Banking royal commission: how CBA’s bosses struggled with checks and balances


Published by Australian Financial Review on Wednesday 21 November 2018

There were two big surprises in the evidence of Commonwealth Bank chief executive Matt Comyn and his chairman Catherine Livingstone before the royal commission. The first was that Comyn pushed so hard against his former boss that he received the now famous injunction “Temper your sense of injustice”. The second was that an experienced director like Livingstone took so long to get across the issues of being a bank director.

Butting heads with your boss is always risky. While former CEO Ian Narev is not vindictive, clashing strongly and repeatedly with a subordinate inevitably unsettles both. Comyn wisely held back and deferred to his boss’s judgment. The classic choices are “exit, voice or loyalty” and having given voice, he chose loyalty over exit.

Given the nature of the royal commission we only get to hear one side of these stories. On the basis of what we have heard it seems that Comyn’s judgment was sound. He judged how far he could press before having to defer, but clearly established his disagreement with Narev on several important decisions.

As CEO, Narev clearly had to make a range of important decisions for the company. The commission has explored his role in a couple which went wrong. Just why he took decisions which he probably regrets with hindsight is open to conjecture. As has been pointed out, in general his decisions in these instances supported the profit of the bank. It is very likely that he also took a range of decisions which did not – we just do not have the evidence.

In companies like CBA which run divisional models, much responsibility is channelled to the CEO. Each divisional executive is responsible for his or her business. Even the CEO would usually defer to the responsible business “owner” to make key decisions on the grounds that they are the best informed.

Digging for issues

The role of the control groups, the executive committee, the CEO and the board, is to provide the appropriate checks and to provide balance across the group. In the CBA model, the executive committee was not normally focused on problems inside individual businesses, but rather with balancing issues, sharing information or managing co-operation across businesses.

One of the consequences was to put more responsibility on to the CEO and board for digging into issues within businesses.

The Laker committee was already told us that the board was not very effective in its role in providing the necessary challenge to management. Livingstone’s evidence about how long she took to get up to speed is telling. It is very clear that there have been deficiencies in preparing members of the board for their work. While they depend on the CEO and the executives for the information reports about the business, they also need to understand enough of the business to ask difficult questions.

Banks are very complex businesses and operate in a highly regulated environment. Building a board which combines the required depth of experience and ensuring it has the appropriate training and information is a key task for Livingstone. If she struggled despite her experience on other boards, then it is clear that other new directors will require even more education. The commissioner expressed surprise about the limited nature of the preparation of board members.

Nature of risks

The role of the CEO, and his willingness to challenge his businesses, was thus the lynchpin. He needed to resolve divisional arguments, and to strike the appropriate balance between the various interests. The control functions, finance, audit, risk and legal, were essential.

What is missing in the evidence presented is just what role these control groups played in shaping the decisions Ian Narev took. On the sale of insurance with retail banking products, the CEO was faced with a trade-off between Comyn, who sold the product to his customers and Annabel Spring, who produced the product. Narev did not support Comyn and in retrospect it is clear that he misjudged the reputational and financial risks involved. We can assume that his judgment was supported by the chief risk officer and general counsel, even if it was wrong. The error, though, was probably in the advice about the nature of the risks.

As a footnote, it is also interesting to note that while the four major banks are often referred to as an oligopoly it is not clear they can operate as one. The case of broker commission reveals just how hard it would be to actually operate as an oligopoly. CBA wanted to reduce broker commission, and yet even with 25 per cent of the mortgage market it did not feel able to move by itself. It clearly felt that the other members of the so-called oligopoly would not follow its lead to their joint advantage. The competitive pressures outweighed any tendency to function as an oligopoly.