HOW MUCH IS ENOUGH?
When ANZ chief executive Mike Smith moved the company’s headquarters out of its home in the historic Gothic tower on the corner of Melbourne’s Queen Street and Collins Street in 2009, he got quite the upgrade.
In the bank’s new premises, a shiny new building in the Docklands precinct, Smith was handed a palatial new office. On the top floor of the building, his new chief executive suite was more than 100 metres square. That made his personal office bigger than most two-bedroom apartments. In fact, it was bigger than many three-bedroom apartments.
The top floor, where other senior executive offices were also located, was highly exclusive. While staff had to swipe a card to gain entry to the building as a whole, they had to have special clearance to enter the floor where the senior managers worked. The new digs were fitted out lavishly. Stone imported from Turkey adorned the boardroom, in which sat a big leather desk with a price tag of half a million dollars.
Smith, who had been appointed ANZ chief executive two years earlier, had joined Australia’s third-largest bank with a sign-on bonus of $9 million. That was in addition to his base salary of $3 million. Bonuses were able to be earned on top of that. Smith’s office was nearly as big as his Toorak mansion, which cost $10 million. The four-bedroom home had a heated in-ground pool and a tennis court, and space for eight cars. This was good, as Smith was a keen collector of vintage Aston Martins.
Under his leadership, between 2007 and 2015, ANZ spent billions on an optimistic expansion into Asia. From Indonesia to China, Japan and South Korea, it wanted a piece of the growing Asian economy.
But the plan proved a failure. Over the period of Smith’s reign, ANZ’s share price fell 6 per cent. Over the last five years of his leadership, it was the worst performing of the major banks on the local share market. Investors rejected his strategy. Still, he became the highest-paid major banking chief executive in Australian history. Over his eight years at ANZ, he took home close to $100 million. As a banker, even if you lost, you still won.
When the bank’s chief financial officer, Shayne Elliott, took over from Smith as CEO, he was told he could move into Smith’s old office. Elliott stood at the threshold of the gargantuan office, the size of half a basketball court, but didn’t want to set foot inside and chose to sit in a smaller office down the corridor. Now, Smith’s old office has been carved down the middle. On each side of the divide is a separate meeting room for all employees to use.
Just as Smith’s luxurious office was dismantled, the edifice of the most powerful corporate titans in Australia was slowly demolished by the royal commission. For an inquiry that began its public hearings in March, it took very little time to careen through the top ranks of Australia’s biggest financial companies. By the time its public hearings had wrapped up in November, sixteen senior executives in those companies had lost their jobs as a direct result of the revelations. Two smaller companies had been shut down, one of them with its financial services licence revoked. And Commissioner Hayne had not even handed down his findings or recommendations.
However, bankers appeared to be insulated from ever being truly punished for their wrongdoing.
As counsel assisting the commission Michael Hodge, QC, tore through the superannuation round of hearings, he made a pointed finding about NAB executive Andrew Hagger.
Hagger had spent hours in the Federal Court defending his failure to tell ASIC the truth about the company’s fees-for-no-service scandal when he’d phoned up ASIC’s Greg Tanzer. ‘Hagger’s description of the call as “open and transparent” is not accurate,’ Hodge said.
A few weeks after his spell in the dock, NAB announced Hagger would be leaving the business. As he drove away from the bank’s headquarters in his Maserati for the last time, he took with him a redundancy payout of up to $796,000. So long, and good luck. It was a nice little package, adding to the more than $20 million he had trousered over his decade at the bank. He had taken home an average of about $2.5 million a year in statutory pay since 2009, including $4.1 million in 2016—the year in which it emerged NAB had fleeced its superannuation members of $35 million in fees charged where no service was provided.
In 2015, NAB had even paid Hagger a one-off ‘retention award’ worth $550,000 that was the only such payment made to the bank’s executives that year. ‘Mr Hagger is important to the business and its transformation in the medium term,’ NAB said at the time.
While Hagger’s nest egg had been well-feathered by NAB, savers in the bank’s MLC-branded super funds for which he was responsible were lucky if they received even remotely the same treatment. NAB’s MLC Super Fund MySuper and MLC Staff MySuper funds were ranked among the worst performing in the country.
It was a humiliating exit for Hagger, but Australia’s tight network of corporate heavyweights managed to sort things out. Just a few months later, iron ore billionaire Andrew ‘Twiggy’ Forrest came to the rescue. Hagger was chosen to run the family’s charitable and commercial activities, known as Minderoo—a group of interests that had the backing of more than $5.5 billion in assets. The former NAB banker would become the inaugural chief executive officer of the Minderoo Foundation, along with running Minderoo’s investment arm.
‘I find hardship and suffering is the shortest road to wisdom,’ said Forrest, whose day job was chairman of Fortescue Metals, one of the world’s largest mining companies. ‘The investment community at large have been really supportive of Andrew who did take a lot of the brunt for the bank on himself,’ the billionaire told the Financial Review. ‘I don’t deny it was a very difficult period for him and I do admire people who come through a very challenging period because they are much richer for their experience as a result.’
Salvation came easy to some.
In late 2015, Matt Comyn, a rising star at Commonwealth Bank, received interesting feedback during a routine review of executive development at the company.
The bank gave feedback to all its senior executives. Comyn was in charge of CBA’s sprawling retail division, which looked after savers, borrowers and mortgages.
However, the recommendations given to Comyn were strange. The banker was told he needed to work on his ‘personal conviction’. It turned out the company believed he had to prove he could manage competing agendas. He needed to pick which battles he wanted to fight if he wanted to make it to the top of the corporate ladder. ‘Calm down’ was the main message he received, Comyn said.
The message was given to Comyn after he revealed his concerns about the sale of insurance products at the bank. CBA was selling thousands of insurance policies to consumers who weren’t able to claim on them, and Comyn had been waging an internal fight against the useless products over the course of 2015 and 2016.
The bank wanted to continue to make the sales. It was making $150 million from the insurance each year.
Comyn visited chief executive Ian Narev to put forward his case as to why the sales should stop. He told his boss the bank was ‘not treating our customers fairly’. Narev insisted it was a ‘very good product’ and at the end of the conversation told Comyn: ‘Temper your sense of justice.’ The young executive came away from the discussion confused, but didn’t stop calling for the insurance products to be overhauled.
A year later Narev promised Comyn he would ask the bank’s chief legal officer to conduct a review of the insurance products. That review never took place.
Comyn couldn’t ask the company’s board of directors to handle the issue. He figured they would just refer it back to Narev, who would ignore it and possibly punish Comyn for raising the issue with the bank’s governing panel over Narev’s head.
Why should Comyn trust the board anyway? More often than not, it seemed to be a protection racket for the company’s profits and the executives who were raking in the most money.
CBA’s board was a collection of a few of Australia’s most successful and influential business executives. When the full extent of the company’s failure to comply with money-laundering laws became clear, questions started being directed to them.
CBA chairman Catherine Livingstone was a lauded figure in the business community. She was both a former president of the Business Council of Australia and the former chair of Telstra. She had also chaired the CSIRO, acted as a director of Macquarie Group and Goodman Fielder, and taken Cochlear to the world as the ear implant maker’s chief executive. There were few more celebrated figures in corporate Australia.
However, when she joined the bank there was no immediately clear sign that she would be holding the company to higher standards of governance.
Company boards have few tools at their disposal to either incentivise or punish their executives other than with the payment or withholding of bonuses. On top of standard ‘base’ salaries, executives are measured against a range of short-term and long-term incentives. The overriding concern is profit. The higher the profit, the bigger the executive bonus. With little else guiding executive behaviour, profits were put before people. And when customers came last, the banks failed to punish executives by taking away their bonuses. In fact, it was highly unusual for a company to do anything but give executives their bonuses, regardless of their behaviour.
As a CBA board director, before she was shortly promoted to chairman, Livingstone signed off on the full suite of bonuses for executives while knowing the lender had failed thousands of times to comply with anti-money-laundering legislation.
It was during the 2016 financial year that CBA had first discovered its failure to send the regulator, AUSTRAC, tens of thousands of transaction reports. Each failure was a breach of the law. Instead of punishing executives, Livingstone decided to sign off on CBA’s 2016 financial year remuneration report, which gave an ‘above target’ strength rating to matters of risk management. This resulted in Narev being awarded $12.3 million. It was also the year during which the bank was under assault over its treatment of life insurance customers.
Dragged before a House of Representatives parliamentary committee in October 2017, Livingstone was taken to account for her actions. ‘Surely it must be the case that the board has manifestly failed in relation to its duty with the remuneration report,’ said the committee chair, Liberal MP David Coleman. ‘You signed off on a remuneration report that found all metrics had been met, and one, that related to risk … was above target … it is very hard to see at a bare minimum that that is not extraordinarily incompetent.’
But Livingstone was not one for budging. ‘On the basis of the facts that the board knew at that time, we made the right determination,’ she responded.
Later, it would become clear that the members of the board had known more than they were letting on. Indeed, documents obtained under freedom of information laws showed the board had been probed for all documents relating to its oversight of the bank’s anti-money-laundering compliance. There was no way CBA was in the dark about its dealings with the regulator, which would eventually lead to a $700 million settlement—the biggest fine in Australian corporate history.
When Livingstone was later put on the stand at the royal commission, she revealed the bank had attempted to recover some of the bonuses it had paid to former CBA chairman David Turner, after concluding that he had overseen a period when the bank had a disregard for prudent behaviour.
After APRA conducted a prudential review of the bank’s failures, CBA asked Turner to give back 40 per cent of the director’s fees paid to him over his last year at the bank—equal to hundreds of thousands of dollars. He did not agree to return any of his fees, and the bank was powerless to do anything else. Turner told another board member that ‘he didn’t recognise, in the APRA report, the CBA board that he knew’.
All in all, the board contended it had a limited knowledge of the compliance issues at the bank, despite this being one of the main reasons a board exists. Since 2011 CBA had never reduced an executive’s short-term bonus for compliance issues unless those issues were publicly aired by the media.
Bankers were fiercely protective of their pay. The 2017 federal budget revealed the lengths to which they would go to protect their salaries.
In early 2017 Treasurer Scott Morrison paid a visit to the UK, where he held discussions with the banking regulator, the Financial Conduct Authority. The UK had been stung by the GFC far more severely than Australia had, and the government had been forced to rescue stranded lenders using taxpayer money to plug the holes in the sinking financial system, which had been created by executive largesse and excess.
When it repaired the sector, the UK government instituted a series of hard-hitting reforms. These included a bank levy, which would tax the biggest banks as a way to both temper their sense of exuberance and collect revenue in case the public ever had to pay for their negligence again. It also created an executive remuneration register, which would keep a portion of banker bonuses until well after the financial year in which they were awarded so it could more easily take back financial rewards if misconduct was later revealed.
When Morrison handed down his budget in May that year, Australia’s banking sector was subjected to local versions of both policies. The banks loudly campaigned against the introduction of the sensible measures.
The major banks—CBA, Westpac, NAB, ANZ and Macquarie Bank—were expected to receive a collective bill in the order of $1 billion a year thanks to the proposed levy. The major bank levy, which applied a 0.06 per cent tax on banks with liabilities in excess of $100 billion, was forecast to rise to a total of $6.2 billion over four years.
Even starting out at $1 billion a year, the banks complained that the levy could undermine the stability of the financial system as a whole. But as they cried poor, they were also helping themselves to a fair amount of revenue just for their own executive pay packets. Those five banks paid a combined $300 million to their small senior executive teams during that financial year, meaning remuneration packages were equal to nearly a third of the estimated $1 billion impact of the government’s new levy. The $300 million went to a total of just sixty-four bankers across the five companies.
CBA had paid its twelve senior executives a total of $52.4 million for the year when it was aware of the AUSTRAC scandal and the life insurance claims-handling debacle. The remuneration paid by Macquarie Group to its twelve-member executive team—more than $120 million that year—was more than twice its expected $50 million tax bill stemming from the levy. Macquarie even pushed a rumour that it was considering options for relocating overseas following the announcement of the bank tax.
The ABA warned that the cost of the levy would be passed on either to customers through higher interest rates, to shareholders by cutting dividends, or to staff by cutting jobs or freezing wages.
In his 2016 book on the financial system, The End of Alchemy, Mervyn King, a former Bank of England governor and renowned British economist, found high banker pay had fallen little since the GFC despite the sizeable economic damage inflicted by the financial system. ‘Many of the examples of high personal remuneration, especially in the form of bonuses, in the financial sector reflect not high productivity but what economists call rent-seeking behaviour,’ he said. This ‘diverts talent from professions where the social returns are high, such as teaching, to those, such as finance, where the private return exceeds, often substantially, the social return.’
Banking is highly lucrative, and as the GFC revealed, it is a government-backed sport. If a bank fails, it is almost guaranteed a bailout. A 2014 study by the International Monetary Fund estimated that the world’s eleven largest banks enjoyed implicit subsidies from governments of US$62 billion a year, some of which might be captured by bankers rather than shareholders.
Kevin Davis, the chief economist from the Australian government’s 2014 Financial Services Inquiry, believes banker remuneration might not fully reflect the value added to the economy by the highly paid workers in the financial sector. ‘Part of the reason for finance sector growth is that there is potentially lots of money to be made by bright people at the expense of others,’ he said.
It wasn’t always like this. In its first year of privatisation in 1997, CBA paid its top twelve executives a combined $6.6 million. By 2017, the twelve highest-paid executives earned almost $32 million, an increase in wages six times bigger than salaries in the rest of the economy over the same period.
Brought before a parliamentary inquiry into the government’s new bank levy, ABA chief executive Anna Bligh was asked about the executive pay bonanza. ‘There was an article in The Australian today that suggested that the big four banks and Macquarie paid a combined $300 million to their small senior executive teams last financial year,’ the committee chair, Liberal senator Jane Hume, said. ‘Does that sound like a reasonable figure to you?’
Bligh, who had attended seeking only to raise the alarm on the government’s big new tax, was wrongfooted by the question and offered a non-answer.
‘It sounds like an awful lot, to have sixty-four employees paid an average of about $4.5 million per employee,’ Hume continued.
Bligh responded: ‘You know that these are very big organisations, and regardless of what you are talking about, they do deal in big numbers. But they are big numbers in and big numbers out.’
Greens senator Peter Whish-Wilson was forced to interject. ‘I think what the chair might be referring to, Ms Bligh, is that perhaps they could absorb the bank levy in their bonuses in the future,’ Whish-Wilson said.
‘I think that is a matter that you might want to put to the individual banks,’ Bligh replied.
While excessive bonuses for bankers may not have seemed like a problem to the bankers themselves, the regulator was deeply concerned. Despite the introduction of laws giving APRA broad new powers to monitor remuneration and sack badly behaved bankers, the sector was not taking heed of the new world.
APRA chairman Wayne Byres told an industry gathering in late 2018 that the Banking Executive Accountability Regime was just one tool to regulate behaviour, and that the sector needed to take more responsibility for punishing rogue bankers. APRA’s own sector-wide review of banker pay had found that while junior bankers and front-line staff faced financial penalties for acting out of line, senior executives in charge of each division were usually ‘insulated’ from the consequences. ‘This must change,’ Byres warned.
The regulator found that big banks were too heavily focused on rewarding executives for return on equity (the amount of profits being paid out to shareholders). Boards also failed to challenge executives who wanted more pay. The oversight of board remuneration committees suffered from ‘insufficient documentation’ given to them by executives.
‘Financial organisations are adept at designing financial incentives for staff to say yes to taking risk—after all, taking risk is how profits are generated,’ Byres said. ‘Far less incentive exists to say no, even when it is the right thing to do for the long-term interests of the company itself. The perception in the community is that in the financial sector, particularly at senior executive level, the carrots are large and the sticks are brittle.
‘It’s no surprise that areas where the financial sector has been dogged by scandal have been areas where the most basic form of incentive—sales or revenue-based rewards—are prevalent: financial advice, broking, mortgage lending, insurance sales, financial markets trading. Not only are rewards generous, but there are seemingly few repercussions for poor outcomes. It’s in the industry’s interests that this perception changes. Without effective accountability, particularly at the highest levels, companies send a message, to both employees and the public, that they are all care and no responsibility. From a prudential perspective, this is a major concern.’
However, it was not just the banks that were hooked on bigger and bigger profits: their shareholders were also demanding fealty to the almighty dollar.
In Australia, shareholders are given the right to say no to the companies they invest in.
Under the two-strikes rule brought in under the Gillard Government, if 25 per cent of investors in a company vote against a board’s remuneration report, a first strike is recorded. The next year, if 25 per cent of investors decide to vote against the company again, a second strike is notched up. This second strike allows a vote on whether to spill all the positions from the board and elect new members. It’s designed to keep companies accountable for how they incentivise their highest-ranking executives. If shareholders disagree with the path a company has taken, they are able to voice their concerns. It’s a small, somewhat tokenistic power given to shareholders to help steer how their money is spent.
The laws were introduced in 2011, but it took until 2016 for them to be put to the test. And the victim of the first strike in Australian corporate history? The Commonwealth Bank of Australia.
It came during a harrowing year for the bank. The CommInsure scandal had blown up in its face and was the second major disaster for the nation’s largest company after the financial planning revelations just two years earlier.
However, shareholders weren’t so upset about these scandals. When 49 per cent of them voted against the bank’s remuneration report in late 2016, it was, curiously, because the bank wasn’t focused enough on its profits.
CBA wanted to introduce a new ‘people and community’ measure to determine 25 per cent of chief executive Ian Narev’s long-term bonus. Another 25 per cent would be tied to measurements of customer satisfaction. The other 50 per cent would be based on total shareholder return, or the profits the company was delivering.
For a bank in the middle of a public relations disaster over how it was putting profits before its customers and the public, it was a head scratcher.
The shareholders weren’t interested in the public. They were only concerned about their financial returns. ‘We want to see the shareholders’ interests being protected by the remuneration committee, and being focused on long-term monetary benefits for shareholders, as opposed to soft measures like diversity and culture,’ Australian Shareholders’ Association representative John Campbell told the bank at its annual general meeting as the shareholders registered the first strike.
Following the slapdown CBA reverted to its old scheme, under which 75 per cent of bonuses were tied to shareholder returns and just 25 per cent to measures of customer satisfaction. Shareholders’ interests had won out.
The victory was short-lived, however. All it would take was a few more scandals for a royal commission to be called, which would cost shareholders dearly. Ironically, they should have been more concerned about the culture in the bank than its short-term profitability.
At the four largest banks, more than half of the $212 million their 150 top managers earned during the 2017 financial year was made up of bonuses. Much of this was tied to long-term and short-term profitability metrics, and that was the way shareholders wanted it to remain.
The problem was not just small retail shareholders, made up of mum-and-dad investors—it was institutional shareholders. These included some of the biggest financial institutions in the world, such as Blackrock, which managed more than $6 trillion in funds, and Vanguard, which had $5 trillion invested in companies across the world. Sovereign wealth funds, which hold untold fortunes, were also in on the act.
NAB chairman Ken Henry, a former Treasury secretary, lamented these shareholders’ focus on financial incentives above all else. He told a business lunch in early 2018 that there was an ‘insufficient appetite’ for including any non-financial metrics as part of the incentive plan for executive remuneration. Financial institutions were forcing the banks to put financial performance before other concerns.
‘A lot of investors in Australia are in a long journey,’ Henry said. ‘Many of them are very close to the starting line on that journey. It’s not just frustrating for boards or other investors, it’s also frustrating for regulators.’
Despite his exasperation, Henry’s hands were not entirely clean.
In 2016, NAB’s board gave senior executives their full bonuses even though board directors were unhappy about a rising tide of breaches that had seen the bank’s compliance audits covered in red ink. During that year the board’s risk committee had heard for the first time about the fees-for-no-service scandal discovered two years earlier by the bank’s executives.
When it was finally time for Henry to sit in the witness box at the royal commission, it took a lot of effort to extract simple answers from him. Counsel assisting the commission Rowena Orr, QC, asked whether he thought if the bank had clamped down on executive pay earlier, ‘issues might have been resolved earlier’.
‘Yes, they might have,’ Henry said. ‘Yes, indeed.’
His admissions came only after lengthy questioning, and didn’t reflect favourably on the former Treasury mandarin. He appeared both flippant and stubborn in the dock. This was a chairman who had been brought to explain how NAB had gone about trying to retain money it had stolen from customers in order for its profits to be larger, despite a long-running regulatory investigation.
When Orr asked if there was any better way to demonstrate to executives that their behaviour was wrong other than cutting their bonuses, Henry answered, ‘Well, we could have fired everybody, I suppose.’
When Orr wondered whether the bank’s engagement with ASIC over the fees-for-no-service issue was appropriate, Henry didn’t want to hold a debate. ‘We’ve been through them,’ he said.
Orr said no, she didn’t believe this was the case. ‘You don’t,’ Henry said. ‘No. No. You wouldn’t.’
Then Orr wanted to know why the scandal hadn’t been reported to the board in 2015, when the rest of the executives already knew.
‘If you’re saying should the chief risk officer have said, well there may have been a breach, OK, fine,’ Henry said. ‘Perhaps.’
For the wider public, it was their first uncut look at Henry, who many only knew as the man who had helped steer the country through the GFC. For others who had worked with him in Treasury, it was the man they were familiar with. A female barrister demanding answers from one of the most powerful men in Australia was a set-up designed to provoke a certain response out of him.
When Orr asked whether Henry should have stepped in and sorted out the scandal earlier, he appeared not to understand the gravitas of what he was being asked. ‘I wish we had, let me put it that way. I wish we had—I still don’t know,’ he said.
This was a royal commission, and Orr demanded a proper answer. ‘I would like you to answer my question, Dr Henry. Do you accept that the board should have stepped in earlier?’ she asked.
‘I have answered the question how I can answer the question,’ he said.
‘I’m sorry, is it a yes or a no, Dr Henry?’
‘I’ve answered the question the way I choose to answer the question.’ ‘Well, I would like you to answer my question. Do you accept that the board should have stepped in earlier?’ ‘
I wish we had.’
‘I’m going to take that as a yes, Dr Henry?’
‘Well, you take that as a yes, all right,’ he said.
It seemed that if you were anointed into the small circle of directors who were privileged to sit atop one of the country’s few financial behemoths, you believed yourself to be invincible. The pay appeared to be commensurate with immortality.
However, slowly but surely the royal commission revealed that there was nothing special about these corporate titans. They were fallible, just like everyone else.
As AMP head of advice Jack Regan walked onto the stand at the Federal Court, the company’s chairman, Catherine Brenner, was half a world away. From her family’s skiing holiday in Japan, she picked up her laptop and tuned into the proceedings.
It was mid-April in 2018, and the royal commission was in its early stages of public hearings. Until that point, Brenner had seemed unstoppable in climbing Sydney’s corporate ladder, but on the laptop she witnessed the beginning of the events that would spell the end of her career.
Within twenty-four hours of Regan finishing up on the stand, Brenner was on a late-night flight from Tokyo back to Sydney. She was drawn back to face her own fate in the wake of the revelations that AMP had charged clients fees where no service had been given, and then had lied to the corporate regulator when ASIC began asking questions.
Brenner’s fingerprints were on many aspects of the scandal. Days later, she would be forced out of the company, and from there, it was a slippery slope for her to be turfed out of her other board commitments. By September, she was gone from the boards of construction giant Boral and Coca-Cola Amatil. All her corporate boltholes were gone.
Brenner had been on the AMP board for eight years in a posting that had brought her into the top ranks of corporate Australia. The former investment banker had enjoyed a meteoric rise with some assistance from her mentor, ANZ chairman David Gonski. She was known as one of the FOGs, or Friends of Gonski. Gonski was also chairman of Coca-Cola, where Brenner would later end up on the board. She had grown close to Gonski when she was appointed to the government’s Takeovers Panel, which ruled on corporate mergers.
At AMP, Brenner’s ambition was such that it unnerved fellow board directors. The company had long been a perennial underperformer on the stock market. Indeed, its shares were a quarter of their value compared to where they had traded at the turn of the millennium. Under pressure from increasingly irritated shareholders, the company launched a review of its chairman, Simon McKeon. He hadn’t been in the post long, and his credentials as the 2011 Australian of the Year—awarded for his charitable work and his stewardship of Monash University, where he was chancellor—didn’t seem to earn him any kudos with a certain faction of his fellow board members. Indeed, Brenner was pressuring her fellow directors to install her as chairman, saying that only she could gear up the company to make more profits, more quickly.
When he became aware of the putsch, McKeon abruptly stepped aside as chairman just two years into the role. If he didn’t have the support of his colleagues, he didn’t want to stay. Brenner was appointed as chairman shortly after, but the promotion would sow the seeds of her demise.
Almost instantly, she went about pressuring the company to take short cuts in the pursuit of profits. She leaked to the media that some institutional shareholders had called for AMP chief executive Craig Meller to be sacked, saying that while she was happy with the group’s current strategy, ‘I just want to get Craig and his team to do it a little bit faster, if possible.’
The problem was that AMP didn’t really have a strategy to earn money in any respectable fashion. Its financial advisers were a continual source of headaches, with dozens forced out of the industry by ASIC over the sale of dodgy advice. Its life insurance business was scandalous, with salespeople cancelling policies and signing customers up to the same product just to earn hefty bonuses in an illegal manoeuvre known as ‘churning’. Its superannuation business was underperforming and only really existed to sell contracts to the other underperforming arms of the AMP conglomerate. Its funds management business was also lousy. Its products would not be recommended by any independent financial adviser because they were instruments used mainly to dupe customers into handing over as many fees as possible.
Any reasonable adviser inside AMP could see the writing on the wall. Soon, hundreds a year would be walking out the door for greener pastures at rival organisations.
When the royal commission published a series of documents outlining the negotiations senior board members were undertaking with ASIC as AMP misled the regulator over its fees-for-no-service scandal, it was clear Brenner would have to go. She tried to hold on. Gonski even reportedly counselled her to defend her position, which had grown to be seen as obviously untenable to anyone outside the circle of her company director friends.
The small pool of Australians chosen to sit at the top of company boards usually look after each other’s backs. According to Bronte Capital founder John Hempton, a meticulous independent investor who helped blow the whistle on widespread fraud at US pharmaceuticals group Valean, the club of corporate directors is more like a cartel than a competitive group of experienced business leaders. With the major companies in Australia steered by just a handful of directors, the situation has become one of ‘You scratch my back, I scratch yours’, Hempton told an ASIC gathering in 2018. Directors on one board will argue for better remuneration, and other boards will follow by pushing up their executives’ pay.
Famous American investor Warren Buffett uses the phrase ‘ratchet, ratchet, bingo’ for directors who sit on various remuneration committees and drive up one another’s salaries. ‘It’s pretty obvious what’s wrong with incestuousness. Incestuousness means the compensation goes up,’ Hempton said. ‘There are directors in this market on four or five boards taking home half a million dollars. Do you really think they want to rock the boat?’
Taking away bankers’ pay is the only way to send a message that their behaviour is not right. Although CBA was slapped with a $700 million penalty for its anti-money-laundering breaches, the bank’s chairman responsible for overseeing governance standards kept all of his pay.
Fines levied against companies are a roundabout way of targeting poor behaviour. More often than not, shareholders or customers are the ones who pay for the penalties. Meanwhile, taking money away from a bank only serves to reduce its regulatory capital, meaning taxpayers will be relied upon more heavily to rescue a lender if it gets into trouble.
Corporations cannot be sent to jail, although individuals can be. Individuals can have their money taken away from them. ‘Referring to “banks”, which are nothing but legal entities with a banking licence, as if they are real things is unhelpful,’ wrote my colleague Adam Creighton. ‘“Banks” are collections of workers in buildings using computers to make and oversee contracts between borrowers and lenders that are enforced by the courts. If we want executives’ behaviour to improve, penalties for poor behaviour need to fall on them.’
For Shayne Elliott, this was a bridge too far. In the dying days of the royal commission, he penned a note to Commissioner Hayne.
In the letter sent on 7 December, just a week before shareholders voted against ANZ’s own bonus plan with a strike against its remuneration report, Elliott warned Hayne against a proposal that banks explain why they make cuts to executive salaries. ‘It will often be difficult to articulate who is responsible for compliance and conduct issues where roles have changed over time, and to fairly represent the position in a communication about remuneration outcomes,’ Elliott said. ‘Executives may be less willing to take on senior roles in banks, particularly in divisions which are perceived to be at greater risk of compliance incidents.’
The banks had long argued that big pay packets were the only way to attract talent at their companies. They were operating in a global environment and wanted to attract the best executives from across the world. Big pay packets to lure bankers away from the US and Europe were a part of that deal.
However, the problems with banking scandals were not unique to Australia. Banks across the globe had failed to comply with the law. In a 2017 speech, Bank of England governor Mark Carney calculated penalties against banks across the globe since the GFC had hit US$320 billion. ‘A series of scandals ranging from mis-selling to manipulation have undermined trust in banking, the financial system and, to some degree, markets themselves,’ Carney said. The ‘crisis of legitimacy’ had left just 20 per cent of British voters believing their banks were well run, compared with 90 per cent in the late 1990s.
When CBA ousted Narev in the wake of the money-laundering scandal, it scoured the globe for a suitable replacement. In the end it settled on Comyn, the executive who was in charge of the division of CBA that had produced the most scandals. ‘The easy answer for us would have been to appoint an external person,’ Livingstone told the royal commission. ‘To find an external person globally at that level who has not been involved in some regulatory event is almost impossible. And I don’t mean that as a joke.’
AMP was also forced to look for a new chief executive when Meller was forced out after the fees-for-no-service scandal. Luckily for the company, it found a global candidate who agreed to come on board. But if AMP wanted to send a message about paying its executives the right incentives, it certainly had a strange strategy. The Asia-based Credit Suisse private investment banker Francesco De Ferrari signed on to the top job with almost $18 million in possible performance bonuses on top of a maximum $8.3 million annual salary. He would win $6 million worth of shares if he got the stock price higher than $5.25 by early 2023. To get over that hurdle would be a herculean task. De Ferrari would need to more than double the company’s share price in just under four years. The pressure to engineer a heroic share price performance would be intense. It was a confusing move for a scandal-ridden company.
De Ferrari was appointed the new boss by AMP’s new chairman, David Murray, who had replaced Brenner. Murray was himself a controversial figure. He had been chief executive of CBA for thirteen years, and was respected in the business community. He was also the inaugural chairman of the country’s sovereign wealth fund, the Future Fund, and had steered the government’s 2014 Financial System Inquiry.
Murray was also known for speaking his mind and shooting from the lip. In 2016 he took a swipe at ASIC’s campaign to improve corporate culture in Australia, labelling it an ‘absolutely impossible’ idea. ‘It’s anti-competitive, it’s inefficient, and to be perfectly candid there have been people in the world who have tried to enforce culture; Adolf Hitler comes to mind,’ he said. He was forced to walk back his Hitler comments a day later, but remained steadfast in his opinion of the corporate watchdog.
Shortly after he was named AMP’s new chairman, Murray gave a speech criticising former ASIC boss Greg Medcraft’s six-year tenure. ASIC was ‘an organisation not focused on its main job, which is to be the cop on the beat in the financial sector’. He was particularly scornful of Medcraft’s enthusiasm for ‘tracker mortgages’, where loan rates followed movements in the Reserve Bank’s cash rate. Medcraft saw the products, which are popular in many overseas jurisdictions, as a way to help restore trust in the banking sector. They would do away with the problem of banks copping flak for withholding the RBA rate cut and failing to pass on the savings to customers.
‘The chairman decided to tell the industry it should have tracker mortgages,’ Murray said. ‘If I was at the Reserve Bank, I’d say “Excuse me, keep out of monetary transmission”. If I was at APRA, I would say “Keep out of credit”.’
It was clear what Murray thought of the regulators. Plus, by the time of his appointment, AMP was being circled by ASIC for potential criminal prosecution over its lies to the regulator during the fees-for-no-service blitz.
It was hefty language for a chairman supposedly responsible for rebuilding the company’s shredded reputation, let alone one negotiating with the regulator over an impending court case. But AMP wasn’t going to simply roll over.
In December 2018, ASIC launched legal action against AMP to force the company to hand over documents related to the fees-for-no-service scandal that the company was claiming were covered by legal professional privilege. These documents went to the heart of exactly what the company’s most senior-ranking executives knew about the scandal, and what they had told Clayton Utz, the independent firm that had been tasked with providing a report on it to ASIC. That report had been doctored beyond recognition by AMP.
Why wouldn’t AMP hand over the documents? After all, most of the executives involved in the scandal had been forced out of the business already—there was no one left to protect. One company source said AMP did not want to make the documents public because after the scandal broke and the company’s share price was smashed to smithereens, five separate class actions had been lodged against AMP. If the documents were made available, there was every certainty it would lose the class actions. Not only would it be humiliating, it would likely affect the bonuses to be paid to the executives who were left.
There’s another Warren Buffett line he likes to tell his followers: ‘You only find out who is swimming naked when the tide goes out.’ AMP had a large financial interest in keeping its misbehaviour as opaque as possible. Transparency would cost it dearly.