corporate governance
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A brief analysis of Westpac Banks Corporate GovernanceTRANSCRIPT
Corporate Governance
A Study into Westpac’s Corporate Governance Policies
Australian Institute of Business
Michael C Yule - A001322735
21st January 2014
Word Count – 2683
Not including Executive Summary or Recommendations
1
Executive Summary
Corporate Governance has become increasingly critical in organisations of recent times, as a
result of many radical changes occurring in economical, political and global contexts.
This report will therefore study the importance and consequences to Westpac Banking
Corporation, referencing the Australian Corporate Governance Principles and
Recommendations Report, last revised by the ASX in 2010. The concepts and techniques of
Corporate Governance in an Australian context discussed in the review will then be used to
critically analyse Westpac Banking Corporations current Corporate Governance Principles
and Policies.
Upon analysing Westpac’s tools for managing Corporate Governance, several
recommendations’ will be made in which the policies of Westpac’s governance can be
strengthened moving forward.
Table of Contents
Introduction 5
Corporate Governance in Australia 6
Westpac Banks Corporate Governance 10
Conclusion 13
Recommendations 14
References 15
Appendix 16
2
Introduction
Over the past score, the importance of corporate governance has been highlighted, with many
different policies being discussed vigorously. The increasing complexity of corporations and
the rise of globalisation in the 21st century has placed corporate governance in the spotlight,
especially after spectacular collapses of previously perceived “too big to fail” corporations
such as Ansett, Enron and more recently Lehman Brothers from the Global Financial Crisis.
The banking sector in particular is the subject of stricter regulations in comparison with other
entities, as they are responsible for protecting the rights of the depositors, ensuring the
stability of the payment system, reducing systemic risk while also playing an important role
in capital allocation. (Turlea, E, Mocanu, M, & Radu, C 2010)
The ASX in 2010 released an updated report on the recommendations for Australian
organisations in relations to corporate governance. (ASX 2010) The policies outlined in this
report are not mandatory unlike the American rule-based model, with Australian
organisations simply having to explain as to why any recommendations were not acted upon.
As the recommendations in the ASX Corporate Governance report are not mandatory, this
places more importance for Australian organisations to be aware of the outcomes and the
consequences from choosing to adopt the recommendations (Christensen, Kent, Stewart
2014)
The 2010 ASX report lists 8 Principles, which it recommends will help promote robust
corporate governance for organisations. This report will look closely into these principles
listed in the 2010 ASX Corporate Governance report, while analysing Westpac Banks current
standing with the respective principles. As of 2012, 92% of organisations in the ASX 500
complied with all 8 principles brought forward by the ASX. (Grant Thornton 2012)
The first part of this report will look at the structure and policies of Westpac Banks corporate
governance compared to the recommendations by the ASX, and the importance of these
recommendations. Continuing on, a more specific and detailed analysis will be carried out as
an attempt to discover any improvements that can further strengthen Westpac Banks
corporate governance position.
3
Corporate Governance in Australia
In 2010 the ASX revised its publication of Corporate Governance: Principles and
Recommendations, which is a guideline for Australian organisations to achieve solid
corporate governance policies. Unlike the American system – where corporate governance is
based on a rules-based model, the Australian system follows the UK and Commonwealth
voluntary models. (Tricker, B 2012)
Nearly all of the policies that are outlined below from the 2010 ASX report are not
mandatory, and if companies do not follow the approaches they simply have to provide a
explanation as to why they were not followed to shareholders. With the pressure from a large
variety of stakeholders - the percentage of organisations that follow all of these polices is
substantial, as the implications as well as the perceptions from stakeholders from not
complying with the recommendations can be significant.
The 2010 ASX report outlines and details 8 core principles that are deemed to be necessary
for sound corporate governance. These 8 principles and the implications of these
recommendations will be discussed below, specifically looking into the ways in which
Westpac meets or exceeds these recommendations.
Principle 1: Lay solid foundations for management and oversight
This first recommendation provided by the ASX can be considered the “building blocks” for
corporate governance, and aims to identify and develop the positions and responsibilities of
the board of directors, with performance and director appointments fully disclosed to all
relevant stakeholders. For the purpose of this report “stakeholders” is defined from Tricker, B
(2012) as “all those affected by companies’ decisions, including customers, employees, and
managers, partners in the supply chain, customers, bankers, shareholders, the local
community, broader societal interests for the environment, and the state.”
Appendix 1.0 illustrates the proportion of independent non-executive directors in the Westpac
board, which contains 90% independent non-executive directors. (Westpac “Corporate
Governance Statement” 2013)
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While the proportion of independent directors within a board is an ongoing discussion,
independent directors are generally seen to provide more separation between management
and ownership, which is a preferred state under agency theory. As per Kang, H, Cheng, M, &
Gray, S (2007), which analysed the demographics of organisational boards, Westpac seems to
be an exception to their study as companies in the materials and industrials industry sector
and with lower levels of shareholder concentration are more likely to have a BOD comprising
a significant proportion of independent directors.
Principle 2: Structure the board to add value
This principle does not have a finite solution; it is simply asked that organisations have a
board that is built up of an effective composition to adequately discharge its responsibilities
and duties. (ASX 2010) The report does not specify the exact proportion of independent
directors, only stating that the “majority of the board should be independent directors”
(ASX 2010) Westpac clearly illustrates the classification it uses to ensure that directors are
“independent”. Westpac Banks board is seen to be a unitary, majority non-executive director
board. While these types of boards clearly separate ownership and management, some argue
that a majority of independent non-executive directors on the board fall into a more
compliance and conformance role, rather than contributing effectively to policy making and
strategic decisions of the organisation. (Tricker, B 2012)
The statement issued in the Westpac Independence Definition states “A Westpac independent
director is independent of management and free from any business or other relationship that
could materially interfere with – or could reasonably be perceived to materially interfere with
– the exercise of their unfettered and independent judgment.” (Westpac “Corporate
Governance Statement” 2013)
Appendix 1.1 displays the current board structure and relevant subsidiary committees within
Westpac Bank.
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Principle 3: Promote ethical and responsible decision-making
Principle 3 is of significant importance, and can be closely related to agency theory. Agency
theory argues that separating the roles of CEO and chairman of the board can mitigate agency
costs. (Grove, H, et al. 2011) In the case for Westpac Bank, Gail Kelly is the current CEO
and a director of the Westpac board. Lindsay Maxsted is Chairman of the board, creating a
clear separation between the two roles. This principle also covers diversity and gender issues,
which will be covered later in this report.
Principle 4: Safeguard Integrity in Financial Reporting
This recommendation is mandatory for organisations that are included in the S&P / ASX 300
Index at the beginning of the financial year. (ASX 2010) The main focus of this
recommendation is on an audit committee requiring to be established by the board of the
organisation. Westpac Bank has an audit committee that reports directly to the board, while
receiving assurance on risk components that are within the financial statements by the risk
management committee.
Principle 5: Make timely and balanced disclosure
Westpac Bank’s Board had 8 meetings during the 2013 financial year as per their Corporate
Governance Statement. (Westpac 2013) This principle is aimed to ensure that all directors
and key personnel have access to liquid information and data, and they provide this
information to stakeholders in a timely manner. The banking industry is considered to require
a more active management approach by the board of directors due to the complexity of the
organisation. (Grove, H, et al. 2011) This principle is crucial, as without the complete and
correct information, the correct decisions cannot be made by the board.
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Principle 6: Respect the rights of shareholders
This principle as recommended by the ASX is aimed to provide shareholders up to date and
correct information, with details of the organisational decisions and goals being
communicated effectively. Westpac has made use of electronic and online media to assist in
the communication to shareholders. Making use of the advancement of electronic
communication, Westpac’s annual general meeting is also shown live via webcast, and
shareholders can forward questions to management and the board during the annual general
meeting directly via the internet, which provides a method for the increasing global
demographic of shareholders to participate in the annual general meetings.
Principle 7: Recognise and Manage Risk
Organisations inherently create shareholder returns by undertaking some sort of risk, such as
systematic risk or operational risk. This recommendation in the ASX (2010) report states that
“Risk management is the culture, processes and structure that are directed towards taking
advantage of potential opportunities while managing potential adverse effects”
During the Global Financial Crisis banking institutions were the target of wide scrutiny from
a diverse variety of stakeholders, as perception was that they purposely dealt in
unmanageable risk, stemming from the belief that executives were overcome with greed and
driven towards unsustainable profits. Whether this was indeed the case, or if there were other
variables that were involved is not the aim of this report. As a result stakeholder’s perceptions
of banking institutions have become increasingly cynical, and the rising complexity of
financial markets and products in a global context has created a larger emphasis on sound risk
management by the board of the organisation. Westpac has created a thorough three tiered
risk management system, which will be discussed further into this report.
Principle 8: Remunerate fairly and responsibly
The key advice from this principle is that the board of directors should establish a
remuneration committee. Westpac has put this recommendation into place with a separate
remuneration committee that reports directly to the board of directors. This principle has been
under scrutiny of recent times, as there is a balance between attracting and retaining the best
talent, while demonstrating a clear correlation between performance and remuneration.
7
Critical Review of Westpac Banks Corporate Governance
Westpac Bank, along with the 2013 Annual Report also issues a “Corporate Governance
Statement”, specifically detailing the policies and methods that are used for Westpac’ internal
and external governance.
From the overview of the corporate governance principles in Australia discussed previously
in this report, there are three principles that are of significant impact to the banking industry
and Westpac in particular;
- Principle 3: Promote ethical and responsible decision-making
- Principle 4: Safeguard Integrity in Financial Reporting
- Principle 7: Recognise and Manage Risk
Westpac Bank in the 2013 Corporate Governance Statement covers the components of ethical
and responsible decision-making quite extensively. Westpac’s Code of Conduct in this
statement is described as “the standards of conduct expected of our people, both employees
and contractors. It provides a set of guiding principles to help us make the right decision
every time” (Westpac’s Corporate Governance Report 2013)
Westpac also has a “Code of Ethics for Senior Finance Officers”, which covers conflicts of
interest, the board, employees and contractors, whistleblower protection and also securities
trading.
Following on in the report is the Westpac Group Diversity Policy. This policy, among other
goals aims to have a workforce profile that delivers competitive advantage through a deeper
understanding of customers needs, and to create a truly inclusive workplace. (Westpac 2013)
As of the 30th September 2013, women employed by Westpac in roles in the Board of
Directors, and Leadership roles were 30% and 42% respectively. (Westpac 2013) As of the
13th December 2013 the percentage of women on the top 200 Australian companies’ boards
was 17.1%. (Australian Institute of Company Directors 2013) The graph shown in Appendix
1.2 illustrates the increase in women’s representation on Australian boards.
The current proportion of women in director’s positions for Westpac is nearly double the
average. This focus on diversity and to create a more balanced leadership team creates an
image that Westpac is committed to diversity, setting an example to other organisations and
stakeholders, thus creating a stronger corporate reputation. (Westpac’s Corporate Governance
Report 2013)
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In regards to a more diversified workplace and a stronger representation of women in
management positions within Westpac Bank, there has not been the growth that has been
promised by the current CEO, Gaily Kelly other than the board of directors. The current
proportion of women in Westpac Banks workforce is currently 60% therefore ceteris paribus;
there should be an equal amount in leadership positions. (WBC 2013) In reality however
there are many variables that need to be taking into consideration, such as maternity leave
and other factors affecting women’s progression in the workplace.
Elstad, B, & Ladegard, G (2012) states that as women typically remain a minority in the
business elite context, they could be subject to social barriers regardless of their ratio on a
board because of a general low esteem resulting from gender stereotyping. This shows that
there is much more to women’s equality in the workplace than simply a quota or goal. The
attitudes and culture of organisations needs to undergo a fundamental shift to genuinely
increase not only the amount of women in leadership positions, but also the quality of their
participation in leadership decisions.
Principle 4, which covers integrity in financial reporting, is also of great importance, not only
in the realm of corporate governance, though also in the banking industry. In the Westpac
Corporate Governance report (Westpac’s Corporate Governance Report 2013) PwC is
employed by Westpac as the external auditor, and attends all Board Audit Committee
meetings and all annual general meeting held by Westpac.
Westpac states that the audit committee, which comprises of four independent, non-executive
directors, has oversight of the integrity of the financial statements and financial reporting
systems, as well as reviewing the performance of the internal audit function, while liaising
with the external auditors. (Westpac’s Corporate Governance Report 2013)
Risk management is especially crucial for the banking industry as discussed previously in this
report, due to many internal and external factors. Westpac Bank has a clear and concise
structure in relations to risk management, with a visible representation being shown in
Appendix 1.3 from Westpac’s Corporate Governance Report 2013.
During the Global Financial Crisis of 2008, banks across the globe came under scrutiny from
decisions that were perceived as unethical and irresponsible – placing banking profits above
suitable risk management. Westpac Bank has a comprehensive risk management structure, as
well as a separate risk committee to oversee the banks risks management and exposure.
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Westpac breaks down its risk management approach to three key lines, with the first line of
defense, consisting of the individual business units maintaining their own risk management
processes and assurances. The second line of defense provides risk management oversight for
the individual business units within the organisation.
The third and final line of defense is the independent assurance, provided by PwC which
overlooks all risk management processes and structures in place and reports directly to the
board of directors, making sure that there is sufficient external independent analysis in place
to avoid the bank exposing itself to unknown and unnecessary risk.
During the Global Financial Crisis, Westpac and all Australian banks avoided catastrophic
failure that occurred to some of the banks in America. Considering that in America corporate
governance policies are mandatory law under the Sarbanes-Oxley Act, this poses an
interesting discussion for further research. Westpac complies with a largely voluntary code of
conduct in regards to risk management, and as such attempts to lead in governance
management. With governance principles under law which can result in criminal and civil
penalties for non-compliance, do organisations in America simply comply to avoid penalties?
A unique issue that is becoming more prevalent is the case of organisations outsourcing part
of their supply chain production to overseas companies. Westpac Bank is known to outsource
numerous activities, such as loan maintenance, document imaging and call centre operators to
countries such as Indonesia and India.
India’s corporate governance, especially in regards to shareholder rights is much different to
the standards within Australia. Agency costs can differ as there is still tight family control,
while a separation of cash flow and voting rights from pyramidal and cross-holding structures
can cause a concentration of ownership, disadvantaging minority shareholders.
(Narayanaswamy, R, Raghunandan, K, & Rama, D 2012)
ASIC (2006) identified that the importance of protection for minority shareholders was
critical in corporate governance, from the work of IOSCO’s Securities Task Force.
It is therefore important that Westpac understands the political and economical environment
that outsourcing occurs within, and to ensure that the same governance principles apply.
With the increasing use of outsourcing from Westpac and companies around the globe, it is
important to make sure that Westpac is not partaking in comparable regulatory arbitrage.
10
Westpac Banking Corporation is one of the largest banks in Australia, and as per Accuity
Bank Ratings (2013), the 42nd largest bank in the world. Due to the size of Westpac, this
report concludes that Westpac has no choice but to be leaders in corporate governance, by
ensuring that they not only comply with the recommendations but exceed them.
Conclusion
Corporate governance is a dynamic and ever changing topic that has increasing significance
in the global economy.
Using the 8 principles developed by the ASX that form the guidelines for corporate
governance in Australia, Westpac Banking Corporations policies were critically analysed and
several recommendations were listed that could improve further on Westpac’s corporate
governance. It is noted that Westpac Bank complies with all the ASX recommendations in
regards to corporate governance.
For Westpac Banking Corporation, the recommendations provided in this report will further
strengthen an already strong and sustainable organisation. During the discussion of this
report, it is evident that Westpac is a superb example of an organisation that excels and prides
itself in strong, sustainable corporate governance.
Over complying on the recommendations brought forward from the ASX, solidifies
Westpac’s position as a thought leader in Australian corporate governance.
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Recommendations
From conducting a critical review of Westpac’s’ current corporate governance policies and
board composition, the below recommendations are deemed necessary to ensure that Westpac
Bank continues to provide strong and sustainable growth to shareholders into the future.
It is important to note that Westpac Bank exceeds the recommendations and principles by the
ASX. As Westpac is one of the largest organisations in the country – care should be taken to
ensure Westpac not merely excels in thought leadership, but leads in best practices – as
practiced.
- Directors of different countries in which Westpac Bank operates in should be elected
in Westpac Australia’s main board, or as an independent committee, for global
insights and expertise as the banking industry is no longer predominantly influenced
by domestic forces.
- The proportion of 90% of independent directors within Westpac’s board may create a
lack of experience with the organisation throughout the board. Considering Westpac
exceeds many of the recommendations brought forward by the ASX, a further study
could be of benefit into the performance of the board, with a larger proportion of non-
independent directors.
- It has been noted that Westpac Bank outsources many activities overseas; it is highly
recommended that a committee is created to ensure governance remains strong by
liaising with outsourcing contractors and stakeholders throughout all business units.
- Develop a committee for diversity and gender equality to successfully implement the
CEO’s aim, of having a larger proportion of women in management positions within
Westpac.
- Westpac Bank prides itself on exceeding corporate governance policies. This report
recommends that further analysis of Westpac’s corporate governance policies
compared against global benchmarks such as the IOSCO. As the codes listed by the
ASX are predominantly voluntary, international standards should be used as a
benchmark to ensure Westpac bank remains as a thought leader in corporate
governance both domestically and globally.
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References
Accuity Bank Ratings 2013 – Top Banks in the world – Accuity Industry http://www.accuity.com/useful-links/bank-rankings/ viewed 16 January 2014
ASIC 2006 – Corporate Governance, an IOSCO Perspective - http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/Corporate_Governance_IOSCO_Perspective.pdf/$file/Corporate_Governance_IOSCO_Perspective.pdf, viewed 16 January 2014
ASX Corporate Governance Principles and Recommendations with Amendments 2010, 2nd edn
Australian Institute of Company Directors 2013, Statistics – Appointments to S&P/ASX 200 Boards, accessed 14 January 2014. http://www.companydirectors.com.au/Director-Resource-Centre/Governance-and-Director-Issues/Board-Diversity/Statistics viewed 17 January 2014
Christensen, P. Kent & J. Stewart Corporate Governance and Company Performance in Australia', Australian Accounting Review, 20, 4, pp. 372-386, Business Source Complete, EBSCOhost, viewed 5 January 2014
Elstad, B, & Ladegard, G 2012, 'Women on corporate boards: key influencers or tokens?', Journal Of Management & Governance, 16, 4, pp. 595-615, Business Source Complete, EBSCOhost, viewed 13 January 2014
Grant Thornton “Corporate Governance Reporting Review 2012”, www.grantthornton.com.au/files/gt-corporategovernance-2012.pdf, viewed 12 January 2014
Grove, H, Patelli, L, Victoravich, L, & Xu, P 2011, 'Corporate Governance and Performance in the Wake of the Financial Crisis: Evidence from US Commercial Banks', Corporate Governance: An International Review, 19, 5, pp. 418-436, Business Source Complete, EBSCOhost, viewed 5 January 2014
Kang, H, Cheng, M, & Gray, S 2007, 'Corporate Governance and Board Composition: diversity and independence of Australian boards', Corporate Governance: An International Review, 15, 2, pp. 194-207, Business Source Complete, EBSCOhost, viewed 5 January 2014
Narayanaswamy, R, Raghunandan, K, & Rama, D 2012, 'Corporate Governance in the Indian Context', Accounting Horizons, 26, 3, pp. 583-599, Business Source Complete, EBSCOhost, viewed 16 January 2014
Tricker, B 2012, Corporate Governance: Principles, Policies and Practices, 2nd edn, Oxford University Press
Turlea, E, Mocanu, M, & Radu, C 2010, 'CORPORATE GOVERNANCE IN THE BANKING INDUSTRY', Accounting & Management Information Systems / Contabilitate Si Informatica De Gestiune, 9, 3, pp. 379-402, Business Source Complete, EBSCOhost, viewed 5 January 2014
WBC 2013 The Westpac Group Annual Report 2013 viewed 30th November 2013 http://www.westpac.com.au/about-westpac/investor-centre/annual_reports/
Westpac “Corporate Governance Statement” 2013, viewed 14 January 2014 www.westpac.com.au/docs/pdf/aw/.../TPS_Corporate_Gov_Statement.pd
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Appendix
Appendix 1.0 – Demographics of Westpac’s Board
Westpac “Corporate Governance Statement” 2013
Appendix 1.1 – Westpac Banking Corporations Corporate Governance Framework
Westpac “Corporate Governance Statement” 2013
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Appendix 1.2 – Percentage of Female Directorship on ASX 200 Boards
Australian Institute of Company Directors 2013
Appendix 1.3 – Westpac’s Risk Management Approach
Westpac “Corporate Governance Statement” 2013
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