Corporate Governance

A Study into Westpacs Corporate Governance Policies

Australian Institute of Business Michael C Yule - A001322735 21st January 2014

Word Count 2683

Not including Executive Summary or Recommendations

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. analysing Westpacs tools for managing

Upon

Corporate

Governance,

several

recommendations will be made in which the policies of Westpacs governance can be strengthened moving forward.

Table of Contents

Introduction Corporate Governance in Australia Westpac Banks Corporate Governance Conclusion Recommendations References Appendix

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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.

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)

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 signicant 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.

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 Banks 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.

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, Westpacs 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 stakeholders 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. Westpacs 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 (Westpacs 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 womens representation on Australian boards. The current proportion of women in directors 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. (Westpacs Corporate Governance Report 2013) 8

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 womens 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 womens 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 (Westpacs 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. (Westpacs 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 Westpacs 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. 9

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. Indias 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 IOSCOs 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.

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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 Westpacs 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 Westpacs position as a thought leader in Australian corporate governance.

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Recommendations
From conducting a critical review of Westpacs 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 Australias 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 Westpacs 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 nonindependent 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 CEOs 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 Westpacs 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/usefullinks/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/$fi le/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-DirectorIssues/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/gtcorporategovernance-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, 2 nd 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 http://www.westpac.com.au/about-westpac/investor-centre/annual_reports/ Westpac Corporate Governance Statement 2013, viewed www.westpac.com.au/docs/pdf/aw/.../TPS_Corporate_Gov_Statement.pd 30th 14 November January 2013 2014

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Appendix
Appendix 1.0 Demographics of Westpacs 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 Westpacs Risk Management Approach

Westpac Corporate Governance Statement 2013

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