On May 1st this year, the Australian Prudential Regulation Authority (APRA) released its prudential inquiry into the Commonwealth Bank of Australia (CBA). This report, into a formerly trusted Australian institution, was commissioned following a number of damaging incidents of misconduct and regulatory breaches. The review identified, among a range of issues, inadequate governance oversight and highlighted the lack of board challenge of management reporting.
The report stated, ‘The Board’s strong confidence and trust in senior management’s ‘high IQ’ and their ability to ‘take care of all things’ meant that the Board also did not challenge management strongly, or hold them to account over longer time frames’.
How does a board of our largest bank composed of leaders from the commercial world get it so wrong? A common starting point in reviewing governance failures is to examine the composition of the board. Governance principles suggests a range of board member skills and experience provides the optimal mix to ensure a diversity of perspectives is brought to the analysis of organisational performance, risk and strategic direction. Research undertaken to examine governance in another trusted sector, Australian public hospitals, highlights some interesting findings in relation to skills and other factors influencing effective governance.
Governance is more than board members
When we think about governance we often think about boards. However, board members are only half of the equation. Governance is an exchange between board members and executives. Boards rely on management to deliver reports that provide a transparent, balanced view of the current status of the organisation. The APRA report highlights that a scarcity of executives skilled in risk management contributed to some of the issues at CBA. Risk reporting to the board was found to be deficient. Similarly, in the study of public hospitals, executive skills in understanding governance and reporting requirements at that level were found to influence governance effectiveness. Management reporting to the board was found to vary greatly between hospitals reflecting different understandings of governance. At some hospitals, reporting was focused on providing the board with assurance on meeting compliance requirements through, for example, departmental performance measures. At other boards, a comprehensive range of information was used to, not only provide compliance assurance but to understand the quality of services provided and the experience of patients. The APRA review found that the CBA Board received positive aggregate customer satisfaction metrics but did not receive any information or analysis on customer complaints, which would have provided insight into some emerging risks.
Board directors are often selected for a range of skills in areas such as finance, business, politics and media. The public hospital research found that while there is often a focus on getting clinicians on boards, the real value in having directors with clinical experience was not in their technical skills, but in their broad understanding of how the healthcare sector works. This finding rings true to the CBA board where relatively few directors or executives had banking experience which gave them an in-depth understanding of the sector.
The study also found leadership skills were critical for both board members and management. While this sounds obvious for those who direct and control powerful organisations, the APRA report found that executives were appointed who had not ‘peaked in their career’ and had fewer skills in ‘reflection, humility, learning and adaptive capacity’. The hospital study echoes this and found board directors and executive staff were often appointed primarily for their technical skills and not leadership and governance skills. Leadership skills were found to be essential in promoting challenge and adequate reflection on organisational and governance performance.
The need for reflection
A key finding from the study of public hospitals was the value of critical reflection. Regular review of reporting frameworks were essential in ensuring reports addressed key governance responsibilities. Similarly, regular reviews of not only board effectiveness but board committee effectiveness were important. Board committees do much of the heavy lifting of essential governance work. Yet few hospital boards took the time to examine whether these committees were working well and whether they added value to the board. A final aspect of reflexivity found to be important was active board engagement, with reflection on evidence arising from internal and external reviews of their own and others performance. The APRA review also found the CBA board and executives were insular and lacked critical reflection. The committees were found to be underperforming and the board did not learn from its own or others mistakes.
Governance effectiveness requires board and senior executives skilled in governance and leadership who create regular opportunities for debate, challenge and reflection on current organisation and governance performance using a broad range of data and evidence.
By Alison Brown