When then Treasurer Scott Morrison reviewed the Australian Prudential Regulation Authority’s (APRA) recently released final report of the Prudential Enquiry into the Commonwealth Bank of Australia (CBA), he was quick to describe it as “required reading” for all board members in Australia.
The report looked into governance, culture and accountability within CBA in the wake of incidents such as the AUSTRAC anti-money laundering proceedings and made 35 recommendations, all of which CBA has committed to implementing.
The Treasurer was right. It’s a compelling if hefty read. My perusal highlighted just three key areas directors would do well to focus their attention on: tell it like it is, warts and all; always question whether the decision you’re to make is not only legal but ethical and fair; and remember the value of non-financial performance metrics.
The first area reminds us that we need to be cognisant of management’s human tendency to overemphasise the positives while downplaying any negatives – and in CBA’s case, the gravitas and particular eminence of two key individuals, including a former chief risk officer, tended to stifle debate.
It is not unusual for inequality in the power base to have some individuals feeling unfit to question the actions or views of the supposed gurus but there is a simple remedy I have found most effective. Get the CEO and other senior executives to open their reports to the board by sharing what they believe was the worst news for the organisation over the past month before moving to the good stuff.
A word of caution, though: this needs to take place in a ‘we’re all in this together’ environment that seeks solutions rather than reasons to castigate.
The second area demands that boards need to be as deeply concerned with the fairness of their actions and decisions as they are with their legality.
Governance Matters has developed what we call the 7F Model of key questions to consider before a major decision is made: Does the proposal Fit with the organisation’s strategy and purpose; Future: will it last and does the environment want it into the future; Feasible: can we do this; Fast track: is there a project plan to implement; Fathomable: do I understand the proposal; Facts: do I have all the information I need to decide and, perhaps, most importantly: Fair, what will this do to the organisation’s reputation?
Finally, the common thread throughout the APRA report tells us there is a gulf between the board’s astuteness in handling financial risk and its shortcomings when evaluating non-financial risk. I’m sure this is because there are so many metrics around financials that we all spend an inordinate amount of time studying these tangible and measurable numbers.
Our challenge is to convert non-financial risks into similar metrics, where elements such as customer satisfaction ratings and complaints receive comparable scrutiny. And complaints need to be ranked according to severity and treated accordingly.
If nothing more than these three areas were ingrained in the CBA’s internal culture, the chances are the entire story would have been so much different.
Until next time,