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The National Australia Bank is getting into all sorts of strife. Maybe it is time to vote Crikey onto the board to help clean up its governance and ethics.

NAB Board Candidate

Dear NAB Shareholder

I’m writing to you as an external candidate for the board of the National at the upcoming annual general meeting of the company in Melbourne on Thursday December 14.

I am campaigning on a ticket of greater corporate accountability. I believe the National should take a far more active stance to create a culture of shareholder pressure in Australia. Starting with the National itself.

So what’s wrong at the National? The share price has been all over the place. In this year alone, the share price has been as low as $19.88 in February up to a current high of $28.94, a rise of 45% but admittedly on low volumes. Market capitalisation of $43.7 billion now exceeds the 49 per cent of Telstra that is listed and worth $41.7 billion, making the National Australia’s largest company by capitalisation with the exception of New York-based News Corp. In US dollar terms though, the NAB share price, after allowing for the MLC purchase in June, has remained at about the US $20 billion level hardly a stellar performance for a global company.

But, the National is selling at a 20-25% discount to CBA on a prospective earnings basis (National’s PE of 12, CBA 15-16). If the National’s share price was performing as well as CBA, the National’s share price should be over $35 with $40 on the horizon.

Shareholders are obviously exposed to a share price that has the potential to drop below $20 on any whiff of sustained bad news or top $40. That’s quite a swing, even unprecedented for such a major stock in Australia. It is a bellweather of either an uninformed and nervous market or disinterested investors.

So what’s the problem?

It seems that the National has been steered by an unbridled executive management into some very risky waters indeed over the last year on a charter trip where shareholder accountability and risk management is on a holiday.

All the usual suspects are aboard including the likes of “we’re the executive and (think or hope) we know what we’re doing”, “she’ll be right”, “we’ll let you about it later if it’s good (the old keep-the-cards-close-to-the-chest routine)”, “people are being beastly to us”, “we’ve done nothing wrong” and “if we have, let’s just hope no-one finds out and if they do, we’ll admit it to the spin doctor ward”, “the (pet) instos we assiduously massage support us” the sort of charter that in shipping that takes container ships 4 miles off course and wrecks them on the Great Barrier Reef. In the risk-sensitive world of banks, this charter ends in salvage waters.

There’s a lot of smoke and heat. Let’s take a peak into the baggage hold.

Cash for comment/no comment

There’s the well publicised cash for comment (or no comment) John Laws affair. Our rookie CEO Frank Cicutto starred live in peak time viewing under the harsh television lights on the National ABC’s 7.30 Report, looking like a spotlit rabbit caught out of the burrow and forced into a groveling and grudging door stop apology.

Damage report? Long term damage to trust and confidence in the brand, the bank’s main asset.

Alleged unconscionable conduct

More recently, the bank’s management has allegedly engaged in some very odious behavior in Tasmania. The Australian Competition and Consumer Commission certainly thinks so.

Alan Kohler in the Australian Financial Review reported on November 7, that on the afternoon of November 2, “the Australian Competition and Consumer Commission hit NAB with a Federal Court writ alleging unconscionable conduct. It referred to a case in Hobart in which the NAB had allegedly sold up the family home of an elderly couple, and kept the proceeds, having unsuccessfully called in a guarantee from the wife who had no idea she had given one”.

Here’s what part of the ACCC’s press release on 3 November had to say about it.

“The ACCC alleges that in response to NAB’s repayment demands, the couple sold the family home, the entire proceeds of which were recovered by the bank. The ACCC further alleges that NAB is improperly withholding thousands of dollars from the sale of the home.”

The ACCC is seeking orders that include damages to the couple for emotional distress, repayment of all excess monies recovered by the bank from the proceeds of the couple’s family home, an injunction restraining NAB from engaging in similar conduct in the future and a review of the NAB’s trade practices program.”

ends

Now the ACCC presumably doesn’t take this type of action against any organisation on behalf of individuals lightly. What was the process in the bank that so raised the ire of the ACCC and who are the individuals responsible. It might be best for the shareholders if the individuals responsible for this grubby little episode pursued opportunities elsewhere. The court revelations should be fascinating but costly to shareholders in dollars and reputational capital.

Hands up the shareholders who want their dividends generated by this type of alleged behaviour from the executive management, even if it is only in Tasmania.

Damage report? Presently uncontrolled and unquantifiable risk to the brand name and customer confidence. A report from the auditors KPMG and directors to shareholders on this matter and any other of similar ilk please, including the estimated monetary damage to the brand name.

Alleged price fixing

Then there is the ACCC’s case against our bank for price fixing on credit card schemes.

The ACCC’s press release included “After an extensive investigation, the ACCC formed the view that the level of interchange fees are unlawful” and is seeking pecuniary penalties, an injunction restraining NAB from engaging in similar conduct in the future, and an order requiring NAB to make fair and just restitution for the benefits derived from the alleged breach.”

Crikey’s old flat mate Andrew White wrote an article in the Australian on October 12 quoting the ACCC’s now recently retired Allan Asher as saying “We are asking the court to make a calculation of the amount of unlawful gains that they have made and to have that money repaid to consumers”. Class action damages by interest groups were also mooted. White also reported that Mr Asher said the ACCC last week (pre October 12) agreed to let the NAB back into the joint study but under the condition that NAB did not try to sabotage the process and that the court case continue.

Sabotage? What on earth is going on?

George Lekakis’s article in the Australian Financial Review on October 30 quoted Mr Asher as saying “I’m not interested in what people say I’m interested in what they do. The National Australia Bank needs to co-operate thoroughly and generously with the commission”. Lekakis reported that the ACCC estimates that Australian banks collect interchange fees of around $600 million each year. Mr Asher was quoted as saying “So, it would be some proportion of that figure [$600 million] multiplied by six years”.

Hands up the shareholders who think allegations of sabotage and illegal price fixing by the powerful and deep pocketed ACCC with a track record of success, possibly leading to open-ended damages to the tune of hundreds of millions of dollars or more in reparations and mooted class actions against the bank help the prospects of sustained share price growth?

Damage report? Uncontrolled and unquantifiable risk to the brand name and customer confidence. Let’s hear from the auditors KPMG and directors on this one too please, and none of the “ill-conceived, no material exposure” routine please. Like the ACCC, shareholders are interested only in what the bank and KPMG are doing about the matter.

Ireland compliance issues

Anthony Hughes’s article in the Sydney Morning Herald on October 31 reported that on Friday October 27, the NAB’s National Irish Bank paid more than $10 million to settle its liability to a government probe into tax avoidance dating back to 1986 by Irish financial institutions. Hughes reported that the Irish Government had concluded the countries financial institutions had colluded in tax evasion.

Hughes also reported that the NAB’s Yorkshire Bank in the UK was fined 100,000 pounds (almost $300,000) by UK regulators because of mistakes in personal equity plans offered by the bank.

George Lekakis’s article in the Australian Financial Review on October 25 reported that Ireland’s Minister for Enterprise and Trade, Ms Mary Harney, had said earlier in the month that she might take legal action to recover from National Irish Bank the 2.5 million Irish pounds (about $5 million) that it cost to fund the investigation.

If it cost the Irish Government $5 million, what did it cost the NAB and what else don’t we know about?

Cicutto has been reported in George Lekakis’s article as saying that “the parent had overhauled the compliance standards within the subsidiary and that he was confident about its new operating framework”. That’s comforting. But what’s the “parent” doing about the problem children who are responsible. Cicutto has presided over this mess for some years now and has some explaining to do to shareholders about why it was necessary for the Irish Government to spend $5 million on forcing a $10 million payment from NAB and why it took so long to settle matters. Previous indications were that the bank was white as the driven snow on these matters. It appears Cicutto may need to be more closely supervised by the parent.

Damage report? Loss of credibility in any present and future statements of denial of wrongdoing by the bank and unquantifiable brand name damage. Report from KPMG and auditors please, including identification of the bank officers who participated in this episode over the years. Such employees look expensive to shareholders.

AusMarkets.com

The ACCC is taking a close interest in the formation of a bank portal to be called AusMarkets.com.

A consortium of ANZ, CBA, NAB and Westpac announced on 6 November 2000 (see anz.com)that they were forming an independent company to operate and manage a multi-contributor, multi-product AusMarkets.com platform. It will provide large institutional and corporate clients with a single access point for transacting wholesale financial market products. The initial focus of product delivery will be on money market and debt securities. This will be followed by a full suite of interest rate derivatives and foreign exchange products.

This whole proposal looks like fertile ground for ACCC intervention. If the ACCC does not like NAB’s involvement in the alleged credit card price-fixing schemes, what makes our bank’s management think this one will escape the ire of the ACCC.

The whole thing on the face of it looks destined to become embroiled in ACCC and public interest inquiries.

Then there is the question of whether it will attract the ire of entrepreneur John Maconochie and the $51 billion AusMaq damages case. AusMarkets.com looks very similar to what Maconochie’s Idoport (JMG) claims the NAB’s National Markets Group should have been doing for the last few years.

The bank has been very silent about AusMarkets.com and its exposure to further litigation. Let’s hope the directors and their risk management committee are awake this time. Shareholders need to be kept informed.

Damages report? Unknown at this stage, but has the potential for a gold medal performance.

ASIC inquiry into NAB commissions

On November 8, ASIC confirmed it was conducting a formal inquiry into allegations that National Australia Bank financial advisers received higher commission payments for selling NAB’s products than those of other external providers.

ASIC commenced the inquiry following allegations published in an article in the Sydney Morning Herald of October 26 “Sweetheart deal for advisers”. Anne Lampe of the SMH reported on November 9 that the information about the bank employees’ “remuneration matrix” emerged during the ongoing $51 billion AusMaq case.

Anne Lampe followed this up in an article in the Sydney Morning Herald’s Money section ‘your money, their junket’. The report made references to the ‘remuneration matrix’ in which the bank’s financial advisers receive double commission if they advise clients to buy NAB products. The report referred to remuneration matrix material that noted if the unlevel playing field of double commissions is removed, NAB could lose $500 million in sales.

George Lekakis’s report in the Australian Financial Review quoted NAB’s head of premium financial services, Mr Andrew Linklater as saying “We are confident that our procedures are consistently the highest level of industry practice and fully comply with ASIC regulations”.

Well Andrew son, you’d better hope the ASIC agrees with you, to say nothing of the ACCC, because you’re probably holding your own future as well as Frank Cicutto’s, Don Argus’s and a large chunk of the shareholders’ money in your hands. You see, Frank and Don were on watch at the time. It might be useful to consult them before you say too much more. You’ll probably find them attentive.

What’s the shareholder’s exposure on this one? It could be a nightmare for shareholders if ASIC determines that investors were victims of deliberate systemic nondisclosure. The potential damages could run into the billions if hundreds of thousands of investors claim for any losses. If the ACCC wades in on this one, the other dramas the bank has with the ACCC and the courts could look like warm up events in comparison.

Damages report? One hesitates to even think about it.

$51 billion AusMaq court case

Almost last, but not least by any means, is the $51 billion AusMaq case.

After a 7 week opening by the plaintiffs against the bank, the case adjourned for the Olympics on September 7. It resumed on October 3 and the bank has since been opening its case in reply for 5 weeks. It looks set to equal or better the plaintiffs opening time of 7 weeks possibly finishing its opening in early December.

CEO Cicutto was reported in the Australian by Tim Boreham on November 3 as saying he was more “more comfortable than ever” that John Maconochie’s multibillion litigation against the bank would fail. This is after portraying in court Maconochie as bullying the bank. The elderly folk in Tasmania should get a kick out of that one.

Cicutto doesn’t say why he is ‘more comfortable than ever’ about McBully’s case, but he and his chairman Mark Rayner also didn’t tell shareholders at last December’s AGM that it is likely to cost the bank a legal bill of up to $100 million as reported by Tim Boreham in the Australian on September 27.

$100 MILLION DOLLARS!!!

The bank’s executives, Cicutto included, and the auditors KPMG in last year’s Annual Report, have kept telling the shareholders there was no material exposure to the bank and its shareholders from this case. The bank omitted to tell shareholders about a legal exposure alone of $100 MILLION DOLLARS.

I don’t know about the merits of the dispute, but I can imagine Cicutto would be feeling rather “more comfortable than ever” after successfully touching the board for a LEGAL BARRIER OF $100 MILLION DOLLARS OF SHAREHOLDERS’ MONEY. Cicutto doesn’t say whether he is “more comfortable than ever” about his personal position as a personal defendant or whether he is “more comfortable than ever” about the bank and its shareholders. And he doesn’t nominate what his comfort level would be with a mere $50 million legal barrier, but I plan to ask him at the AGM.

Win, lose or draw, Cicutto and the bank’s executives have no financial exposure at the moment. Perhaps shareholders should demand Cicutto and the board to back their judgment by putting their emoluments and handsome remuneration on the line like a negative option plan for say a non material amount of about $100 million of legal barrier costs that they forgot to tell shareholders about last year.

Somehow, I just can’t see that happening.

For this Board candidate’s money, something smells very wrong about all this.

This case has been consistently dismissed by the bank as being misconceived and without merit. Cicutto has invested the bank’s entire reputational capital into this case.

Now it emerges that IN ADDITION TO THE BANK’S ENTIRE REPUTATIONAL CAPITAL, Cicutto needs legal services costing $100 MILLION DOLLARS OF SHAREHOLDERS’ FUNDS to defend the claim. This simply cannot be as clear cut or “comfortable” as Cicutto makes out. What’s the real problem here? The shareholders deserve answers, now.

And just suppose for a moment that $100million dollars and the bank’s entire reputational capital doesn’t persuade the judge at the end of the day to agree with Cicutto’s comfortable state and see off this claim. What would happen to the bank then?

If the plaintiffs get up for just 10% of their claim, that’s $5 billion give or take, the bank would face an immediate $5 billion deficiency of capital. It would be bust. The regulator (APRA) would have to step in and administer the bank (shades of Continental Illinois bank in the US in 1984, and the US Savings and Loans debacles of the early 1990’s) until the claim could be satisfied, probably by selling the bank’s offshore assets in a fire sale.

By the AGM on December 14 we should have finally heard both sides of the dispute in court and we might be able to get a better picture of the eventual scale of this bank disaster. But with Cicutto feeling “more comfortable than ever” hiding behind the shareholders’ shield, it will be up to the judge in the end who decides the bank’s destiny and the shareholders’ fortunes if the shareholders leave the shield in place of course.

The SEC and NAB’s USD1.6 billion bond issue

The prospectus issued in the US by NAB for its US$1.6 billion May 2000 bond issue made no specific mention of the $51 billion (then $32 billion) AusMaq case. The latest analyst talk in Melbourne is that the United States Securities and Exchange Commission is seeking answers and the NAB Board is feeling some pressure.

I’m not sure what would happen if the bond holders and the SEC insisted it be paid back to investors. I’ll be wanting to know about this if I am successful in being elected to the NAB board.

A Systemic flaw at the NAB and a PR disaster

Every large business has its ups and downs. But something tells this board candidate that there is a systemic flaw in the NAB at the risk management level which is on the verge of spinning out of control.

There is the John Laws cash for comment/no comment PR disaster, two serious ACCC matters in the courts, a serious ASIC investigation into alleged undisclosed commissions, heavy punishment penalties levied by the Irish Government on compliance issues, a looming ACCC investigation into the AusMarkets.com proposal, the $51 billion AusMaq legal claim in court, and rumours of SEC queries that if true could have very serious consequences.

No wonder experienced journalists like Alan Kohler (Australian November 7) are saying “NAB has become a PR liability in an industry of PR liabilities” and at the announcement of results on 2 November that Cicutto “looked swarthy at best and downright scary at worst”.

The truth is that none of these matters should be anywhere near the courts or before regulators or governments. The bank is being systemically exposed to open-ended risks, any one of which is damaging growth in shareholder value to a greater or lesser degree.

Analysts are now opining that share price growth through acquisition is out of the question while the major risks remain open and the brand remains under pressure.

One thing seems clear. The bank management is no longer operating on commercially rational lines and appears to be in a state of siege of gold medal proportions. Having steered the bank into these various predicaments, Cicutto appears rattled and unsure of what to do next. Some clear and rational direction appears long overdue.

The mail is that the bank board is ostensibly very happy about things and particularly about their CEO and his performance. So were the BHP and AMP boards of yesteryear.

Its over now to the institutional shareholders to play their part and give the NAB board a wake up call by giving fresh new candidates a run. Boards of big companies in Australia exist at the pleasure of the Australian institutions. Maybe their investments would perform better if they were a little less accommodating of poor performance at board, management and share price levels and used their proxy and PR power to effect change instead of leaving it to the little blokes to do the hard work for them. In the case of the NAB, their silence is becoming deafening.

Who knows. Their own investors might even reward them for it with kudos and larger inflows into their funds. The Aussie dollar might even rise on the back of increased confidence.

The AGM

BRW’s full page advertisement in the Sydney Morning Herald GOOD WEEKEND November 11 has picked up the vibes about AGM’s in Australia. The ad reads

Caption – annual general meeting, caption – the annual report (picture of an annual report), caption – the truth (BRW’s July 21 Cover page NAB’s $36 billion legal nightmare inside Australia’s biggest court case), caption BRW. the unfair advantage.

Pity about singling out the NAB. It could have been any one of a number of Australian public companies which form the core of Australian institutional shareholdings.

See you at the NAB AGM and your proxy is welcome.

Stephen Mayne

NAB board candidate

Peter Fray

This crisis will cut hard and deep but one day it will be over.

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