Trends in ASX-listed bank governance

Economic Papers (Economic Society of Australia), Dec, 2006 by Stephen Chu, Martin Lawrence, Geof Stapledon

This paper reviews trends in bank governance in Australia over the past 15 years. It reviews changes in board size, board committee structures and executive remuneration trends. Remuneration has increased substantially, but there is not a strong relationship to bank performance. Changes in board committee structures have occurred independent of regulatory requirements.

JEl codes: G21, G34

Keywords: Banks, Governance, Executive Remuneration

1 Introduction

Unlike most Australian companies, Australian banks are now subject to explicit regulatory requirements on governance. Since the introduction of the Australian Prudential Regulation Authority (APRA) Prudential Standard 510 (APS 510) in 2006 (see APRA, 2006), Australian banks have been required to meet a set of governance requirements determined, assessed, and overseen by APRA as the country's banking regulator. These include: having a board with a minimum of five directors, a majority of whom are independent (as determined by APRA); having an independent chairperson, a variety of requirements around auditors and audit committees, and having a formal policy on board renewal.

These mandatory requirements are substantially tougher than those that apply to other listed companies. Companies within the top 500 ASX-listed entities are now required to have an audit committee; and companies in the S & P/ASX 300 Index are now required to have an audit committee with at least three members, all of whom must be non-executive directors and a majority of whom (including the committee chairperson) must be independent non-executive directors. (1) Outside of audit committees, other listed Australian entities are generally not required to adopt particular governance structures and practices. Instead, they are required either to comply with the Best Practice Recommendations of the ASX Corporate Governance Council or to explain why they do not comply--the so-called 'comply or explain' approach.

Similarly, the extended disclosure requirements and advisory vote on remuneration policy instituted in the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (CLERP 9 Act) reforms in 2004 represented an empowerment of shareholders rather than imposing mandatory structural and behavioural requirements on companies. (2) The CLERP 9 reforms also contained mandatory requirements on auditor rotation, and audit independence and regulation; but, for the most part, Australian companies other than banks have escaped the prescriptive governance regulations instituted under the Sarbanes-Oxley Act and amended New York Stock Exchange Listing Rules in the United States.

Australia's banks represent a relevant sample in which changes in key governance practices across the market can be observed. As a basic indicator of the changes in regulation applying to ASX-listed banks, the increase in investors' governance expectations and the banks' own increased complexity, the average number of pages in bank annual reports grew from 73 pages in 1991 to 105 pages in 1995, to 137 pages in 2000 and to 220 pages in 2005--a 201% increase in the number of pages, if not necessarily in the level of disclosure!

APRA's adoption of a mandatory governance code for Australian banks also begs the question of how the governance of Australia's listed banks has evolved in response to investor and community sentiment--and market realities--over the past fifteen years.

The present article reports the findings of a survey of key elements of ASX-listed bank governance between 1991 and 2005. It is intended to provide a series of 'snapshots' in time of bank governance over the past fifteen years, and to highlight areas deserving future study.

2 Methodology

The banks selected were the nine continuously listed on ASX between 1991 and 2005: Adelaide Bank, ANZ, Bendigo Bank, Bank of Queensland, Commonwealth Bank, National Australia Bank, St George, Suncorp Metway and Westpac.

A 'snapshot' of key governance indicators as at the date of the annual report in 1991, 1995, 2000 and 2005 was created. These included data on board size, board composition (including independence of directors, and gender mix), presence of various board committees, experience and background of the non-executive directors, the remuneration of the chief executive officer (CEO), and the equity ownership of the CEO and the non-executive directors. These data were then used to analyse trends in the governance of Australian listed banks. The key findings are highlighted below.

3 Board Size and Composition

Table 1 illustrates that, between 1991 and 1995, the size of bank boards increased (on average from 9.7 to 10.3 directors), although the overall composition of boards remained about the same. The growth was mainly due to the expansion of the boards of the Commonwealth, National, and Bendigo banks. The actual board composition was, however, largely unchanged: non-executive directors continued to account for almost 80% of the total.

Between 1995 and 2000, bank boards shrank, from an average of 10.3 directors to 9.1, as ANZ and NAB unwound their large boards. Board composition was again largely unchanged, and this continued in 2005, albeit with a small fall in the proportion of independent directors. This was driven by a rise in the number of executive directors, with the Bank of Queensland appointing its first CEO-director, and executive directors on the National board expanding from one to three as part of the major changes following the institution's upheaval in 2004. The National's board also grew between 2000 and 2005 (from eight to fourteen) largely driven by the changes following 2004. By contrast, the Commonwealth Bank board fell from thirteen to ten directors.