A lack of banking experience is still a big weakness for the NAB board.
Two comments on Monday by chairman Charles Allen go to the heart of the
corporate governance issues at the National Australia Bank.
Firstly, Allen acknowledged the need for more banking experience at
director level when he confirmed, “the board was continuing its search
for additional directors with relevant financial services experience.”
Of course, for a brief period of six months, the banking experience on
NAB’s board was doubled by the appointment of experienced UK retail
financial services executive, John Stewart. However, with yesterday’s
appointment of Stewart to the top job after Frank Cicutto’s departure,
the NAB reverts to its customary arrangement of the chief executive
being the only banker at the board table.
Moreover, although highly respected in his own field, Stewart’s
all-round experience can be viewed as narrower than that of his
predecessor. Despite Charles Allen lauding Stewart’s international
banking experience, his résumé reveals a career exclusively grounded in
domestic personal banking and wealth management services – the domestic
market concerned happens to be outside Australia. Stewart’s move to
Melbourne appears to be his first overseas posting, in contrast with
Cicutto’s career at NAB, which included periods heading up the US
operations and as chief executive of the Clydesdale Bank.
Stewart yesterday admitted that his lack of wholesale financial markets
experience was a weakness in his background and gave the stock response
that he would need to invest in the required expertise and control
systems to compensate. However, the fact remains that Stewart has no
experience in corporate and international banking – a division that
contributed 21 per cent of NAB’s profit last year – nor of managing a
multinational financial services organisation generating 44 per cent of
its profit outside its domestic market.
It is unclear how the NAB board’s search for more banking experience has
been conducted and for how long. Allen’s claim about a dearth of
suitable qualified candidates in Australia does not ring true unless the
search is confined to membership of the Melbourne Club.
If it is so difficult, how can a public sector body like Treasury
Corporation Victoria assemble a board with six non-executive directors
comprising: a former chief executive of National Mutual; a former chief
financial officer of the ANZ Banking Group; a former executive director
and head of Australian debt capital markets at Morgan Stanley; a former
CEO of Jacques Martin funds administration; a former treasurer of
Colonial State Bank; and a former senior economist at ANZ and the
Secondly, Allen’s defence that the former chief executives of companies
using derivatives in their businesses had sufficient understanding of
the “fairly simple” principles of such instruments should be ringing
alarm bells among regulators and shareholders.
The statement shows an elementary misunderstanding of the nature of
derivatives and their use in financial risk management.
The fundamental feature of these instruments is that they allow the
transfer of financial risk from one party to another. Mining,
manufacturing and oil companies typically seek to reduce the financial
risk arising from their business operations and are therefore buyers of
instruments that reduce risk. By selling such instruments and
transferring the risk into their own books, banks are risk hedgers and
traders – with a view to making a profit.
In simple terms, buying an option limits the risk of loss while giving
unlimited profit potential. For every option buyer there must be a
seller, and the seller has a limited profit potential but unlimited
possibility of losses.
Companies buy options and banks sell them. To assert that a familiarity
with buying options somehow qualifies someone to sell them is tantamount
to claiming that an occasional punter on Melbourne Cup knows as much
about running a book as a bookmaker, or a buyer of an insurance cover is
a qualified policy underwriter.
Allen’s opinion about the derivatives experience required at bank board
level is in stark contrast to that of former Reserve Bank governor
Bernie Fraser, who last month said Australian banks should have at least
one director able to supervise the trading of products as complex as
Managing changes to the NAB’s culture at management and staff levels
clearly falls within new CEO John Stewart’s area of responsibility, but
changing the culture of the board is not in his job description.