At the Financial Services Royal Commission, both the CEO of CBA, Matt Comyn, and the Chair, Catherine Livingstone, strongly criticised their predecessors. Ms Livingstone said there was a misplaced confidence by the board, where directors held brief meetings and failed to ask for additional reports. She cleaned out management, including CEO Ian Narev, and built a fresh board. When Matt Comyn was asked whether CBA’s previous leaders had been the right people for the job, he replied, “No”.
On 21 and 22 November 2018, the Australian Financial Review reported:
“In July 2011, it was announced that the 44-year-old Narev would become the bank’s next CEO. In turn, Narev proceeded to hire highly intelligent, well-educated and extremely ambitious young people from outside the CBA to fill the bank’s top executive positions, although he did appoint one of the CBA’s young rising stars – Matt Comyn – as head of the bank’s vitally important retail banking operations.
“Unlike previous CBA chiefs, they noted, he encouraged his team to work together, rather than adopting the divide and rule approach. But this emphasis on harmony meant that Narev was uncomfortable arbitrating on the inevitable conflicts that arose between the bank’s different business units, and found it even more difficult to punish members of his executive team when they failed to deliver.”
Then quoting from a source who asked not to be identified, the AFR reported:
“The insider said Narev’s lack of operational experience and his lack of inquisitiveness meant that he delegated responsibility for operational issues to others. Also, he was unwilling to sack people who had not performed.”
“Ian was a great delegator of authority. His go-in stance was: if I ask you to do something I expect you to do it. He was not afraid to challenge you and he was always open for you to come to him with problems.”
“Overconfidence, bred from financial success, meant that serious gaps in CBA’s controls for non-financial risks were overlooked.”
Insights from Garry Mackrell
I was a member of Commonwealth Bank’s Executive Committee (Exco) for 13 years until 2010. My roles included Head of Strategy and Head of International. I retired a year before Ralph Norris finished as CEO and before David Turner became Chairman, so I did not see Ian Narev in the top job first-hand. However, I was an ASB Board member alongside Ian Narev and Ross McEwan (the other candidate for the CEO role) and I saw many Board and Exco interactions, including observing the up-and-coming Matt Comyn.
I can say with absolute certainty that all are people of honesty, integrity and good character. But given the revelations of the Royal Commission, what went wrong?
Expectations change over time
I am sure that in hindsight, different decisions could have been made, but CEOs and boards make decisions at the time that others are not empowered to make. The lens they look through changes over time. What was right and proper years ago may look wrong today.
I am constantly amused by the so-called experts denigrating CBA’s ‘toxic’ culture. Few of these experts with loud opinions have worked at the top of a large public company. I think the stuff about culture is mostly rubbish.
I worked for six CEOs and as many chairs, and served on innumerable boards in eight countries. The people I worked with all had different personalities, styles, strengths and weaknesses. And for half my career at CBA, it was government-owned before it became a public company in 2001 with David Murray as the first CEO.
I believe the law of unintended consequences came into play.
Adjustments in responsibilities and accountabilities
Regulators were concerned about the potential for bank CEOs to have too much power, so they wanted heads of departments of Risk, Audit and Finance to be more directly accountable to boards. This led to a weakening of the power of business units as risk and compliance responsibilities were increasingly centralised in head office. The centre became all-powerful and lines of businesses increasingly fragmented. Decision-making was more and more bureaucratic. Inadvertently, operational risk in front office and business lines became much larger than management realised. Problems in the trenches and running up and across business lines got lost in the maze. The understanding of the business drivers of Wholesale Markets, SME, Retail, Wealth and Insurance were weakened by the overly-centralised function.
In my view, the fundamental issues in recent years were that the Chief Financial Officer (David Craig) and the Chief Risk Officer (Alden Toevs) assumed too much power in the APRA-sanctioned model. Craig and Toevs were both technically strong but in their middle-level management, there was a narrower field of knowledge lacking experience in operational matters across all activities. In particular, when the Basle 3 rules came in, capital attribution became incredibly complex. The application to credit and market risk was mostly appropriate, but operational risk models had little precedent and were underestimated. This has since proven to be a far more significant risk than expected, as shown by the Royal Commission and earlier events.
Finally, business divisions and head office functions became silos. The general trend to specialisation and centralisation meant that the career bankers of old, many of whom started in branches and became cadets and therefore moved around the organisation as they moved up, no longer existed in senior positions. Many of these long-term career bankers had come from interstate and regional areas with real world experience (does this sound familiar re current political shortcomings?).
Most new senior executives (other than Matt Comyn) came from outside the bank, often straight into senior roles, with little practical understanding of either front-line operations or adjacent business lines. They couldn’t and didn’t know what was going on further down the line, or more critically across the chain, and didn’t know what questions to ask and what to look for.
With increasing numbers of senior external appointments, company loyalty becomes largely irrelevant. We used to share stories of past legendary leaders and what they instilled in the troops. This was replaced by financial reward and a focus on the next career move. It doesn’t engender teamwork and a focus on customer service and efficiency.
The experts who call for outside appointments to change the toxic culture have it the wrong way around. Apart from Matt Comyn, I don’t think any senior leader really has had a career in the current CBA in the fullest sense, unlike most of the risk managers of previous decades.
Different CEOs, different styles
David Murray’s style was ‘presidential’ in that division heads ran fiefdoms and fought for their own corner. Decisions were made on the basis that they argued for their department and he would decide. At AMP, he will certainly be analytical and strategic, forget soft and fluffy.
Ralph Norris did not like the fiefdoms and ran a more collegiate process. We discussed the issues and argued our case and then he would decide. Once he decided, that was it, there was no trying to renegotiate.
The common claim under Ian Narev that there was not enough challenge and CBA became too collegiate, was in my view, because the executives did not know what to ask.
It was a complete contrast to the senior committee brawls that happened in the Murray and Norris eras. We knew a lot about the other businesses and we were not afraid of confrontation. We spoke with knowledge and experience.
Remuneration and market disclosure
When disclosure of senior executive salaries became mandatory, the then Chairman John Ralph said this would not end well. It would lead to endless upgrades in packages as egos and entities fought for their key talent in the public domain, much like international soccer players of today.
The Royal Commission seems to believe that bank staff should not get bonuses and only earn a fixed salary. When I first joined CBA, there were no bonuses and we received a promotion if we did well. Pay levels were below competitors and we were called the Commonwealth Training Bank. If a salary-only rule is introduced for banks, the plodding bureaucrats will stay and the smart, ambitious people will go elsewhere including overseas. If society wants innovation and competition in banking, the salaried model is not going to fly. I also note that if lawyers do well and work hard, they eventually become partners and share in the overall profits of the firm.
Related to this was the move to quarterly financial upgrades. Markets became fixated with short termism and this has fed into a constant focus on meeting or exceeding budget as opposed to longer-term value creation. It is especially so in Australian banks where dividends are more important than capital growth, particularly when relevant capital gains taxes and dividend imputation are factored in.
Colonial First State and vertical integration
There has been a lot of uninformed tosh written about the CBA’s supposed suboptimal misadventures in vertically-integrated businesses. Clearly, a lot of time and water has passed under the bridge since the Colonial acquisition and many lessons have been learned, both positive and negative.
The strategic considerations behind acquiring the Colonial Group were several.
One tactical element was that, while the Four Pillars policy remained set in stone, bank growth was constrained. CBA had suboptimal market positions in life insurance and superannuation, and mandatory super was threatening to move domestic savings from bank deposits to wealth products.
Moreover, as a scale intermediary with nearly half the retail customer base of Australia, it was critical that CBA stay at the epicentre of emerging product flows (including on and off bank balance sheet items and derivatives) in both wholesale and retail markets.
This extended to origination but more particularly distribution of equities arising from the privatisation and demutualisation of businesses. A broad retail customer base for the first time was investing in equities, which led to the launch of CommSec.
The Colonial acquisition came in three parts. First, the cost extraction synergies of Colonial State Bank paid for the entire deal within three years. Second, asset manager Colonial First State was destined to grow at a multiple of general asset formation. But third, insurance was a mess, and if CBA had its time again, it should have offloaded the insurance group immediately, rather than spending an enormous effort trying to clean up myriad legacy systems, etc.
I am convinced that Colonial First State remains a valuable growth business. The demerger will be fascinating to watch. The differences and contrasting legal obligations of banking versus wealth will always be a challenge but the fiduciary and other conflicts of interest can be solved. There is too much value along the value chain to meekly fold the tents to political correctness that vertically-integrated businesses are bad.
Open markets should foster, not inhibit, strategic choices, while operating in regulatory frameworks which seek to balance system safety and transparency. If the lawyers’ picnic results in legislated fire walls and caveat seller not buyer, the limited market that is Australia will revert back to small, undercapitalised risk-averse players. Most will lack the capital to withstand major exogenous shocks or the wit or will to compete in offshore markets.
On financial advice, the end result of the Royal Commission’s headline seeking will ultimately be a critical shortage of people willing and able to provide advice backed by capital. The losers will be the Australian public, the opposite result to what the politicians claim is their objective. Moreover, those independent adviser groups left in the game will be under pressure to make a living. If the Commission insists on removing trailing commissions, few advisers will be interested in serving customers over the term of their investments. They also will not have the capital to compensate customers when things go wrong, as they often do.
With Labor also targeting SMSFs via the franking policy and proposing to increase capital gains tax, ordinary individuals will be even more uncertain what they should be doing, other than becoming dependent on handouts.
Mistakes are inevitable but some are unacceptable
I can excuse lots of stuff-ups like charging dead customers and the outdated actuarial tables, and I personally think the CBA-related BBSW arguments are a try-on. Every day, the rate set results in wins and losses even if the dealers try to boost their book profit, but no retail customer was ever remotely affected.
The aspect that I find inexcusable, because it tells me the people didn’t know what they were doing or monitoring, was the $20,000 cash transactions and money laundering mess. It says the approval process, the systems monitoring, the reporting and the follow ups were done by incompetents who didn’t understand what they were doing. Again, as to delineation and spans of responsibilities, under David Murray, more authority was held by the business units. Under Ralph and Ian, it became more centralised in Finance and Risk under stipulation by APRA. The business process chains were increasingly sliced and diced.
The danger of mandated social objectives in business
There are moves in banking regulations to incorporate social objectives into formal governance and company legislation. The drafts I have seen dealing with company objectives do not mention shareholder value. I can say with absolute certainty that requiring companies to commit to a long list of essentially conflicting or non-quantifiable social objectives will end in tears for everybody.
When a business has multiple objectives, some are inevitably conflicting, and the likelihood is much greater that they will fail at least some and probably ALL those objectives. The problem with the so-called social licence is it becomes a vehicle for some minority in society to impose their views on others through legalistic artifices, drifting further and further into a rules-based framework. Business and economic progress gets highjacked by politicised leaders who impose their ideology by rules.
A listed entity must balance customer service, efficiency and sustained long-term shareholder value. How they achieve it should blend in social and community aspects, but essentially it is about giving customers better products and services supported by good people, technology and capital. Governments can take post facto (i.e. from the owners of the company), a share of the economic surplus generated to support those in need, public safety, border security etc.
I started out in life believing in socialist-type ideals. I am ending life after observing closely many countries’ political systems. The best outcomes require the rule of law, freedom of expression and freedom of markets in which the forces of creative and destructive capitalism are allowed to play out. This must occur within level playing fields laid out by government, a strong central tax system to protect the weakest in society and strong institutions to defend against economic and political power becoming too concentrated. These are great achievements for a society and must be fought for.
Garry Mackrell worked at CBA from 1973 to 2010, including 13 years on the Executive Committee and head of various departments. He was Graham Hand’s boss for two years in Investment & Economic Research Department. This is his personal reflection after a long career at the top of Australian banking.