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Are Australian bank boards fit for purpose?

Australian banks have certainly taken criticism over the last couple of years, much of it deserved and some of it produced for the pleasure of the media. Banks have been in a never-ending cycle of public-attested mistakes. While culture and greed are often cited, I doubt this is really the case.

One area worth exploring is whether banks have the right management and governance experience for the modern business environment. This is not a question of a director’s ‘smarts’ but rather if traditional experiences are still as relevant.

Most recent bank losses have little to do with lending losses. They have been operational failures.

CBA copped a $700 million dollar fine for its “software error” causing breaches with AUSTRAC’s anti-money laundering (AML) rules.

Westpac lost its CEO and Chairman due to AML failures on small international transactions in what AUSTRAC said was due to a lack of "appropriate IT systems and automated solutions”.

In many respects, a cold analysis of banking governance suggests the above examples were accidents waiting to occur.

First, the good news. When running a heatmap over the skills of bank directors, they rate well in the core skills of ‘Risk and Audit’, ‘Economic and Financial Theory’, ‘Accounting’, ‘Industry Expertise’ and holding responsibilities in ‘Large Commercial Business’.

But times are changing at an ever-increasing pace. The required skills from a director ten years ago are not those required today. Banks now resemble huge digital machines run at high speed sitting on top of large capital bases. Staff numbers are continually cut and those remaining have more diverse and larger responsibilities.

Unfortunately, many bank directors lack some really important business experience. They don’t understand technology, they don’t have operations skills and they are light on human resource experience. These skills are thought to exist because they may have held senior roles like a CEO of a large company.

The reality is you need hands-on experience and scar tissue from being deeply involved in technology and operations to know where the subtle but real risks exist.

Technology is moving under our feet as it evolves and living with these new risks and ambiguity can only be learnt on the front line. Being a ‘good people manager’ will only give a partial credit for these complex skills.

When we look at these new skill requirements our directors are coming up short.

This second table clearly shows that banks could materially improve the diversity of skills on a board. Historically, many would argue that these skills are of second order. Directors need to know how to run big companies with large staff numbers.

But that is no longer the case. Knowing how to run technology is perhaps even more important in avoiding a scandal that makes the front page of the Australian Financial Review than in driving commercial success.

 

Donald Hellyer is Director of OpenDirector and CEO of the development company BigFuture.

 

4 Comments
Sandi
March 07, 2020

Taking the skills matrix to the next level - very useful tool.
It also adds to discussion of role of the Board and the Executive in the business management...
If Technology or HR are specific skills that are not represented on the Bank Board and they should be - not sure how a HR professional or CTO/CIO will actually get invited to join these Boards against current criteria.

Steve
March 07, 2020

Of greater concern is that the banks have become the political punching bags of the Industry Super funds. Given their recent run of mergers, they are slowly evolving into 4 pillars themselves & with close to 1 trillion in FUM & fast growing, are becoming far too powerful. Perhaps the Fed Govt should introduce anti-trust legislation to prevent them controlling Bank Boards, or any other publicly listed company.

Jonathan
March 04, 2020

Thanks Donald - another overlooked skill for bank boards is credit assessment. Insolvent banks are almost always brought down by bad lending, but few (usually none) of the directors understand how to lend money. It's like a retailer (Coles, Woolworths or Myer) having no one with retail experience on their board - it would seem an obvious oversight. Banks are very large beasts requiring a wide range of skills to be managed correctly.

Donald Hellyer
March 04, 2020

Agreed Jonathan, it just that recent losses in the banking sector have been tech related. I am sure lending losses will return again!!

 

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