**This article has been updated 7 February, 2019 due to errors in the original story.
The final report from the Royal Commission into misconduct in the Banking, Superannuation and the Financial Sector was released on Monday afternoon. Teams of journalists from major networks and publications combed through the pages and identified some of the key issues.
Organisations, the government, and regulators have made commitments to meeting some of the recommendations in the door stop of a document.
Last year, TAS CEO Shane Baker told the GRC Professional that the reason why the Royal Commission was so important is that Australia had been fortunate when it came to the global financial crisis (GFC).
24 hours after the report had been released, the GRC Professional caught up with the Macquarie University Banking Risk Expert Professor Elizabeth Sheedy who has been very critical of the way organisations have been measuring conduct and culture.
Have the recommendations raised the bar?
Professor Elizabeth Sheedy said that there has not been enough change in the external environment to warrant businesses and shareholders taking it seriously. Thus, there could be a risk that the financial sector might find itself subject to another inquiry in a few years’ time.
“To be honest I have been a little bit disappointed by the final report, maybe my expectations were just too high,” Sheedy said. From a risk and compliance perspective, she said there is a lot of emphasis on putting resources into APRA for a more intensive prudential supervision remuneration practice in culture.
For her, this approach is neither realistic nor practical.
“It is very resource-intensive doing that kind of prudential supervision, there’s not that many people around that have the expertise in areas with the experience to do a good job at it,” She added.
Her misgivings come from the fact that this is not the first time that the Prudential regulator has considered this track of considering governance risk and remuneration culture.
“I am just reflecting on the fact that they set up the governance, culture and remuneration culture team and they were starting to make some headway building their resources and then basically everyone left and set up a consulting firm.”
She believes that it will take the regulator years to build up the team that will have the right skills and the right resources for the task.
supervising culture from outside is tough and she does not think that the oft-repeated example of the De Nederlandsche Bank will apply well to the Australian context, which Commissioner Kenneth Hayne highlights.
When the report was released on Monday afternoon, APRA released a formal statement for the royal commission for this role in supervising governance and remuneration culture:
The Commission highlighted the central role that APRA’s work on governance, culture, and remuneration will play in underpinning better behavioural standards and stronger accountability in the financial system and recommends APRA do more in this area. APRA has acknowledged the importance of this and will continue to build expertise and capacity devoted to these issues.
The APRA Chairman Wayne Byres said in a formal statement on Monday afternoon, “Although the Commission has assigned some important new responsibilities to APRA, our primary responsibility remains the safety and stability of the financial system, to protect the financial well-being of the Australian community. APRA is the only regulator with a primary focus on ensuring the safety and soundness of the financial system.”
Not Enough on Remuneration?
Sheedy was also dissatisfied with the recommendations around remuneration.
“Basically, what they are saying is 'go away and implement the Sedgewick report. The Sedgewick was basically the report by the Australian Banking Association (ABA). And Sedgewick was all about was the balanced scorecard. I am sorry, but the balanced scorecard has been an abject failure.”
Sheedy is referring to the report authored by Stephen Sedgwick title the Retail Baking Remuneration Review which was published in 2017.
Last year Sheedy also released her findings on the balanced scorecard and found that the challenge with using it as a measurement is that if there is misconduct there will be an effort on the part of the individual to try to conceal that misconduct.
“The fundamental problem that you’ve got is that you have these non-financial measures that are ineffective. Take compliance, for example, people are going to hide their violation, aren’t they? People are going to hide their non-compliance. To think that measure these things accurately is just nonsense.” she explained.
Why would the culture change?
One of the issues that she identified is that the criminal referrals are not spelled out and have been delivered as a secret letter to ASIC.
“Why is that this taxpayer-funded royal commission, why are we out in the dark about the criminal referrals. How long is it going to take them [ASIC] to investigate? And if they do make it to court, how many years is that going to take make it through the legal system? And even if they get a conviction it is a good chance that the courts will give a very minor penalty that makes no real impact.”
For her, there is not enough pressure for sustainable change.
This extends to her concerns around the measurement of culture within their organisation, since she has not seen effort on the part of organisation to ensure that the tools that they use to measure culture in their organisations want to change.
In the 2017 Conference Edition of the GRC Professional Magazine Deloitte Specialist Partner in Governance, Regulation and Compliance writes on change management and culture “How many psychologists does it take to change a light bulb? Only one, but the light bulb has to want to change.”
Key issues for the Macquarie University Professor:
The key things that she would have liked to have seen are a moratorium on variable remuneration.
And Confidence that when the criminal investigations going through the courts that the penalties will be meaningful. There has been no recommendation to change those penalties.