The Key Code and Advanced Handbook for the Governance and Supervision of Banks in Australia Volume 2

This Key Code and Handbook examines the corporate governance and accountability of Major Banks, their directors and executives which were the central focus of bank, Supervisor, Regulator and governmental activity and public scrutiny in 2018 and 2019. This book explores this responsibility focus by providing evidence from the Global Financial Crisis and beyond with both APRA and ASIC investigating illegal conduct, misconduct and conduct which was below the level of community expectations. This book discusses how the Royal Commission into misconduct in the banking and financial services industry has already given rise to a detailed Final Report whose recommendations are still being put into effect. Further, this book uses evidence provided by the large number of Prudential Standards issued by APRA and investigations into the conduct of Major Banks by Regulators. This book explores governance variables – over 1,700 in number and grouped into 159 ‘key groupings'or separate categories – which are all indexed to 28 governmental, regulatory and supervisory reports and documents to create a governance code and commentary specifically tailored to Australian banks. Each governance variable is modelled on the Stage 1 Relational Approach contained in Enhancing Firm Sustainability Through Governance. Given the huge interest in the governance of banks, Parts 1 and 2 – explaining the Relational Approach - of Stage 1 were recently published in November 2018 and June 2019 in the Australian Journal of Corporate Law. This book is the largest reference book and handbook in publication worldwide containing the structures, mechanisms, processes and protocols – the checks and balances we call ‘governance variables'– that deeply addresses and explains banking accountability and regulation in Australia. The Key Code and Advanced Handbook for the Governance and Supervision of Banks in Australia Preface Tables Stage 1 Relational Corporate Governance Approach Model Table of Statutes Table of Stage 2 Government, Supervisory/Regulatory, Major Bank and Industry Body Reports, Codes, Rules and Publications Contents Part I: Governance of Banks in the GFC and Beyond Key Field No 5 (Part 1): Introduction to the Relational Corporate Governance Model, Key Code and Advanced Handbook Chapter 1: Aims and Approach to Examining the Governance of Banks in the Global Financial Crisis and Beyond to the Australian Banking Royal Commission Inquiry into Banking Misconduct in Stage 2 1.1 The ‘Bank-Specific’ Stage 2 Relational Corporate Governance Approach and Model Is a ‘Key Code’ and ‘Advanced Handbook’ 1.2 Stage 2 Government, Regulatory, Bank and Industry Body Reports and Publications 1.3 ‘Core’ and ‘Emerging’ Themes 1.4 Non-Financial Risk Definitions and Major Risk Classes 1.5 ‘Key Groupings’ of Governance Variables for ‘Accountability Mapping’ 1.6 Aims of Parts 1 and 2 Chapter 2: The Theoretical and Operational Parts of the Stage 1 Relational Approach and Model 2.1 The Conceptual/Theoretical Components of the Relational Model and How They Are Used in Practice 2.2 The ‘Three Relational Axes of Good Governance’ 2.3 Governance Variables (Also Part of the Operation of the Stage 1 Model Below) 2.4 Governance Factors Chapter 3: Determining the Effects of Governance Variables in the Relational Approach 3.1 Shareholder-Primacy Interrelationship Scheme 3.2 Operational or Practical Use of the Stage 1 Model – How to Determine/Predict the Effect of the Governance Variables in Affecting Firm Value/Share Price and Operating Performance/Profit 3.3 ‘Relational Effect Path’ of Each Governance Variable 3.4 The Coverage Table (Table 3.1 in the Stage 1 Model) 3.5 The Relational Proximity Table (Table 3.2 in the Stage 1 Model) 3.6 The ‘Spine’ of Relational Effect Paths and the Comparator Variable: [BrdSkills] (+) – Board – Skills ‘Mix’ 3.7 [TransTimeMon] (+) – Transparency and Timing of Reporting – Monitoring Effect 3.8 Introduction to the Chap. 4 User Guide and Chap. 5 Quick-Reference Guide Chapter 4: Key Code and Advanced Handbook User Guide 4.1 Using the Stage 2 Key Code and Advanced Handbook for the Governance ‘Mapping’ or Reviewing of an Australian Major Bank 4.2 How Do We Determine the Relative Strength of a Governance Variable? 4.3 Using Table 10.2 – How Do We Determine the Coverage/Rating of a Stage 2 Bank-Specific Variable? 4.4 Variable, Source, Abbreviation and Key Grouping 4.5 Stage 1 ‘Key’ or ‘Core’ Variable 4.6 Target or Hypothesised Coverage/Rating 4.7 “Mapping” the Bank – How Do We Determine the Existence of a Governance Variable in the Bank and Then Verify it is Performing or Behaving as Predicted or Contemplated by the Model? 4.8 Some User Guide ‘Rules of Thumb’ 4.9 ‘Board Skills’ Key/Core Variable 4.10 The ‘Compensation and Incentive’ Key/Core Variables 4.11 Non-executive/Independent Directors 4.12 Reporting, Information Flows and Escalation of ‘Red Flags’ Chapter 5: Quick-Reference Guide Part II: Governance of Banks in the GFC and Beyond Key Field No 5 (Part 2): The Challenge for Relational Governance Variables for Australian Banks Chapter 6: Key Questions and Core Failures in Bank Governance 6.1 The Key Questions for the Governance of Banks in the GFC and Beyond to the Australian Banking Royal Commission Inquiry into Banking Misconduct 6.2 ‘Core’ Areas of Corporate Governance Failures from Banks in the GFC and Beyond 6.3 Securitisation of Mortgage-Backed Securities 6.4 Multiple Failures in Governance Variables in Banks During the GFC 6.5 Overview of Multiple Governance Failures in Banks 6.6 Failures Identified in Commentator Studies and Governmental and Market Participant Reports Chapter 7: Distinguishing Features of Banks for the Relational Approach 7.1 Similarities and Differences with the Enron Collapse 7.2 Maturity of Debt, Liquidity, Leverage and the Interconnectedness of Banks 7.3 Deposit Insurance, Government Bailout and Risk-Taking 7.4 Systemic Risk 7.5 Conflicts of Interest 7.6 Perceived Weaknesses in Governance Codes 7.7 Summary – Governance Variables for Distinguishing Features and Bank Regulation Are Needed Chapter 8: Maximising the ‘Default Standard’ of Shareholder Value 8.1 Should the Shareholder Wealth-Maximisation Principle Apply to Banks and Financial Firms? 8.2 The Market for Corporate Control May Be Weaker 8.3 The Shareholder Wealth-Maximisation Principle and the Short-Term Share Price 8.4 Did the Shareholder Wealth-Maximization Principle Exacerbate the Severity of the Financial Crisis? Chapter 9: Overview of Stage 2 Bank-Specific Key Code and Advanced Handbook for Australian Banks 9.1 Overview of the Relational Corporate Governance Approach and Model in Stage 2 9.2 Introduction to Bank-Specific Stage 2 Key Code and Advanced Handbook Chapters for Australian Banks Part III: Governance of Banks in the GFC and Beyond Key Field No 5 (Part 3): Bank-Specific Coverage and Relational Proximity Rating Results for Australian Banks Chapter 10: Existing Stage 1 and New Stage 2 Bank-Specific Relational Corporate Governance Variables for Australian Banks 10.1 Bank-Specific Governance Reports and Pronouncements 10.2 The Key Code – The Bank Combined Coverage and Relational Proximity Table 10.2 Displays the Target or Hypothesised Coverage and Relational Proximity Rating Part IV: Governance of Banks in the GFC and Beyond Key Field No. 5 (Part 4): Issues in Executive Compensation and Accountability – Incentives, Bonuses, Equity and Option Compensation and the BEAR Chapter 11: Approach and Structure of Part 4 Has a Risk-Taking Focus 11.1 Introduction to Incentives, Option-Based and Equity-Based Pay and Risk-Taking by Banks 11.2 Review – Compensation Governance Variables from Stage 1 11.3 Variable Performance-Based Pay and Deposit Insurance Increase Moral Hazard and Risk-Taking 11.4 Variable Option Compensation in Combination with Limited Liability Increases Risk-Taking 11.5 Variable Pay Combined with Short-Term Profit Results and Reporting Increased Risk-Taking 11.6 Summary of Studies and New Governance Variables for Variable Performance-Based Compensation and Bank Risk-Taking 11.7 Variable Compensation, Deposit Insurance and Government Bailout 11.8 Variable Compensation and Limited Liability 11.9 Variable Pay and Short-Term Profit Results and Reporting Chapter 12: Government and Market Reform Report Recommendations for Compensation or Remiuneration 12.1 Walker Review 2009 Recommendations 12.2 OECD Key Findings 2009 and Absence of Pay for Performance 12.3 Moody’s Challenges for Executive Compensation 12.4 Existing Compensation Variables from Stage 1 12.5 Compensation Committee and High End Employees – Risk ‘Alignment’ Effect and Risk ‘Failure’ Effect of Equity and Options – Relational Effect Paths 12.6 Governance Variables for Compensation/Remuneration Committee Composition, Functions and Policies in the ASX Principles and Recommendations, APRA’s Revised Draft CPS 511, the Walker Review 2009, APRA Final Report and the 12.7 Governance Variables for Compensation/Remuneration Committee Functions and Policies in OECD Key Findings 2009 12.8 Governance Variables for Compensation/Remuneration Committee Functions and Policies in the OECD 2010 Conclusions and Practices 12.9 IIF Risk-Based Incentive Principles 12.10 Long-Term Profitability Adjusted for Cost of Capital 12.11 Risk-Taking and Risk Appetite 12.12 Adjustments for the ‘risk time horizon’ 12.13 Adjustments for Organization as a Whole and Firm-Wide Profit 12.14 Severance Pay 12.15 Transparency and Disclosure 12.16 IIF Examples of Risk-Adjusted Compensation and Incentives 12.17 Disclosure of Bands and Elements of Compensation for Executives and High End Employees 12.18 Restrictions, Delay, Lock-Up, Deferral and Clawback of Incentive Payments – Relational Effect Path 12.19 Failure to Adjust Pay Bonuses for Risks Incurred for Low Level Employees 12.20 Required Minimum Shareholdings of Executive Board Members, Executives and High End Employees Including Vesting Arrangements 12.21 Formal Code of Conduct for Remuneration Consultants Including Use of the Code by Remuneration Committee to Engage Advisers 12.22 Incentive Payments and Bonuses to Be Calculated by Economic Profit Not Revenue 12.23 Remuneration Design Adjustments for the firm’s Risk Appetite, Cost of Capital and Liquidity Risk 12.24 Adjusting Pay Benchmarks for Risk 12.25 Remuneration and Breaches of Company Risk Appetite Limits, Internal Procedures and Legal Requirements Chapter 13: FSB Principles for Sound Compensation Practices (FSBP) and FSB Implementation Standards (FSBIS) 13.1 FSB Principles and Standards 1–3 for Effective Governance of Compensation 13.2 FSB Principles and Standards 4–7 for Effective Alignment of Compensation with Prudent Risk-Taking 13.3 FSB Principles and Standards 8–9 for Effective Oversight and Engagement by Stakeholders 13.4 FSB Implementation Standards (FSBIS) Chapter 14: NAB Self-Assessment 2018 Recommendations and Commentary on Remuneration 14.1 NAB Remuneration Framework – Fixed and Variable Remuneration 14.2 NAB Remuneration Framework – Consequence Management 14.3 NAB Board Oversight of Remuneration Practices 14.4 NAB Remuneration Governance Model 14.5 NAB Assessment of Risk and Conduct Within the Remuneration Framework 14.6 NAB Application of Remuneration Consequence Chapter 15: Westpac Review Team 2018 Recommendations and Commentary on Remuneration 15.1 Westpac’s Remuneration Approach – Fixed and Variable Remuneration 15.2 Westpac’s Risk Gates for Short Term Variable Reward 15.3 Westpac’s Risk Adjustments for Short Term Variable Reward 15.4 Westpac’s Navigation and Consistency of Frameworks and Policies 15.5 Westpac’s Use of Malus Provisions 15.6 Westpac’s Deferral of Variable Reward 15.7 Westpac’s Implementation of Sedgwick Recommendations 15.8 Westpac’s Non-remuneration Components of Consequence Management 15.9 Westpac’s Factors that Inform Accountability Outcomes Chapter 16: Shareholder Value Maximisation in Banks and Financial Firms 16.1 Traditional Governance Variables Maximise the Share Price 16.2 Shareholder Value-Maximisation and Ownership Structure – Incentive Equity Holdings/Plans of Directors and Officers 16.3 Shareholdings of Lower-Level Management Predict Bank Failure 16.4 Owner-Control Predicts Bank Failure Due to Increased Risk-Taking 16.5 Risk Preference of Bank Management and Shareholders May Diverge 16.6 Substantial Equity Ownership Not Aligned Where Holding Positions Are Short-Term 16.7 “Inside Debt” Compensation Reduces Risk-Taking Chapter 17: Additional Compensation/Remuneration Committee Considerations 17.1 Chairperson Pay and Non-executive Director Pay Differentials 17.2 Enhanced Disclosure of Pay Not Linked to Performance and Exceptional Commencement/Termination/Pension Arrangements – ‘Golden Hellos’ and ‘Golden Parachutes’ 17.3 Disclosure Obligation for ‘Enhanced Benefits’ 17.4 Compensation Component of ‘Enhanced Benefits’ Chapter 18: Compensation Practices for Misconduct Risk 18.1 Supplementary Guidance to the FSB Principles and Standards on Sound Compensation Practices – The Use of Compensation Tools to Address Misconduct Risk (‘FSBSupp’) Chapter 19: FSRC Final Report Commentary and Recommendations in Relation to Remuneration 19.1 FSRC Recommendations and Commentary on Executive Remuneration 19.2 FSRC Recommendations and Commentary on Issues of Implementation 19.3 ‘Front-Line’ or ‘Customer-Facing’ Staff Remuneration Chapter 20: The BEAR – Bank Executive Accountability Regime – And APRA’S Non-Financial Risk Accountabilities 20.1 ADIs and Accountable Persons 20.1.1 ADIs 20.1.2 Obligations of an Accountable Person 20.1.3 Governance Variables for Obligations of an ADI and Accountable Persons 20.2 BEAR Accountability Obligations of an ADI and an Accountable Person 20.2.1 Governance Variables for Accountability Obligations 20.2.2 Reasonable Steps 20.3 Key Personnel Obligations of an ADI 20.3.1 Governance Variables for Key Personnel Obligations 20.4 Deferred Remuneration Obligations of an ADI and Governance Variables 20.4.1 The Deferred Remuneration Obligation 20.4.2 Section 37EA – Meaning of Variable Remuneration 20.4.3 Section 37EB – Minimum Amount of Variable Remuneration 20.4.4 Section 37EC – Minimum Period of Deferral 20.5 Section 37F – Notification Obligations of an ADI and Governance Variables 20.5.1 Accountability Statement 20.5.2 Accountability Map 20.5.3 Section 37FC – Types of Events for Which APRA Must Be Notified 20.6 Section 37G – Pecuniary Penalty for Non-compliance with the BEAR 20.6.1 Section 37G – Pecuniary Penalty 20.6.2 Prudential Matters 20.6.3 Resolution 20.7 Registration of Accountable Persons 20.7.1 Section 37H – Register of Accountable Persons 20.7.2 Section 37HA – Registration as an Accountable Person 20.8 Disqualification of Accountable Persons 20.8.1 Section 37J – Disqualification by APRA 20.8.2 Section 37JA – APRA May Vary or Revoke a Disqualification 20.8.3 Section 37JC – Allowing a Person Disqualified by APRA to Act as an Accountable Person 20.8.4 Section 37KA – Indemnifying ADIs and Accountable Persons Not Permitted Except for Liability for Legal Costs 20.9 APRA’s Improvements for Non-Financial Risk Accountabilities Not Being Clear, Cascaded and Enforced (NFRAccFail) Chapter 21: APRA Revised Draft Prudential Standard CPS 511 Remuneration 21.1 APRA Remuneration Framework 21.2 APRA Role of the Board in the Remuneration Framework 21.3 APRA Review of the Remuneration Framework 21.4 APRA Variable Remuneration Design 21.5 APRA Variable Remuneration Outcomes 21.6 APRA Variable Remuneration of Specified Roles 21.7 APRA Variable Remuneration Deferral and Clawback 21.8 APRA Remuneration Policy 21.9 APRA Other Requirements of CPS 511 Part V: Governance of Banks in the GFC and Beyond Key Field No. 5 (Part 5): Boards and Committees, Independence, Expertise and Bank and Risk Culture Chapter 22: Governance of Banks in the GFC and Beyond Key Field No. 5 (Part 5): Boards and Committees, Independence, Expertise and Bank and Risk Culture 22.1 Approach to Boards, Committees, Independence, Expertise and Bank and Risk Culture from the GFC to the Australian Banking Royal Commission Inquiry into Banking Misconduct 22.2 Summary of Responsibilities of the Board 22.3 Review of the [BrdIndMon] (+) Variable from Stage 1 – Board Independent: Executive Director Proportion – Monitoring Effect Chapter 23: Board Characteristics for Australian Major Banks 23.1 Overview – Governance Failings of Boards of Directors 23.2 Board Size, Composition and Qualification 23.3 Board Size and Information and Task ‘Overload’ 23.4 Governance Variables for NED Induction, Training, Development Programs, ‘Dedicated Support’ and Financial Industry Awareness – Coverage/Rating + 7/87.50 rprox – Relational Effect Paths 23.5 Time commitment of Non-executive Directors – Coverage/Rating + 7/87.50 rprox Chapter 24: Functioning of the Board and Monitoring and Evaluation of Performance 24.1 [BankNEDTestStrat] (+) Variable – Banks – Challenging and Testing Strategy by Non-executive Directors – Enhancement of Monitoring Effect – Coverage/Rating + 7/87.50 rprox – Relational Effect Path 24.2 [BankNEDTestRisk] (+) Variable – Banks – Challenging and Testing Risk by Non-executive Directors – Enhancement of Monitoring Effect – Coverage/Rating + 7/87.50 rprox – Relational Effect Path 24.3 Time, Qualifications, Role and Annual Election of Chairperson 24.4 Role of the ‘Senior Independent Director’ 24.5 Performance Evaluation of the Board 24.6 Evaluation Statement of the Skills and Experience of the Board 24.7 Regulatory Authorization Processes to Approve Non-executive Directors Beyond Scope of Book 24.8 APRA Final Report Failings in Board Effectiveness, Risk Management, Internal Monitoring and Decision-Making 24.9 APRA Final Report Failings in Reporting to the Board Chapter 25: Diversity 25.1 Interim Variables for Board Diversity Chapter 26: Skills, Independence, Competence and ‘Fit and Proper Person’ Tests 26.1 Existing Governance Variables Based on the Independence Ingredient 26.2 Independence May Be Associated with Less Bank-Specific Knowledge 26.3 OECD Findings on Independence and Competence 26.4 APRA’s Prudential Standard 520 Fit and Proper – Fit and Proper Person Variables – Coverage/Rating + 7/87.50 rprox 26.5 Governance Variables Based on OECD Recommendations on Continuing Training Chapter 27: Failures in Risk Modelling and Rating Securitized Products 27.1 Variables for Failures in Risk Models of Securitized Products 27.2 Variables Based on Credit Ratings of Securitised Products 27.3 Leverage and off-Balance-Sheet Entities Chapter 28: Ownership, Governance Structure and Government Bailout 28.1 Bank Size and Leverage Related to Probability of Bailout 28.2 [BankHighLevRisk] (−) – Banks – Level of Leverage (High) – Effects of Risk-Taking – Coverage/Rating − 7/87.50 rprox – Relational Effect Path 28.3 ‘Maturity Transformation’ of Bank Debt and a Continuous Supply of Liquidity 28.4 [BankConnect] (−) – Banks – Level of Interconnectedness of Banks (High) – Effects of Risk-Taking – Coverage/Rating − 7/87.50 rprox – Relational Effect Path 28.5 [BankSystRisk] (−) – Banks – Level of Systemic Risk – Effects of Risk-Taking – Coverage/Rating − 7/87.50 rprox – Relational Effect Path 28.6 [BankSizeRisk] (−) – Banks – Increases in Bank Size – Effects of Risk-Taking – Coverage/Rating − 7/87.50 rprox – Relational Effect Path 28.7 Controlling Shareholder Predictive of Greater Risk and Bailout 28.8 Relationship Between Stronger Governance, Market Valuation and Performance 28.9 More Independent Boards with High Institutional Ownership Performed Worse in the Crisis 28.10 Country-Level Governance Chapter 29: Composition, Independence, Representation, Codes of Conduct and Culture 29.1 Greater Challenge, Debate and Testing 29.2 Change in Board Culture and Codes of Conduct/Ethics and Conflicts 29.3 FSB’s Framework for Assessing Risk Culture 29.4 FSRC Findings on Governance, Remuneration and Culture 29.5 FSRC Final Report Recommendations and Commentary on Culture 29.6 FSRC Final Report Recommendations and Commentary on Governance 29.7 FSRC Recommendations and Commentary on Priorities 29.8 NAB Self-Assessment 2018 on Financial Objectives and Prioritisation 29.9 Westpac Review Team 2018 Prioritisation Decisions 29.10 FSRC Final Report Recommendations and Commentary on Non-financial Risks 29.11 FSRC Final Report Recommendations and Commentary on Accountability Chapter 30: NAB Self-Assessment 2018, Westpac Review Team 2018 and Westpac Reassessment on Governance, Accountability and Culture 30.1 NAB Self-Assessment 2018 and Westpac Review Team 2018 on the Role of the Board and Senior Management 30.2 Operation of the Board and Its Committees 30.3 NAB Reporting to the Board 30.4 Westpac Review Team 2018 30.5 NAB Board Challenge and Closure of Issues 30.6 NAB Remuneration and Consequence Management 30.7 NAB Self-Assessment on Senior Leadership Oversight 30.8 Westpac Functioning of Executive Team and RISKCO 30.8.1 Westpac Reassessment Board and Executive Oversight of Non-financial Risk 30.9 NAB Self-Assessment of Accountability Chapter 31: NAB and Westpac Recommendations and Commentary on Culture 31.1 NAB Five Cultural Inhibitors to Targeted Culture 31.2 NAB Values and Behaviours and Cultural ‘Levers’ 31.3 NAB Measuring Risk Culture 31.4 NAB Cultural Inhibitor 1 – Rigour and Discipline 31.5 NAB Cultural Inhibitor 2 – Over-Reliance on People for Deficiencies in Systems and Processes 31.6 NAB Cultural Inhibitor 3 – Failure of Collective Intensity or Individual Resolve to Fix Complex Issues 31.7 NAB Cultural Inhibitor 4 – Failure to Listen and Learn from Customers, Regulators and Employees 31.8 NAB Cultural Inhibitor 5 – Other Priorities Put Before Commitment to Customers 31.9 Westpac’s Findings and Commentary on Culture 31.10 Westpac Finding 1: “Vision, values and strategy set at the top are clear, but translation by leaders into purposeful action for employees can be improved” 31.11 Westpac Finding 2: “Management of non-financial risk, although recognised as important, is not as well understood and embedded as it should be” 31.12 Westpac Finding 3: “The organisation is people-oriented, but can overplay its caring, relationship-focus and collaboration attributes” 31.13 Westpac Finding 4: “There is insufficient personal ownership and empowerment, leading to a tendency to default to collective decision-making and diffused accountability” 31.14 Westpac Finding 5: “There is a tendency towards “Completeness”, Which Can Lead to Acceptance and Perpetuation of Organisational Complexity” 31.15 Westpac Finding 6: “Focus on speak-up and challenge has increased, but more work is needed to increase employee comfort and listening by leaders” 31.16 Westpac Finding 7: “There is insufficient discipline in prioritising, making decisions and saying “no”” 31.17 Westpac Finding 8: “There is a tendency to focus on conceptualisation over embedding and process over outcome” 31.18 Westpac Finding 9: “A lack of institutional learning and reflection holds the organisation back” 31.19 Westpac Reassessment Findings on Risk Culture Chapter 32: APRA Information Paper 2019 on Risk Culture 32.1 APRA’s “Risk culture is not always well understood” Chapter 33: Financial and Bank-Specific Expertise 33.1 Lack of Financial Expertise Predictive of Bank Failure 33.2 Inadequate Risk Management and Internal Controls 33.3 Mix of Financial and Non-financial Industry Knowledge for Effective Challenge 33.4 Financial Industry Expertise and Independence Trade-Off 33.5 Number and Time Commitment of Non-executive Directors for Audit, Remuneration and Risk Committees – Relational Effect Paths 33.6 Development, Training and Support of Non-executives and New Non-executive Director Mentoring by Senior Executives 33.7 The Senior Independent Director Chapter 34: Role, Responsibilities and Time Commitment for the Chairperson 34.1 Division in CEO/Chairperson Roles from Stage 1 and OECD Recommendations in Stage 2 34.2 Agenda Items, Access to Information and Promoting Alternative Views Chapter 35: Size and Composition of the Board 35.1 Proportion of Executive and Non-executive Directors on the Board 35.2 Evaluation of the Board, Board Renewal and Communication with Major Shareholders 35.3 Board Review of Performance for Board and Committees and Renewal of Board 35.4 Evaluation Statement of the Skills and Experience of the Board 35.5 Communication with Major Shareholders 35.6 Cooperation of the Board and Committees Chapter 36: Board Committees 36.1 Audit Committee 36.2 APRA Shortcomings in Operation of Audit Committee 36.3 Westpac Audit Committee Reporting from Group Audit 36.4 Board Risk Committee (BRC) 36.5 Compensation/Remuneration Committee 36.6 Other Committees 36.7 APRA Failings in Board Committees 36.8 APRA Failings in Senior Executive Leadership 36.9 APRA’s Improvements in Non-Financial Risk Management in Relation to Operational, Compliance and Conduct Risks (NFRMan) 36.10 APRA’s Observations That Acknowledged Weaknesses Are Already Known (NFRWeak) Chapter 37: Complexity of Bank Structures, Off-Balance Sheet Entities, Disclosure and Transparency 37.1 Off-Balance Sheet Entities and the Relational Approach 37.2 Separate Legal Entity Principle Can Affect Group-Wide Risk Policy and Disclosure 37.3 Complex and Opaque Bank Structures 37.3.1 Complexity of Bank Structures and Directors’ Duties to the Entity 37.3.2 Boards of Parent Companies 37.3.3 Complexity Makes Oversight by Non-executive Directors Problematic 37.4 [NEDBankStructInfo] (−) Variable – Banks – Non-Executive Directors – Complex and Opaque Bank, Group and Entity Structures – Reduction in Decision Quality and Delineation and Disclosure of Powers, Duties and Lines of Responsibility – Coverage/Rat 37.5 Complex and Opaque Bank Financial Instruments 37.5.1 Complexity of Financial Products and Lack of Control 37.6 Separation of Deposit-Based Banking Beyond Scope of Walker Review 2009 37.7 Bank (Continuous) Disclosure and Transparency and Structured Products 37.7.1 ASX Continuous Disclosure Obligations 37.7.2 ASX Information and Facilities for Security Holders 37.7.3 Information Asymmetry Extends Beyond Shareholders 37.7.4 Principles for Transparency and Disclosure 37.8 Disclosure at the Structured-Product Level 37.8.1 Deficiencies in the Quality of Decision-Making by Non-executive Directors 37.8.2 Deficiencies in the Transparency and Timing of Reporting and Internal and External Monitoring 37.9 Disclosure at the Financial Institution Level 37.9.1 Risk Disclosure 37.9.2 Valuation Disclosure 37.9.3 Liquidity Disclosure 37.10 Bank Supervisors and Regulatory Guidance Part VI: Governance of Banks in the GFC and Beyond Key Field No 5 (Part 6): The Governance and Management of Bank Risk, Risk Appetite and Risk Culture Chapter 38: Introduction to Failings of Risk Management in the Global Financial Crisis and Beyond to the Australian Banking Royal Commission Enquiry into Banking Misconduct 38.1 The Link Between Risk Management and Governance 38.2 Board Responsibilities and Failings of Board Oversight in Risk Management 38.2.1 Board Responsibilities 38.2.2 Failings of Board Oversight in Risk Management 38.3 Application – Governance Variables Based on Board Responsibilities and Principal Failings of Board Oversight in Risk Management, Internal Monitoring and Decision-Quality 38.3.1 Approach to Modelling Governance Variables 38.3.2 Governance Variables for Board Responsibilities in CPS 220 Risk Management 38.3.3 Additional Requirements on Head of a Group 38.4 Failure to Identify Risks on an Organisation-Wide Basis Rather than by Business Unit or Activity 38.5 Separation and Low Status of Risk Managers Likely to Cause a Deficiency or Reduction in the Flow of Information from Management to the Risk Manager on the Details of Particular Risks 38.6 Failure to Escalate Problems or ‘Red Flags’ – Deficiencies in the Flow of Information Upward Through the Bank to Senior Management and/or the Board 38.7 Failure in Information Flow on Leverage and Risks Due to over-Reliance on Regulatory Capital Ratios and Rates of Return on Equity 38.8 Failure of Information Flow on Identifying Risks 38.9 Failure of Information Flow on Risks in CDOs and Other Financial Products 38.10 Failure of Information Flow to Senior Management Due to ‘Silo Structures’ 38.11 Failure of Information Flow Due to Conducting Stress Testing with Past Information 38.12 Failure to Understand and Compare Bank’s Risk Position Relative to Risk Appetite 38.13 Failure of Risk Model Assumptions 38.14 Failure by Board to Continuously Review Internal Structure of Bank for Clear Lines of Accountability/Responsibility, Risk Culture and Flow of Information About Risks 38.15 Failure in Training Employees Responsible for Distributing Risk Products 38.16 Failure in Expertise or Experience of Risk Management Employees in Entire Range of Risks 38.17 Failure to Monitor Changes in Risks in Real Time and to Escalate Information Rapidly Upward in the Bank 38.18 Failure to Upgrade IT Tools for Complex and Opaque Bank Structures 38.19 Failure to Devote Sufficient Management Time to Management of Risks 38.20 Failure to Align Corporate Strategy, Risk Appetite and the Internal Risk Management Structure 38.21 Failure to Separate Risk Management and Control from Profit Centres 38.22 Failure of Chief Risk Officer (CRO) to Report Directly to Board and Board Risk Committee (BRC) in Addition to CEO 38.23 Failure in Transparency and Understandability of Material Risk Factors Ranked in Order of Importance Chapter 39: NAB and ASIC Failures in Issue Identification, Escalation and Resolution 39.1 NAB Failure to Escalate Problems or ‘Red Flags’ Generally – Deficiencies in the Flow of Information Upward Through the Bank to Senior Management and/or the Board (Generally) 39.2 NAB Operational Risk Management Policy 39.3 NAB Monitoring and Reporting of Issues, Events and Actions 39.4 NAB Compliance Breach Assessment and Reporting 39.5 NAB Audit and Regulatory Issues 39.6 NAB Whistleblower Program 39.7 NAB Complaints Reporting 39.8 NAB Significant Issues 39.9 NAB Customer Remediation Procedure 39.10 NAB Management of ‘Excessive’ Risks 39.11 NAB Regulatory Engagement 39.12 NAB Breach Reporting 39.13 NAB Voice of Customer in Issue Management 39.14 NAB Complex Issue Management and Closure 39.15 NAB Resolving Customer Complaints 39.16 NAB Customer Remediation 39.17 NAB Regulatory Interactions 39.18 ASIC Governance Taskforce 2019 Findings on ‘Information Flows’ Chapter 40: Risk Culture, Risk Appetite and Risk Appetite Statements 40.1 Elements of Sound Risk Culture 40.1.1 APRA’s Aims for Risk Culture 40.2 APRA’s Nine Themes Inhibiting Sound Risk Culture 40.2.1 APRA Identifies “Widespread Complacency” 40.2.2 APRA Identifies “Reactivity Rather Than Pre-emption Regarding Risk” 40.2.3 APRA Identifies “Uneven Influence of the Risk Function” 40.2.4 APRA Identifies “Not Fully ‘Walking the Talk’ When It Comes to Risk Management” 40.2.5 APRA Identifies “Less Tendency Towards Reflection, Introspection and Learning” 40.2.6 APRA Identifies “Collegial, High Trust Environment Leading to Some Over-Confidence and Over-Collaboration” 40.2.7 APRA Identifies “Striving to Balance Empowerment with Challenge, Although Not Well Executed” 40.2.8 APRA Identifies “Aiming to Be a Values-Led Institution, But an Over-Reliance on Good Intent” 40.2.9 APRA Identifies “Self-Perceived, But Incomplete, Focus on the Customer” 40.3 Senior Management Responsibilities for Risk Culture, Risk Management and Provision of Information 40.3.1 Governance Variables for Senior Management Responsibilities 40.4 Developing a Risk Appetite Is a Responsibility of the Board 40.5 Risk Appetite Statement (RAS) and Risk Management Strategy (RMS) 40.5.1 APRA Requirements for the RAS and RM This Key Code and Handbook examines the corporate governance and accountability of Major Banks, their directors and executives which were the central focus of bank, Supervisor, Regulator and governmental activity and public scrutiny in 2018 and 2019. This book explores this responsibility focus by providing evidence from the Global Financial Crisis and beyond with both APRA and ASIC investigating illegal conduct, misconduct and conduct which was below the level of community expectations. This book discusses how the Royal Commission into misconduct in the banking and financial services industry has already given rise to a detailed Final Report whose recommendations are still being put into effect. Further, this book uses evidence provided by the large number of Prudential Standards issued by APRA and investigations into the conduct of Major Banks by Regulators. This book explores governance variables over 1,700 in number and grouped into 159 key groupings or separate categories which are all indexed to 28 governmental, regulatory and supervisory reports and documents to create a governance code and commentary specifically tailored to Australian banks. Each governance variable is modelled on the Stage 1 Relational Approach contained in Enhancing Firm Sustainability Through Governance. Given the huge interest in the governance of banks, Parts 1 and 2 explaining the Relational Approach - of Stage 1 were recently published in November 2018 and June 2019 in the Australian Journal of Corporate Law. This book is the largest reference book and handbook in publication worldwide containing the structures, mechanisms, processes and protocols the checks and balances we call governance variables that deeply addresses and explains banking accountability and regulation in Australia