AustralianSuper says tougher regulation of banks ‘warranted’

The Australian 12:00am August 21, 2017

Richard Gluyas

The nation’s most powerful superannuation fund has distanced itself from company directors, arguing in favour of tighter prudential regulation for banks due to the industry’s privileged role in the economy and its “repeated” ­failure to protect the interests of customers.

AustralianSuper, with 2.1 million members and $120 billion in assets under management, said it supported the proposed banking executive accountability regime, or BEAR, announced in the May budget because “inappropriate behaviour and poor culture” represented an investment risk.

“The central and privileged role banks play in the Australian economy, coupled with the repeated failure by some banks to protect the interests of consumers in the last decade, demonstrates that for this particular sector heightened prudential regulation is warranted,” the super fund said.

“As such, the improved behaviour and accountability encouraged by BEAR is positive from an investment perspective by creating more sustainable and robust banks, encouraging greater alignment between senior management and shareholders, and enhancing the banks’ standing in the community and the consequent social licence to operate.”

AustralianSuper’s hard-line position is expressed in a submission to the federal Treasury’s consultation paper on BEAR, ­issued last month. It contrasts with the stance of the Australian Institute of Company Directors, which said in its submission that more regulation could encourage risk-aversion and might not improve conduct.

The fund brings an investor’s perspective to the argument — AustralianSuper is not only the nation’s largest individual super fund, it’s also the biggest owner of bank shares, with a hoard worth almost $8bn. Its holdings include Commonwealth Bank ($2.4bn), Westpac ($2.1bn), ANZ ($1.9bn) and National Australia Bank ($1.4bn).

AustralianSuper demonstrated its willingness late last year to hold the banks to account, helping lead a revolt against CBA’s ­remuneration report that left the bank vulnerable to a second strike and a potential board spill at its 2017 annual meeting.

On remuneration, APRA ­already administers a prudential standard that has extensive requirements. The regulator can direct banks to change their ­remuneration policies and lower variable remuneration, and the prudential standard provides for cuts to performance-based remuneration to maintain financial viability.

BEAR, however, goes further, proposing that 40-60 per cent of variable remuneration for executives should be deferred for four years or more.

APRA would have expanded powers to adjust remuneration policies if it believed they were producing bad outcomes, and variable pay could be slashed if an executive failed to meet the new expectations of BEAR and is ­disqualified or removed.

AustralianSuper said it supported a definition of variable pay based on principles rather than prescriptive amounts. It said the definition of pay in BEAR should accommodate two functions — a bonus for achieving predetermined outcomes, and lower pay if benchmark levels of performance or behaviour were not achieved.

Variable pay structures, it said, had often failed to produce lower pay when performance was poor.

The new regimen proposes to overcome this by deferring 60 per cent of the variable remuneration of executives whose decisions could have the biggest impact on banks and their customers.

While this could lead to banks hiking fixed pay and cutting variable pay, AustralianSuper said the risk was small because the levels of deferral proposed were close to the actual levels.

“Therefore we do not believe that BEAR will serve as an impetus for significant change of fixed versus variable pay structures,” senior manager investments governance Andrew Gray said. He also noted that shareholders had the right to vote on remuneration and would use their vote to object to any ­unreasonable migration from variable to fixed pay.

The fund supported the proposal for deferral of 60 per cent of remuneration for chief executives and 40 per cent for other executives. “Sufficient levels of deferral can help ensure alignment between management and shareholders,” Mr Gray said.

“Also, the potential for clawback that deferral allows can help to ensure that management is only rewarded for performance achieved.

“We believe these are important features in remuneration structures in banks.”