Stuart Mackenzie, the most insightful writer in Australia on the Homeside debacle at the NAB, is not at all impressed with the accountability mechanisms on display at head office.
Their particular brand of non-stick coating includes defending major securities firms from enforcement proceedings, defending the indefensible at Phillip Morris and advising companies and their boards on “the most difficult and sensitive corporate disclosure, 05issues.”
Such advice presumably includes using a law firm to prime contract the investigation into the NAB’s risk management practices, ensuring that all work carried out by them, or on their instruction, is protected by attorney-client privilege. Investigation documents are not only inaccessible to anyone taking legal action against the bank, but potentially also to auditors, regulators, shareholders and others who may have a legitimate interest in the findings reported to the board.
But, equipped with extra sharp Fourth Estate brand utensils, let’s scratch the surface a bit.
The key to the investigation’s findings is in the board’s statement this week that senior finance and risk management executives will be appointed as executive team members of all major subsidiaries, “regardless of the type of business.”
This appears to lend credence to persistent reports from current and former employees about concerns in several group functions over the NAB’s (then) “New Management Model” quarantining HomeSide from established reporting and control processes.
Resistance from Jacksonville to head office oversight appeared to be accepted, if not condoned, by some Bourke Street based managers.
Mid-level managers raising the concerns were told to keep out of HomeSide, that its business was different to the rest of the group and they wouldn’t understand it.
The same sources report this practice continuing with group staff receiving similar brush-offs over involvement with the more recent MLC acquisition until HomeSide hit the fan.
The key questions are why those risk executives were not seconded from day one, why HomeSide was treated differently and who made the decisions to do so?
Wachtell’s letter to NAB chairman Charles Allen says that, with hindsight, it would have been preferable for the group to second a senior executive to HomeSide from the outset and for group controls and practices to have been implemented.
It is difficult to understand why any hindsight is required, since NAB is no novice in the acquisition game and has a proven model for acquisition management.
For example, when due diligence at the Bank of New Zealand in the early ’90s caused concern over aspects of their market trading risk management, head office risk practices were imposed and a group treasury “middle office” risk management executive was seconded to Wellington for three years.
The model includes the secondment of several NAB executives to senior positions in support functions such as credit risk, finance and information technology, in addition to secondments to key lines of business.
This approach was used for the NAB’s UK acquisitions and was further developed and refined during Bob Prowse’s involvement in the BNZ acquisition. Indeed, Prowse was subsequently seconded to Wellington as the first post-acquisition chief executive officer.
Other NAB executives, including Don Argus, Frank Cicutto and Richard McKinnon, and the board, should be familiar with the “NAB way” of managing acquisitions.
The report now in the board’s hands states that “the culture at HomeSide could have benefited from the type of controls and practices that on-site Group executives would have brought to a business like HomeSide’s.”
But why wasn’t the proven model followed during the first three years?
Earlier, Wachtell’s letter notes that no one was specifically tasked with following up some of the due diligence team’s findings and continues, “Group management, 05was not in the executive suite at HomeSide. , 05the Group did not have day-to-day involvement in the management of HomeSide, and areas of risk-management weakness that the Group identified both during due diligence and during subsequent periodic visits were not corrected as immediately or rigorously as the Group directed.”
“For example, certain recommendations of the Group’s internal auditors in late 2000 were not implemented by HomeSide’s management as they should have been, and it took several months for the Group to realize this fact from overseas.”
Irrespective of the absence of seconded head office executives, HomeSide’s board of directors is ultimately responsible for the performance of its executive management, as in Australia, whether or not the company is a wholly owned subsidiary.
NAB’s corporate governance statement in the 2001 annual report to shareholders states that the major processes by which directors of the group’s controlled entities meet their duties include ensuring adequate risk management processes; reviewing internal controls and internal and external audit reports; ensuring compliance with prudential standards; reviewing the performance of the chief executive officer and senior management; and ensuring that the board has an in-depth understanding of each substantial segment of the business.
If HomeSide’s board dropped the ball in meeting these responsibilities, who were the directors involved?
In addition to the three Jacksonville-based executives now in a legal fight over their terminations, the board included, at various times, NAB executives Don Argus, Frank Cicutto, Bob Prowse and Richard McKinnon.
If they weren’t appointed to the HomeSide board to protect the NAB’s interests as the sole shareholder, what were they there for?
And how were they appointed? By the group board, according to the corporate governance statement.
Wachtell’s review uncovered no evidence of unlawful or improper conduct by group personnel.
It would have been surprising if it had.
The overwhelming majority of decisions made daily in business about staff accountability, performance, rewards and penalties don’t involve unlawful conduct and are not supported by evidence that would hold up in court.
They involve subjective judgment about whether an employee has performed as expected; given such factors as skills, experience and the responsibility he or she is paid for assuming.
One of the reasons executives get bought off with golden handshakes is because executive performance assessment involves many subjective areas of judgment that companies don’t want tested in court.
The question that shareholders and the market are asking is not, did highly paid executives do anything illegal, but did they perform as expected or not?
The answer appears to be no judging by the fact that their performance bonuses are still cut.
And clearing group executives and directors of culpability for the sixth biggest loss in Australian corporate history, on the basis of corrective action taken after the event, involves logic that will escape most observers outside rarefied atmosphere of the Bourke Street boardroom.
Charles Allen says the completion of the review brings to an end an unfortunate chapter in NAB’s history. He may well be right, but the manner of its ending does little for the cause of improved executive accountability or transparent corporate governance in this country.
Feedback to Stuart Mackenzie at [email protected]