1. Aims and Approach to Examining the Governance of Banks in the Global Financial Crisis and Beyond to the Australian Banking Royal Commission Inquiry into Banking Misconduct in Stage 2
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Abstract
The Stage 1 Relational Corporate Governance Approach Model explained how thirty-nine governance mechanisms, structures, processes and protocols called ‘governance variables’ affected ‘agency costs’ and the long-term efficiency and survival or sustainability of the firm. This survival/sustainability was measured by proxies for shareholder wealth or welfare including firm cost of capital, firm value/share price, firm operating performance/profit and the likelihood of earnings manipulation or ‘management’. The Stage 1 Model was not tied to any particular industry and applied to firms generally.
The thirty-nine Stage 1 governance variables were extracted from the literature, case studies, governance codes and empirical studies comprising the four original ‘Key Fields’: (1) the application of the theoretical models of the firm to the relational approach; (2) Enron and Hastie corporate collapse literature; (3) international and national governance codes of the US, UK and Australia and (4) empirical/field studies actually undertaken by other commentators and researchers in examining the effectiveness or ability of the governance variables in reducing agency costs, enhancing firm value/share price and operating performance/profit and reducing the likelihood of earnings management/misstatement.
This Stage 2 Key Code and Advanced Handbook 2 applies the Relational Model to the Global Financial Crises and the banking and financial services industry in a new Key Field – the ‘Governance of Banks in the GFC and Beyond’ Key Field No. 5. This fifth Key Field examines the behaviour and failures of governance variables relating to banks and financial firms in the GFC of 2008–9 and beyond to the recent Australian Banking Royal Commission Inquiry into banking misconduct. All the bank-specific governance variables – 1749 in number – are modelled or based on, or derived from, seven ‘Key’ or ‘Core’ governance variables from the original thirty-nine variables of Stage 1.
This Stage 2 Key Code and Advanced Handbook indexes and examines major reports and pronouncements from the GFC and beyond to propose a uniform approach to governance and supervision for major banks in Australia. An important element is to bring together major reports and pronouncements in Australia to propose a uniform approach for banks, in particular in relation to governance, accountability, remuneration, board characteristics, committees, conduct and other non-financial risks, bank and risk culture and the governance and management of risk.
In this Chap. 1, the Key Code and Advanced Handbook introduces the major reports and pronouncements from the GFC and beyond which are indexed and modelled throughout the Key Code. As part of this, the seven ‘Key’ or ‘Core’ governance variables from the original thirty-nine variables of Stage 1 are introduced. Also introduced are the ‘Key Groupings’ of the Stage 2 Bank-Specific Governance Variables for Australian Banks. These Key Groupings are the prefixes or abbreviations – spanning one-hundred and fifty-nine (159) categories – in which the Key Code is classified or divided to represent the functions of the bank at the basic activity level.
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OECD Steering Group on Corporate Governance, Corporate Governance and the Financial Crisis: Key Findings and Main Messages, June 2009, approved for publication 29 May 2009, accessed 12 April 2017 at www.oecd.org/corporate/ca/corporategovernanceprinciples/43056196.pdf, (‘OECD Key Findings 2009’), The Challenges for Policy Makers and the Steering Group, pp 12–13.
Francesco de Zwart, Enhancing Firm Sustainability Through Governance, The Relational Corporate Governance Approach, Cheltenham, UK and Northampton, MA, USA: Edward Elgar Publishing, Corporations, Globalisation and the Law Series, July 2015, (‘Stage 1’).
For Stage 1, see also, Francesco de Zwart, “Enhancing firm sustainability through governance – Part 1: The challenge of corporate governance” (2018) 33(2) Aust Jnl of Corp Law 144 and Francesco de Zwart, “Enhancing firm sustainability through governance – Part 2: The framework of the relational corporate governance approach” (2019) 34(1) Aust Jnl of Corp Law 27.
The Australian Treasury announced in a Proposals Paper of 22 January 2020 that it proposed to extend the BEAR to other APRA regulated entities in the insurance and superannuation industries with the introduction of the Financial Accountability Regime (FAR). See Australian Government, The Treasury, Proposal Paper, Implementing Royal Commission Recommendations 3.9, 4.12, 6.6, 6.7 and 6.8 Financial Accountability Regime, accessed 17 February 2020, available at https://treasury.gov.au/sites/default/files/2020-01/c2020-24974.pdf. See Attachment A – Summary of changes from the BEAR to the FAR, pp 11–13. The Government intends to introduce legislation by the end of 2020 to implement the FAR. See Proposal Paper, Next steps, p 3.
Recent pronouncements from APRA in January 2020 state that this draft will be finalised in the first half of 2020 with an expected effective date of July 2021. See:
Australian Prudential Regulation Authority, Information Paper, APRA’s Policy Priorities, January 2020, accessed 17 February 2020, available at https://www.apra.gov.au/apras-policy-priorities, section 2.1.2 Remuneration and Attachment B: Timelines; and
Australian Prudential Regulation Authority, Information Paper, APRA’s Supervision Priorities, January 2020, accessed 17 February 2020, available at https://www.apra.gov.au/apras-supervision-priorities, section 2.3.3 Remuneration.
In addition to finalisation of APRA’s Draft Prudential Standard 511 Remuneration, APRA has announced that it intends to consult on revised versions of Prudential Standard CPS 510 Governance, Prudential Standard CPS 220 Risk Management and Prudential Standard 520 Fit and Proper in the second half of 2020 with expected effective dates of 2022. See the above Information Paper, APRA’s Policy Priorities, section 2.1.1 Governance and risk management, section 2.1.3 Accountability and Attachment B: Timelines.
Grant Kirkpatrick, The Corporate Governance Lessons from the Financial Crisis, Report of the OECD Steering Group on Corporate Governance, 11 February 2009, Financial Market Trends, Vol 2009/1, ISSN 1995-2864, accessed 27 March 2017 at http://search.oecd.org/finance/financial-markets/42229620.pdf (‘OECD Kirkpatrick Report 2009’).
OECD Directorate for Financial and Enterprise Affairs, OECD Steering Group on Corporate Governance, Corporate Governance and the Financial Crisis, Conclusions and emerging good practices to enhance implementation of the Principles, 24 February 2010, accessed 11 May 2017 at www.oecd.org/corporate/ca/corporategovernanceprinciples/44679170.pdf, (‘OECD 2010 Conclusions and Practices’).
European Commission, Green Paper, The EU Corporate Governance Framework, COM (2011) 164 final, Brussels, 5 April 2011, accessed 1 May 2017 at ec.europa.eu/internal_market/company/docs/modern/com2011-164_en.pdf, (‘EC Second Green Paper 2011’).
The Bank for International Settlements, The Basel Committee on Banking Supervision, Guidelines, Corporate Governance Principles for Banks, July 2015, accessed 21 March 2017 at http://www.bis.org/bcbs/publ/d328.htm, (‘BCBS Guidelines 2015’).
Financial Stability Board, Guidance on Supervisory Interaction with Financial Institutions on Risk Culture, A Framework for Assessing Risk Culture of 7 April 2014, accessed 28 February 2019, available at http://www.fsb.org/wp-content/uploads/140407.pdf (‘FSBCult’).
Financial Stability Board, Supplementary Guidance to the FSB Principles and Standards on Sound Compensation Practices, The use of compensation tools to address misconduct risk, 9 March 2018, accessed 28 February 2019, available at http://www.fsb.org/wp-content/uploads/P090318-1.pdf (‘FSBSupp’).
BEAR, above n 3. As stated in n 3, the Australian Treasury announced in a Proposals Paper of 22 January 2020 that it proposed to extend the BEAR to other APRA regulated entities in the insurance and superannuation industries with the introduction of the Financial Accountability Regime (FAR). See Australian Government, The Treasury, Proposal Paper, Implementing Royal Commission Recommendations 3.9, 4.12, 6.6, 6.7 and 6.8 Financial Accountability Regime, accessed 17 February 2020, available at https://treasury.gov.au/sites/default/files/2020-01/c2020-24974.pdf. See Attachment A – Summary of changes from the BEAR to the FAR, pp 11–13. The Government intends to introduce legislation by the end of 2020 to implement the FAR. See Proposal Paper, Next steps, p 3.
Ibid, section 37FB. As stated in n 3, the Australian Treasury announced in a Proposals Paper of 22 January 2020 that it proposed to extend the BEAR to other APRA regulated entities in the insurance and superannuation industries with the introduction of the Financial Accountability Regime (FAR). See Australian Government, The Treasury, Proposal Paper, Implementing Royal Commission Recommendations 3.9, 4.12, 6.6, 6.7 and 6.8 Financial Accountability Regime, accessed 17 February 2020, available at https://treasury.gov.au/sites/default/files/2020-01/c2020-24974.pdf. See Attachment A – Summary of changes from the BEAR to the FAR, pp 11–13. The Government intends to introduce legislation by the end of 2020 to implement the FAR. See Proposal Paper, Next steps, p 3. Accountability Statements and Accountability Maps will remain obligations of the FAR. See Proposal Paper, Accountability maps and statements, p 7 and Attachment A, p 12.
Aims and Approach to Examining the Governance of Banks in the Global Financial Crisis and Beyond to the Australian Banking Royal Commission Inquiry into Banking Misconduct in Stage 2