Is There a Governance Deficit in Australia’s Largest Banks?

Abstract

2017 was a see-saw year for the largest banks in Australia. On one hand, the major banks, the so-called Four Pillars, yet again reported record annual profits. However, at the end of the year, following a string of banking scandals, the Australian government announced a full-scale Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

As a consequence of the Royal Commission’s findings, which are due to be handed down in early 2019, the boards and senior executives of Australia’s major banks and their regulators will undoubtedly be distracted, during much of 2019, by the final recommendations of the commission and the consequent impact on the collective and individual reputations of their banks. But that too will pass. At some stage, the boards of the largest banks, probably chastened by the experience of the commission, will turn their minds to the future and, in particular, to the strategies that they will need to develop and execute to restore the trust of the Australian public. Business as usual will not be an option!

In preparation for the important discussions that must take place at board level in the banks, this paper takes a step back and, in response to questions raised in the commissioner’s interim report, asks a basic question – are the governance practices of the largest banks in Australia suited to undertaking this enormous task? But how to begin to answer such a fundamental question?

Following a discussion of the concept of corporate governance, this paper compares the most basic governance structures of the largest Australian banks against those of the largest Canadian banks, arguing that valuable comparisons can be made by comparing the two banking systems. Using the latest annual reports and regulatory filings for the nine banks, the paper compares the compositions of the two sets of boards.

The paper finds that there is a discernible deficit in governance structures, in particular board composition (i.e. size and experience) in Australian banks as compared to their Canadian counterparts. While such a deficit cannot, without further research, be linked directly to the governance failures being aired at the Royal Commission, it is argued here that, to reduce systemic risk, addressing any deficits in governance structures will be essential to undertaking the arduous work of restructuring the Australian banking sector, post-Royal Commission.

Note: This paper was formally submitted to the Royal Commission in response to the Commissioner’s request for industry perspectives on this specific question.

Keywords: Corporate Governance, Governance Deficit, Systemically Important Banks, Australian Banks, Royal Commission into Misconduct, Canadian Banks

JEL Classification: M14