Former Commonwealth Bank chairman David Turner refused to return 40 per cent of his director’s fees when asked by the board, a demand that was never made public, the banking royal commission has heard.
CBA chairman Catherine Livingstone said Mr Turner, her predecessor, was asked to relinquish the fees in response to the failures of leadership exposed by an Australian Prudential Regulation Authority review last year.
Mr Turner, who also approved $14.2 million in bonuses to top bank executives in just 10 minutes despite mounting scandals, refused to hand back the fees because he “didn’t recognise” the CBA “board that he knew” in the APRA report.
Over a torrid three hours on Wednesday, the banking royal commission also heard that CBA might have breached the law by failing to record Ms Livingstone’s challenge to management over the money laundering scandal in the official board minutes.
Ms Livingstone admitted the board’s assessment of senior executive pay in 2016 was “plainly inadequate”, there was an “impression” that executives were only punished if their failures became public, and that its 2018 annual report was inadequate.
Ms Livingstone has been a director of CBA since March 2016 and was appointed chairman on January 1, 2017.
Not in the minutes
After losing recollections on Tuesday afternoon, she recalled on Wednesday morning it was an October 2106 board meeting where it became clear to her that management did not have the capacity to respond to a serious, escalating and systemic problem with AUSTRAC “either because they couldn’t or they wouldn’t”.
But the minutes of that meeting contained no mention of Ms Livingstone’s question – or the answer she said she received. She said it’s not necessarily the case that board minutes record every conversation that occurs but senior counsel assisting the commission, Rowena Orr, QC reminded her this was a “very significant exchange”.
Ms Orr pointed out section 251A of the Corporations Act required boards to keep accurate minutes and it was an offence not to do so.
The inquiry examined executive pay in detail, hearing that former chief executive Ian Narev and CBA’s current deputy chief executive David Cohen argued in 2016 for senior executives to receive their full bonuses.
“Was it CBA’s approach at this time to wait until a risk had eventuated publicly before imposing any sort of consequence for failing to manage that risk?” Ms Orr asked.
“I don’t believe that was the intention, but it might be the impression created,” Ms Livingstone replied.
Mr Turner recommended Mr Narev receive 108 per cent of his short-term target bonus in 2016 – $2.8 million – despite the media revelation of the CommInsure scandal damaging its reputation.
The former head of wealth, Annabel Spring, saw her bonus cut by 5 per cent in 2016 and by 30 per cent in 2017. Ms Livingstone said it should have been cut to zero.
Group executive pay was reduced by 10 per cent in 2017. Ms Livingstone said, “in the light of subsequent events, it was clearly inadequate, which is why we then made the further adjustment, in light of the proceeding being brought against CBA”.
After the AUSTRAC case was filed in August 2017, the board cut Mr Narev and the his group executives’ short-term bonus to zero. The board decided to not change his long-term bonus, even though Ms Livingstone argued for this to also be cut.
Between 2011 and 2017, there were only seven instances, involving five CBA executives, where short-term bonuses were reduced due to a risk issue and, with one exception, they involved reductions of 20 per cent or less. The bank had never reduced an executive’s short-term pay during this period for a risk-related issue that had not yet been made public.
Not my problem
After the APRA prudential inquiry exposed the dysfunctionality of the board under Mr Turner, the former chairman was asked by the board to return 40 per cent of the director’s fees paid to him over his last year at the bank – but he refused. (Mr Turner was paid $437,521 in FY17 and $874,521 in FY2016.)
“Why did the board request the former chair to return those fees?” Ms Orr asked.
“Because the board felt that it was appropriate as chair that he also effectively participate in the reduction that we had all taken for effectively what was described in the APRA report,” Ms Livingstone said.
“So why didn’t you make that clear in the remuneration report?”
“Because the former chair did not agree to return any of his fees,” Ms Livingstone said. He told another board member “he didn’t recognise, in the APRA report, the CBA board that he knew”.
When the group executives were told in 2017 they had lost the entirety of their short-term variable remuneration, Ms Livingstone said their responses varied.
“Some were immediately accepting. Some were angry. And others felt that because it had affected the whole group, including people who hadn’t been there for very long, that it wasn’t fair,” she said.
Commissioner Kenneth Hayne also chastised CBA for the quality of disclosures in its annual report, which do not show why an executive was having their pay reduced. She agreed this could be improved.
CBA was also put under pressure for calculating 75 per cent of long-term executive bonuses based on “total shareholder return”. APRA has suggested banks reduce reliance on this measure. Ms Livingstone said CBA has not, but is “undergoing another whole review of the remuneration framework”.
Commissioner Hayne also attacked the use of “balanced scorecards”, suggesting the “degree of specificity and detail that is applied in truth serve to mask the lack of critical judgment about what really matters”. Ms Livingstone said CBA was “struggling” with how to set variable remuneration, and was “currently looking at our remuneration framework as we evolve it still further”.