The fate of the now not-so-mighty NAB is now all but sealed. The only
questions remaining are which foreign bank will merge with the NAB, the
terms and the future role of the National’s new CEO John Stewart.
When ex NAB CEO Frank Cicutto broached the bank’s latest stumble, this
time in foreign exchange trading, with his board, little did he and
they know it would be a defining moment for Australia’s and one of the
world’s largest banks.

Since receiving Cicutto’s piece of bad news, the National’s board,
already rattled and reeling from years of bad publicity from a series
of expensive bad calls and misjudgment by a seemingly accident prone
senior management, endorsed management advice that reflected the bank’s
standard way of doing things over the last few years.

The National’s board then presided in horror over increasingly stress
filled days and weeks. The media and institutional shareholders roasted
the previously tried, tested and found to be wanting HomeSide activist
legal and spin template. Unfavorable comparisons were made to the
bank’s initial response to the FX losses. Things went from bad to
worse. The ensuing maelstrom that engulfed the board and in short order
expelled the bank’s CEO and chairman, forced the board to hastily
install a new CEO, John Stewart from the UK, sell the bank’s strategic
stake in St George Bank and cancel the share buyback.

Fast forward to today. The cloak of independence bestowed on PwC and
its soon-to-be-released report is now looking decidedly frayed.

Fascinated viewers and even casual by-standers have watched in
disbelief as Australia’s most senior print journalists and media
commentators have dispensed a sustained, even unprecedented,
public flogging of the National. New Chairman Kraehe has turned
in an ordinary performance. Even so, the bank’s senior management and
board still seem to have had difficulty in grasping the essentials.

In some surprising admissions to the media, Mr Kraehe would have the
market and the National’s owners believe that a report that is cycled
backwards and forwards in its making between senior management and the
board could retain even any veneer of independence. Regardless of the
skill, application and integrity of the PwC individuals charged with
producing the report, and the probity and infilling of the perceived
conflicts of interest by law firms and other accounting firms, the
report generation process is inherently flawed. And when the board
members have had their two cents worth, the National’s redoubtable
legal and PR departments will run it through their usual
confidentiality, legal and professional privilege and spin screens.

Who really believes that the PwC report that emerges will pass even loose muster by the market as independent?

Well, it seems not all of the National’s board members. As the moment
of truth approaches, there have been media reports of signs of board
unease and disunity.

The entire National board and its management has to take the
responsibility for the deployment and risk management of the bank’s
capital. They are accountable for producing past profit reports that
may have relied excessively on running down reserves to preserve a
mirage of real growth. That responsibility cannot be sheeted home
solely to the members of the bank’s risk management committee.
Massive write downs under the smokescreen of a new CEO will only
demonstrate the old guard’s failings and bring their tenure into

New CEO John Stewart is at the cross roads. He was saddled with the
earlier decision to hang everything on a report by PwC. Does he endorse
it and risk being tarred as a captive of the same brush that painted
years of disasters? Or does he commission a new report by a senior
banking investigatory team brought in from overseas to make the
requisite inquiries and produce a public report in a process that that
cannot be seen as anything but independent? APRA’s forthcoming report,
which the bank has shown some prospective reluctance to release, might
be a useful guide.

And what of the bank’s new auditors. It seems that the only starter
left on the grid who has not done advisory, investigative or audit work
for the bank is Ernst and Young.

The remaining report to be done is a ‘cultural’ report. PwC as it
stands today is arguably not qualified. The skilled people in PwC
Consulting in the cultural consulting area were hived off to IBM in
October 2002 in the wake of the reforms triggered by the Arthur
Anderson meltdown.

This leaves the question of the National’s board. No-one should hold
their breath that any more board members will resign. It presently
seems they are lining up behind the PwC report and will sink or swim
with it. Its inherently flawed process will make the board’s continued
tenure a matter of conjecture.

Markets being what they are, this type of structural weakness and
instability inevitably attracts predators. No-one should be surprised
if a market-forced merger supported by overseas institutional
shareholders makes the existing board and senior management redundant
before not too long. It will only take one more market surprise. John
Stewart will be hoping he’s looked under all the rocks. Standby for a
completely new senior management team at the National.

Peter Fray

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