accountable. And, at last, shareholders are on the case. Elizabeth Sheedyis abanking riskexpert at the MacquarieBusiness School,Macquarie University. The days when executives can still get their bonus despite shocking lapses are well and truly over.

Subject

Opinion piece on bank governance

 

Period25 Sep 2020

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