Q+A with Jillian Broadbent AO

Jillian Broadbent AO was a member of the Panel of the Australian Prudential Regulation Authority that conducted an inquiry into the Commonwealth Bank of Australia. Jillian’s had a long and successful career in finance with Bankers Trust in Australia.

Today, Jillian serves as a non-executive director on a number of Australian entities including Woolworths Ltd and Swiss Reinsurance. Jillian is also Chancellor of the University of Wollongong. She was made an Officer of the Order of Australia in 2003 for services to economic and financial development in Australia.

METTLE: Given your long executive career in banking with Bankers Trust before taking up non-executive director roles you were a natural choice for Australian Prudential Regulation Authority (APRA) for its inquiry into Commonwealth Bank Australia (CBA). But did the request surprise you? How did you feel about it?

JILLIAN BROADBENT: I think the whole inquiry was a surprise. We’ve got a very strong banking system in Australia and APRA haven’t had the need to delve into problems like this before. Appointing an expert panel to conduct the inquiry was, on the part of APRA, a means to understand “What’s going on at CBA? They’ve got all these issues; how do these breaches happen?”

The reality is a review like this is very unusual and it was a new approach for APRA. In terms of who they chose to do it, they selected a diverse team from private and public sectors. It wasn’t something people were saying “oh, I can’t wait to do that”.

I believe it’s important we use private sector skills and experience for a public policy purpose, and I think it’s a very dangerous view to fear people might be critical of anyone using their commercial acumen for a public benefit.

METTLE: In New Zealand, many are grateful for the role the big four Australian banks and their subsidiaries played in both Australia and New Zealand coming through the GFC. What do you think the impact of this report will be for the broader banking industry?

JILLIAN BROADBENT: It’s been acknowledged that we’re all very appreciative of the regulators and banking system here in Australia and New Zealand in getting us through the GFC. We were able to navigate that period in economic history pretty well. It also adds to the curiosity from APRA as to how CBA, one of the biggest, most successful banks in the market, was found to have these shortcomings.

It certainly provided a lot of motivation for APRA to work out why this was occurring. It wasn’t an easy challenge, going into complex, dry topics such as governance, accountability and culture at a large institution but it was something they felt had to be done.

METTLE: To what extent do you think APRA’s report has relevance for entities beyond CBA?

JILLIAN BROADBENT: I think the document is very accessible, and I personally gained significant learnings from participating in the panel. They are complicated and interrelated topics, but I hope most other non-executive directors and boards find the report useful.

As a board director, it is hard to get the balance between not interfering in what are considered management matters and being involved enough to ensure outcomes that management are reporting as being achieved, actually are. You can have too much trust. You must be prepared to say: “Can we have a further look at this?”

It’s all about challenging and understanding that boards must test. It’s going beyond taking responses at face value to ensure a reassurance is genuine and be absolutely sure that management is on top of the facts.

“Appointing an expert panel to conduct the inquiry was, on the part of APRA, a means to understand “What’s going on at CBA? They’ve got all these issues; how do these breaches happen?” Jillian Broadbent AO

METTLE: Would you say non-executive directors need to be more conservative than executive directors?

JILLIAN BROADBENT: It’s a tough gig being an effective non-executive director – not a lot of people put in the time and energy to challenge effectively. You have to do your homework and ask questions on topics that at times you don’t know a great deal about.

From my perspective, I think my closest friends are those who challenge me. If I am challenged, I usually think more deeply. Although it is uncomfortable, it helps me consolidate my thoughts.

METTLE: The Panel found there were times when CBA approached things from the “can we” perspective in selling products to customers rather than the “should we” approach. What do you say to business people who say: “But we are a business, we are here to maximise profit for our shareholders, so of course we try to maximise what our customers buy from us.”?

JILLIAN BROADBENT: The way we tried to express an appetite for risk and a consideration of the customer by using the “should we” versus “can we” proposition, I hope will endure.

There is a tendency whenever there’s an issue in a business that is a bit tricky, to flick it to the legal department to come up with a legal solution. In that situation, even if it is possible, there is insufficient consideration of is it suitable for everybody? If you have a customer dependent business, brand quality has to be sustained. Long term shareholder returns are maximized if you retain customer loyalty and support.

The share price reflects brand value. Good business is serving the customer well and to serve customers well is all about the value proposition. If a business is only focused on short term profits, there’s a risk of losing long term value of maintaining the brand. You can’t muck around with these things. CBA is a brand to die for but these matters that led to the review and the recent, adverse publicity has damaged the brand and been reflected in a lower share price.

METTLE: The findings about CBA not being as focused on non-financial risks as it was financial risk presumably surprised the Panel and indeed CBA. This must be a wake-up call for many organisations around the need for “chronic unease” around non-financial risks. What comments do you have for business more generally?

JILLIAN BROADBENT: I do think banks have a broader responsibility in the national economy because of the nature of their operations and being highly leveraged institutions whose products or services many individuals and other companies depend on. It’s important for anyone working at a bank to understand that and the term “chronic unease” reflects the consistent sense of scrutiny that needs to be applied.

I think chronic unease is a bit rare in financially successful organisations because financial success tends to breed ease rather than unease. The challenge then is to constantly be on your toes and question the origins of success to ensure it is real and enduring.

We introduced the term in the report after observing how other industries deal with health and safety. The oil and gas industry for instance are very focused on safety and there needs to be a culture where people are constantly alert. The first instance people relax in such industries increases the likelihood of a fatality, so the stakes are extremely high – unease becomes essential to achieving a high standard and consequently a good safety outcome.

METTLE: The Panel found that CBA’s remuneration framework had little sting for senior managers when poor risk or customer outcomes materialized, but others down the chain felt the pain. From your broader business experience do you think this is more common than should be the case in business? Is there a “Do as I say, not as I do?” mentality?

JILLIAN BROADBENT: Boards tend to only be involved in remuneration of senior executives, but I do think they need to ask for aggregate information about bonus outcomes across an organisation, and probe for the deeper detail they need.

Getting accountability aligned with remuneration is critical, but is extremely difficult. There’s a need to build up strong measures of risk outcomes and ensure executives know if they don’t meet a diverse range of targets, it’s going to impact on remuneration.

The finance sector is generously rewarded which is ok if those who benefit fulfil all responsibilities across both risk management and financial performance.

What we found was that there wasn’t enough stick when risk management failings were identified. In the case of CBA there were certain hurdles relating to risk management standards that individuals would have to comply with before the bonus gates opened. We found these checks were not being applied as effectively and consistently as they could have been.

METTLE: The mantra in business today is about working collaboratively. In New Zealand society (perhaps even more than in Australia) people place a premium on everyone getting along, and it’s quite easy to paint those that challenge the norm as being difficult. Would you comment on this?

JILLIAN BROADBENT: Collaboration is nice to have, but not everything is a birthday party. Working collaboratively should not eliminate challenging each other.

If we don’t challenge, our organisations are never going to be performing at their best. I can’t see how anyone challenging can be offensive and I don’t think challenging on the basis of knowledge can be anything but wholesome.

"Collaboration is nice to have, but not everything is a birthday party. Working collaboratively should not eliminate challenging each other." Jillian Broadbent AO

METTLE: Presumably there will be some saying the findings just make it all too hard to be a director and the report will make banks, business directors and executives even more risk adverse. What do you say to that?

JILLIAN BROADBENT: When we started out with CBA we didn’t know what we would discover. All we knew was to question why a financially successful organisation had found itself in this predicament. It certainly led to challenging some myths.

The first myth being that boards should not delve into management matters and need to understand the division of responsibility between the board and the executive. My observations from the review were that it isn’t that clear. If there is too much respect for this separation of duties and not a willingness to delve and scrutinize, you can end up with a less than thorough coverage of the risks.

Better to have overlaps than gaps. This may lead to tension, but that should be healthy tension for the business. You must challenge to meet your obligations as a director.

There’s been a lot of pressure recently in New Zealand and Australia from major institutional shareholders to have strict quantitative KPIs for bonuses and remuneration, and there’s a dislike of qualitative judgement and unspecific measures. Consequently, the less quantifiable non-financial outcomes and risks, conduct risk and compliance risk and customer complaints get down played and this results in a less holistic assessment of performance.

If you don’t have a remuneration policy aligned with those measures, it becomes a very specific lens through which you view a business. While less quantifiable measures of performance are resisted, they do need to be recorded and considered in company and individual performance.

In the case of CBA, the focus on improving customer satisfaction disguised the extent and seriousness of customer complaints.

METTLE: Are there any final comments you wish to make to MEttle readers?

JILLIAN BROADBENT: The CBA is a key institution that touches so many Australians. The new CBA Board and executive team have their own learnings which they’re already adopting and I’m sure they will emerge stronger following the APRA review and its recommendations.

Jillian Broadbent's top three tips for leaders

Challenge is a healthy activity and should be encouraged.

Always remember open dialogue is constructive and positive.

It’s important to look beyond positive KPIs and seek out possible failings.

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