Australia stands out in implementing FSB

Financial Stability Board (FSB) research has reinforced Australia’s standing as a governance exemplar and made several recommendations to improve finance-sector governance.

The FSB’s Thematic Review on Corporate Governance examined the implementation by FSB member jurisdictions, of which Australia is one, of the G20/Organisation for Economic Cooperation and Development (OECD) Principles of Corporate Governance (Principles).

The FSB’s latest review, the 13th conducted, provides a benchmark of governance standards across developed and emerging markets, and areas for improvement.

The review focuses on how FSB jurisdictions have applied The Principles to publicly listed regulated financial institutions, such as banks, asset managers and insurers.

The Principles serve as the basis for the guidelines on corporate governance of banks, issued by the Basel Committee on Banking Supervision and the OECD Guidelines on Insurer and Pension Fund Governance.

This is important work. The 2008-09 Global Financial Crisis highlighted the need to strengthen corporate governance across the finance sector. FSB jurisdictions, it seems, are heeding the lessons, although more can be done to lift finance-sector governance.

The FSB study is particularly timely in Australia. The Opposition has campaigned aggressively for a Royal Commission into the banking sector and the Federal Government surprised the sector with a proposed $6.2 billion bank levy in the 2017 Budget.

Public trust in banks, worldwide and in Australia, is falling. The latest Edelman Trust Barometer found declining public confidence in major institutions, such as banks, government and media. Australian Bankers’ Association CEO Anna Bligh in April spoke of an “implosion in trust in the banks and an explosion of scrutiny”.

However, the FSB review shows Australia’s finance sector benefits from some of the world’s most effective governance frameworks, in international comparisons.

Regulatory change is underpinning gains. The Australian Prudential Regulation Authority (APRA) in January 2015 introduced its prudential standard, CPS220, which requires boards to form a view of the bank’s risk culture and identify changes to improve organisation behaviour.

APRA in October 2016 released an information paper on current risk practices in a range of Australian banking, insurance and superannuation businesses. APRA found many financial institutions were at an early stage of understanding and managing risk culture and were grappling with how best to articulate their desired risk culture and address any weaknesses.

The Australian Securities and Investments Commission (ASIC) has also focused on corporate culture in the finance sector. ASIC Chairman Greg Medcraft has this year spoken about the importance of culture – and the need for it to be a boardroom focus.

Good governance underpins culture

These developments provide context for the FSB findings. The research suggests Australia has stronger governance foundations in the finance sector than most developed or emerging nations – a trait that bodes well for improvements in organisational culture, risk taking and the restoration of public trust in the banking sector.

Australia is well advanced on many of the 12 recommendations the FSB makes to ensure the basis for an effective corporate governance framework. (See below for specific recommendations).

Australia, for example, is one of eight countries (from 23 FSB members) that require the separation of the Chairman and CEO role in publicly listed financial institutions. Only five countries require separation of these roles for all listed financial institutions.

Although the G20/OECD principles state that separation of the board chair and the CEO role is good practice, no such requirement or guideline exists in the United States, Japan, Korea, Mexico or Spain. Also, all G20 countries require boards to include independent directors but representation varies, from the majority (US, UK) to one third (Italy, Spain).

Board succession planning is another strength in Australian governance. Our banks and insurers have a requirement for a formal policy on board renewal that includes details of the director’s relevant skills and expertise. Many European Union countries, for example, have informal board succession-planning requirements for their finance sector.

The FSB review also singled out Australia for the integrity of its accounting and financial reporting systems (for institutions overseen by APRA).

Australia is also taking steps to understand and address risk culture in the finance sector. APRA’s risk-culture standard has made the issue a key focus of regulated finance-sector organisations. Many countries in the FSB review have not yet specified any requirements or standards on how to, in practice, assess risk culture in the finance sector.

Although Australia’s finance sector is at an early stage in addressing risk culture, the industry, via APRA’s new standards, is taking tangible steps to improve organisation culture, behaviour and ethics.

Australian governance also benefits from stronger whistle-blower protections. The Corporations Act 2001 protects certain whistle-blowers from persecution and ASIC has provided guidance to company auditors on how internal processes can handle revelations from whistle-blowers. APRA prudential standards also require the “fit and proper” policy of each institution to include adequate protection for whistle-blowers.

Australia addressing many governance recommendations

Overall, Australia appears to have made good headway on many of the FSB’s 12 recommendations that broadly cover: ensuring an effective corporate governance framework; disclosure and transparency; board responsibilities; the rights and equitable treatment of shareholders; and the role of stakeholders in corporate governance.

Australia, for example, is singled out with three other countries where regulatory agencies make cooperation arrangements with other authorities available on their website.

Financial institutions in Australia are also adopting, implementing or disclosing codes of ethics or conduct – another FSB recommendation. Apart from company-led initiatives, the industry has implemented the voluntary Banking Finance Oath, a long-term initiative to improve ethics and complement other regulatory or self-regulatory reforms in the sector.

Moreover, boards of large Australian financial institutions regularly assess board effectiveness and focus on succession planning and board training – also recommended by the FSB. Greater transparency in board-nomination processes and director skills and experience, in part though the board-skills matrix, meet the FSB’s recommendations.

Australian shareholders in regulated listed financial institutions are also given an opportunity to vote at shareholder meetings on the remuneration policies of financial institutions and the total value of compensation arrangements offered to the board and senior management.

A potential area for improvement is disclosure of non-financial information. The Principles encourage companies to disclose policies and performance relating to business ethics, the environment and, where material to the company, social issues, human rights and other public-policy commitments. But the disclosures are only required in a few FSB jurisdictions, such as member states of the European Union, and in India and South Africa.

Clearly, Australia’s regulated finance sector has scope to improve governance and further lift its international standing. Recurring scandals in the finance sector since the GFC, in Australia and overseas, suggest room for governance improvement that boards can lead.

But the FSB review, at least, suggests Australia is heading in the right direction on finance-sector governance and has strong foundations to build upon.

Specific recommendations

The 12 FSB recommendations are:

  1. Identify and take steps to eliminate gaps or inconsistencies in cases where corporate governance-related requirements or standards are found in multiple sources.
  2. Consider if the ownership structure, geographical presence and stage of development of financial institutions could be used, when appropriate, as criteria to implement corporate governance requirements in a proportional manner.
  3. Augment, as appropriate, enforcement powers available to supervisory authorities to address weaknesses in financial institutions’ corporate governance regimes or non-compliance with national authorities’ corporate governance requirements.
  4. Consider improving disclosures related to governance structures, voting arrangements, shareholder agreements and of significant cross-shareholding and cross-guarantees.
  5. Identify remuneration-related information that could usefully be provided to shareholders.
  6. Consider adopting, implementing and disclosing codes of ethics or conduct.
  7. Encourage boards to undertake regular assessments of their effectiveness, and to receive training that, in part, helps them remain abreast of relevant new laws and regulations.
  8. Consider how financial institutions can improve their procedures and practices as they relate to succession planning and board training.
  9. Consider enhancing the transparency of the board-nomination process, the qualifications of board members (including skills and experience) and the election process.
  10. Consider requiring that shareholders be given the opportunity to vote at shareholder meetings on the remuneration policies of financial institutions and the total value of compensation arrangements offered to the board and senior management.
  11. Consider enhancing the effectiveness of whistle-blower programmes, including through policies that protect whistle-blowers.
  12. Consider reviewing practices with respect to:
    • The effectiveness of rules regarding the duties, responsibilities and composition of boards within group structures
    • The framework for Related Party Transactions (RPTs), including identifying, approving and disclosing RPTs;
    • Shareholder votes on pay;
    • The disclosure of beneficial ownership; and
    • The role and responsibilities of independent directors on the board and board committees.