VOLUME FOURTEEN BENEFICIAL FINANCE - THE ORGANISATION, ITS DIRECTION-SETTING AND PLANNING, AND THE MANAGEMENT OF CREDIT

CHAPTER 29
DIRECTION-SETTING AND PLANNING

TABLE OF CONTENTS

29.1 INTRODUCTION
29.1.1 THE PURPOSE OF THIS CHAPTER
29.1.2 RELEVANCE TO THE INVESTIGATION

29.2 BENEFICIAL FINANCE'S PLANNING PROCEDURE
29.2.1 THE INPUT OF THE STATE BANK
29.2.2 THE PLANNING AND BUDGETING PROCEDURE
29.2.3 SUMMARY

29.3 THE CONTENT OF THE STRATEGIC PLANS AND BUDGETS
29.3.1 BENEFICIAL FINANCE'S STRATEGIC OBJECTIVES
29.3.1.1 The Vision of Beneficial Finance's Future Position
29.3.1.2 Beneficial Finance's Business Development Objectives and Strategies
29.3.2 PLANNING FOR MANAGEMENT SYSTEMS, HUMAN RESOURCES AND CAPITAL ADEQUACY
29.3.3 SUMMARY

29.4 IMPLEMENTING THE STRATEGIC PLANS
29.4.1 IMPLEMENTING BUSINESS DEVELOPMENT AND DIVERSIFICATION OBJECTIVES
29.4.2 IMPLEMENTATION OF INTERNAL SYSTEMS AND MANAGEMENT RESOURCES
29.4.3 PLANNED GROWTH AND ACTUAL GROWTH
29.4.4 SUMMARY

29.5 CONCLUSIONS AND FINDINGS 29-42

29.6 REPORT IN ACCORDANCE WITH TERMS OF APPOINTMENT
29.6.1 TERM OF APPOINTMENT A(b)
29.6.2 TERM OF APPOINTMENT C

29.7 APPENDICES
A Strategic Planning Process
B Key Strategic Objectives
C Approval by the Board of Directors of Business Development and Diversification Initiatives
D1 Projected and Actual Total Assets
D2 Projected and Actual Shareholders Funds

29.1 INTRODUCTION

29.1.1 THE PURPOSE OF THIS CHAPTER

As described in the previous Chapter, there were some important and dramatic changes to the business activities of Beneficial Finance after July 1984, including a rapid growth in total assets, a dramatic increase in the size of its credit exposures, an accumulation of off-balance sheet entities and a much increased involvement in corporate lending and participation in commercial property developments.

The significant growth, and quite fundamental change, in the nature of Beneficial Finance's business activities - and the associated losses realised - naturally raises the questions: was the growth in assets and the change in the nature of the loan portfolio planned, and how was it controlled? What was the strategy of Beneficial Finance after its formation, and what were the processes by which that strategy was implemented and monitored?

This Chapter examines Beneficial Finance's strategic and business planning procedures at the level of the formation of the plans that were submitted to the Board of Directors for its review, approval, and monitoring.

In its broadest sense, strategic and business planning entails more than these planning procedures and documents, and extends to all activities of the Board and of Management that were instrumental in the planning, implementation and monitoring of Beneficial Finance's business activities. For example, proposals and position papers prepared by Management were submitted to the Board of Directors from time to time regarding such matters as the company's participation in joint ventures, the purchase of portfolios of receivables, and diversification through the expansion of business activities to New Zealand. The Board approved or confirmed major loans made by Beneficial Finance. Indeed, the former non-executive directors of Beneficial Finance submitted to me that "issues which might generally be seen as issues of strategic planning or direction setting were clearly uppermost in the minds of the non-executive directors at each and every Board meeting". These issues, according to the submission, included such matters as the company's capital, management of staff, physical infrastructure, the balance of its various activities, and the risks and benefits of growth.⁽⁾ At the management level, divisional budgets were prepared, information systems evaluated and installed, and human resource requirements evaluated and addressed - including the use of external consultants - in ways that were not necessarily fully described or documented in the formal planning papers submitted to the Board. These can be regarded as aspects of planning for growth, which are not apparent from simply reading the formal strategic plans and budgets.

It is recognised too that there is no universally accepted methodology of business planning. The means by which an enterprise is governed, including the identification of business opportunities and the assessment of the capacity of the organisation to undertake new business profitably and prudently, can, and does, vary from company to company.

The directors have an important role in the strategic and business planning of companies. The functions of a board of directors are commonly stated to include:

(a) setting goals for the corporation;

(b) appointing the corporation's Chief Executive Officer or Managing Director;

(c) overseeing the plans of management for the acquisition and organisation of financial and human resources towards attainment of the corporation's goals;

(d) reviewing, at reasonable intervals, the corporation's progress towards attaining its goals; and

(e) reporting to external stakeholders on the operations of the corporation by way of published accounts and reports.

Although these are the accepted functions of a board of directors, there is no generally accepted manner in which the directors must perform those functions. It is necessary to examine the actions of directors in each particular case, and to determine whether those actions were adequate to discharge the directors' functions and duties with the required standard of reasonable care and diligence.

Paying due regard to these considerations, it is nevertheless the case that Beneficial Finance devoted considerable resources to a formalised procedure of strategic planning and budgeting, including the conduct of annual management conferences, and the establishment of a specialised planning department. The procedure was, therefore, an important feature of Beneficial Finance's arrangements for planning the development of its business.

This Chapter describes the role of that procedure in the planning, implementation and control of Beneficial Finance's growth and diversification. Other facets of the business planning of Beneficial Finance - the details of the conduct of its activities - are described and evaluated in later Chapters of this Report.

29.1.2 RELEVANCE TO THE INVESTIGATION

The business planning of Beneficial Finance is relevant to my Terms of Appointment. In particular, Term of Appointment A(a) requires me to investigate and report on:

"What matters and events caused the financial position of the Bank and the Bank Group as reported by the Bank and the Treasurer in public statements on 10th February 1991 and in a Ministerial Statement by the Treasurer on 12th February 1991."

Term of Appointment A(b) requires me to investigate and report on:

"What were the processes which lead the Bank or a member of the Bank Group to engage in operations which have resulted in material losses or in the Bank or a member of the Bank Group holding significant assets which are non-performing."

Term of Appointment A(c) asks whether those processes were appropriate.

Finally, Term of Appointment C directs me:

"... to investigate and inquire into and report, with reference to the above matters, whether the operations, affairs and transactions of the Bank and the Bank Group were adequately or properly supervised, directed and controlled by:

...

(d) The directors, officers and employees of the members of the Bank Group."

As described in the previous Section, this Chapter describes one particular part of the direction, supervision, and control of Beneficial Finance, that is the procedure adopted for the approval and supervision by the Board of Directors of Beneficial Finance's business planning and budgeting. Accordingly, this Chapter does not, by itself, allow me to make conclusive findings regarding my Terms of Appointment, since any deficiencies in respect of the strategic planning procedure might conceivably have been compensated for by other parts of the Board's and of Management's activities.

Nevertheless, an examination of the adequacy of Beneficial Finance's strategic planning procedure is important. If it was apparently adequate, the Board of Directors would be entitled, in the absence of suspicion, to rely on Management to competently and diligently implement the plans. If the planning was patently inadequate, or deficient, that would give rise to an obligation on the directors to go beyond the plans themselves in order to adequately and properly perform their functions of setting policy, overseeing Management and monitoring Beneficial Finance's progress.

As is described below, the rate of growth of Beneficial Finance's assets was so much over and above that which was planned as to give rise, in my opinion, to reasonable grounds to suspect that the planning and budgeting process was not effective in planning and controlling Beneficial Finance's business growth. Shortly stated, the apparent irrelevance of the strategic planning and budgeting procedures to Beneficial Finance's actual growth gave rise to an obligation on the directors to take other action to satisfy themselves that the company was adequately and properly supervised, directed and controlled. What other action was taken by the directors with respect to particular matters of the company's business is examined in later Chapters of this Report.

29.2 BENEFICIAL FINANCE'S PLANNING PROCEDURE

29.2.1 THE INPUT OF THE STATE BANK

The various subsidiary groups of the Bank operated with "controlled independence" from the Bank. Although the Bank maintained ultimate control through the appointment of its own representatives to the Boards of its subsidiaries, and arrangements were implemented at the management level to enhance co-operation and exchange information, each subsidiary set its own strategic objectives, established its own policies, and formulated its own business plans.

The strategic and business planning at Beneficial Finance reflected this basic relationship between the Bank and its subsidiaries. The development of Beneficial Finance's strategic plans and budgets was undertaken by the Management of Beneficial, and it was the responsibility of the Beneficial Finance Board of Directors to review and approve those plans for implementation by Management. The Beneficial Finance Board also had responsibility to monitor the progress of the company toward achieving its objectives.

There was, however, a significant degree of communication and co-ordination at the Management level (and, of course, at Board level through the common directors) between the Bank and Beneficial Finance, including, in respect of Beneficial Finance, planning and budgeting. The Managing Director of Beneficial Finance, Mr J A Baker, attended the Bank's strategic planning conferences, and representatives of the Bank attended those of Beneficial Finance. The principal features of Beneficial Finance's strategic plans were included, as a discrete Section, in the Bank's strategic plans. Beneficial Finance's 1986 strategic plan (for the financial years 1987-1992) expressly stated that its key financial objectives had been "endorsed" by the Bank.

The influence of the Bank in Beneficial Finance's planning was most extensive in respect of Beneficial Finance's budgeted profitability, dividend policy, and capital requirements. The procedure for developing the Bank's annual profit plans involved the submission of annual budgets by the Bank's various divisions and subsidiaries, including Beneficial Finance. In the course of that procedure, the budgets were commonly returned to the divisions and subsidiaries for revision. In this respect, Beneficial Finance was essentially treated as though it were a division of the Bank, with the Bank's Executive Committee giving directions to the Management of Beneficial Finance to revise its initial budget estimates. In his evidence to the Jacobs Royal Commission, Mr Baker described a direction from the Bank to revise Beneficial Finance's budget for the year ended 30 June 1990 as being "the type of arm twisting that you would expect a parent bank to do to its subsidiary when it was probably wanting to get profits up".⁽⁾

The timing of the various stages of Beneficial Finance's planning procedure was so arranged as to be integrated with the planning processes of the Bank. This was done in a way that enabled Beneficial Finance to formulate its plans so that there was co-ordination with the Bank's planning procedures.

The planning sequence can be summarised as follows:

In or Before March:	the Bank’s strategic planning conference, attended by representatives of all subsidiaries.

March:	the Bank’s strategic plan approved by the Bank’s Board of Directors, incorporating highlights of the subsidiary’s strategic plans.

March/April:	Beneficial Finance strategic planning and budgeting conference.

April - July:	Finalisation of the Bank’s profit plans and budgets.

July:	the Bank’s profit plan submitted to its Board.

May - July:	Beneficial Finance’s strategic plan and budget submitted to its Board for review and approval. The timing depending on completion of the Bank’s profit plan. Revision to that plan delayed the presentation of Beneficial Finance’s final budget to its Board to July in 1987 and 1989.

Beneficial Finance also sought to ensure that its strategic objectives and strategies were complementary to those of the Bank. The 1986 plan, for example, included as an overall objective, that of ensuring that "the Company contributes positively to the strategic objectives of" the Bank.

29.2.2 THE PLANNING AND BUDGETING PROCEDURE

Over the period covered by my Investigation, Beneficial Finance's strategic planning and budgeting procedure was facilitated and co-ordinated by a specialised Planning department.

Until July 1988, when Beneficial Finance undertook a major corporate restructuring, the responsibility for planning lay with a manager in the Finance and Operational Services division, headed by Mr J G Graham. Although sometimes referred to as the "Planning department", there was apparently no formalised departmental status afforded to the planning function until 1 July 1988, when a Planning department was formally established as part of a newly created Finance, Credit and Personnel division headed by Mr M Chakravarti, to whom Mr P H Poulton as Chief Manager, Strategic Planning, and Mr J Suter, Manager, Corporate Planning and Budgeting, reported.⁽⁾

The establishment of a formalised Planning department in 1988 was, in part at least, a reflection of an effort by the Bank's Strategic Planning department to improve the Group's strategic and business planning. Both the Bank and Beneficial Finance prepared, for the first time, detailed planning guidelines, and there was an increased commitment to the incorporation of particular action plans, called "strategic programs", into the strategic planning procedure. Beneficial Finance's 1988 strategic plan (for the 1989-1993 financial years) stated that:

"In recognition of the greater emphasis Beneficial has placed on Corporate Planning, a separate Planning Department has been established. The Corporate Planning Department assists Beneficial in developing strategies to move from its current position to the position where it wants to be and, in the process, to develop a sustainable competitive edge." ⁽⁾

The strategic and business planning procedure of Beneficial Finance included the production of two planning documents that were presented to the Board of Directors for its review and approval:

(a) a five-year strategic plan, which addressed the long term objectives and strategies of Beneficial Finance; and

(b) at the same time, a budget for the ensuing financial year.

The strategic plans and budgets were prepared at the same time, and were usually presented to the Board of Directors for its review and approval at the same Board meeting. The objective of the five-year strategic plans was to identify the long-term objectives of Beneficial Finance, identify the strategies necessary to achieve those objectives, and to provide long-term, high-level financial projections for planning purposes. The accompanying budget for the ensuing financial year was a detailed elaboration of the financial objectives for the first year of the five-year strategic plan.

While the strategic planning procedure varied to some extent from year to year, it generally followed the path shown diagrammatically in Appendix A.

The planning and budgeting procedure commenced with the production of a series of "thought starters" by the Planning department⁽⁾ concerning such issues as the company's mission statement, strategic objectives, the economic environment and the company's competitors.

Annual planning conferences were held in April or May each year. Prior to each conference, the Planning department distributed suggestions to the divisional managers regarding the agenda, and strategic issues to be discussed. Many of the issues relevant to strategy emanated from prior discussions with the senior divisional managers.

The planning conferences were attended by all senior management of Beneficial Finance (and some representatives of the Bank), and dealt both with strategic issues, and with the financial projections to be prepared for the coming year's annual budget. All divisions were afforded the opportunity of engaging in these discussions, and provided divisional budgets which formed the basis for the company's annual budget. Divisional business managers presented reports or papers on the current positions of their divisions and future initiatives. Issues to be covered in the draft corporate strategic plan were discussed, anomalies resolved, and agreement reached about what was achievable.

Following the conferences, the strategic plan and annual budget were prepared in draft form and presented to the Executive Committee for its review and approval. The plans were commonly returned to the Planning department at this stage for modifications, which were principally of a financial rather than a strategic nature. In particular, the draft annual budget was sometimes returned to the Planning department with a request that the budget be revised if the budgeted profit was too low. Such revisions were commonly at the direction of the Executive Committee of the Bank following its review of the budgets of the Bank's various divisions and subsidiaries. For example, Mr T M Clark informed the Bank's Board of Directors, in his memorandum recommending approval of the Bank's profit plan for 1987, that:

"The initial estimates of profit were unsatisfactory, and many hours have been spent revising income plans and expense plans to produce a Profit Plan with an adequate level of profit."

At the Beneficial Finance Board meeting on 27 June 1987:

"Mr Marcus Clark advised that the Bank was looking for an increasing return on capital employed and while the projected budget showed an ATROE of 12.5% it is essential that this be progressively increased to 15% to at least match or exceed Commonwealth Bond yields." ⁽⁾

A similar process of budget revision was described by Mr Clark in respect of the profit plan for 1989, making express reference to the Bank Group budgets.

Once the strategic plan and annual budget had been formulated and accepted by the Executive Committee, the plans were submitted to the Board for its review and approval. On a number of occasions, the strategic plan was presented to the Board in draft form to enable the Board to review the plan and suggest amendments before it was submitted for formal approval. Once the plan and budget had been approved by the Board, they were distributed to the Executive Committee, State Managers and other senior managers for implementation.

Implementation of the strategic plans had three distinct aspects.

First, provided that the annual budgets were fully integrated with the long-term strategic plans so that they were designed to implement the longer-term objectives of the plans, then implementation of the budgets should have ensured that the objectives in the plans would be met. The key aspects of the budgets in this regard were the meeting of asset growth targets by the various divisions, and expenditure on essential internal systems, including, information systems, staff training, marketing and capital budgets.

Second, the 1987 and 1988 strategic plans included specific action plans called "strategic programs" for the various business units. These strategic programmes were intended to ensure that the key objectives of the strategic plans were met. The costs of implementing these programs should, of course, be reflected in the annual budgets.

Third, beginning in 1989, the various divisions of Beneficial Finance prepared their own divisional strategic plans in support of the company's strategic plan. The Investment Banking division, which was formed on 1 July 1988, prepared a divisional strategic plan soon after its establishment. A copy of the Investment Banking plan was distributed to Directors in October 1988, although it was apparently not discussed at a Board meeting. I have identified divisional strategic plans prepared in 1989 for four other divisions:⁽⁾

(a) Southern Business and Northern Business divisions 1989-1994;

(b) Treasury and Capital Markets division 1989-1994; and

Monitoring of the implementation of the strategic plans was limited to the financial targets in the budgets, rather than the strategic objectives or the strategic programs. Some monitoring of the 1987 and 1988 strategic programs was done at the instigation of the Planning department, which provided some monitoring reports to management. Reporting to the Board of Directors against the annual budget was provided in the form of a detailed monthly review of actual financial performance against budget. The monthly reviews did not involve any analysis of performance against the strategies as set out in the corporate strategic plans.

The minutes of the Board of Directors' meeting on 31 July 1987 at which the 1987 strategic plan (for the years 1988-1992) was approved, record that the Board resolved that:

"The strategic programs are to be subject to continuing 6 monthly audits in February and August each year to measure the programs and to identify refinements needed to the initial strategies to ensure that the objectives are achieved."

The minutes of the Board meetings, and the Board Papers, do not indicate that any strategic monitoring reports were provided to the Board. The minutes of the Executive Committee meeting held on 19 August 1987 record that some updates of strategic programs were to be tabled at future Executive Committee meetings to check progress.⁽⁾ The 22 September 1987 minutes record that a six-monthly review was tabled and discussed.⁽⁾ On 27 November 1987, following that review, the Managing Director advised the Board that a two day business planning conference was to be held on 30 November and 1 December with the theme of "Making Beneficial Shockproof".⁽⁾

29.2.3 SUMMARY

The important elements of the procedure of strategic planning and budgeting by which the Board of Directors set policy for Beneficial Finance, reviewed Management's plans for meeting the company's objectives, and reviewed the company's progress, were:

(a) The procedure leading to the formulation and approval of the strategic plans and budgets was extensive. It comprised a specialised Planning department, a management conference attended by Beneficial Finance's senior management, consultations with the Management of the Bank, review and approval by Beneficial Finance's Executive Committee, and review and approval by the Board of Directors. Directors were entitled, in the absence of suspicion, to place considerable reliance upon the procedure to produce plans and budgets that had been widely reviewed and debated by Management, and which carried the support and commitment of Management.

(b) Beneficial Finance's strategic planning and budgeting was carried on in consultation with the Bank's Management, and with regard to the Bank's own strategic and profit objectives. In 1987 and 1989, Beneficial Finance's initial budgets were revised on instructions from the Bank.

(i) the budgets being effective in implementing the strategic objectives of the plans; and

(ii) in 1987 and 1988, the implementation of the strategic programs contained in those plans.

(d) The Board of Directors was informed, in 1987 and 1988, that audits would be conducted on a six-monthly basis of the implementation of the strategic programs. There is no evidence, however, that any reports regarding the implementation of those programs were presented to the Board.

(e) Divisional strategic plans were not prepared until 1989, although the Investment Banking division prepared a five-year strategic plan soon after its establishment in July 1988.

(f) The principal and only regular means by which the Board monitored the progress of the company in meeting the objectives of the strategic plans was through the monthly monitoring of the performance of the company against the financial targets of the annual budgets.

29.3 THE CONTENT OF THE STRATEGIC PLANS AND BUDGETS

While the format of the strategic plans varied over the years examined,⁽⁾ most plans included at least the following information:

(a) analyses of the external environment affecting Beneficial Finance;

(b) an assessment of Beneficial Finance's current position and recent performance;

(d) an assessment of Beneficial Finance's strengths, weaknesses, opportunities and threats;

(e) a description of the company's strategic objectives;

(f) a description of general strategic programs (from 1988); and

(g) high level financial targets and projections.

29.3.1 BENEFICIAL FINANCE'S STRATEGIC OBJECTIVES

29.3.1.1 The Vision of Beneficial Finance's Future Position

The 1986 strategic plan did not provide an express vision of the company at the end of the five year period covered by the plan. Indeed, the plan stated that:

"One of the Plan's major weaknesses is that it tends to give an indication of where the company might be in five years and not where it would like to be." ⁽⁾

Later strategic plans did include a statement of the company's preferred "future position". The 1987 plan (for the 1988-1992 financial years) stated that:

"In 1992, Beneficial will be a medium sized, efficient and national operating financial institution. Beneficial will offer a wide range of traditional financial products and new innovative products/financial services. Lending activities will be concentrated predominantly in the domestic markets with some exposure in New Zealand. Funding activities will be undertaken in national and international markets including, New Zealand, Asia, USA, UK and Europe." ⁽⁾

A similar vision of the company's future position was included in the 1988 strategic plan:

"In 1993, Beneficial will be a medium sized, efficient and national operating financial institution. Beneficial will offer a wide range of traditional finance products and new innovative products/financial services and continue to target market niches. Domestic lending markets will continue to be developed. In addition, a major thrust will be made into the New Zealand market with the acquisition of selected receivable portfolios and the possible establishment of a finance company (in conjunction with State Bank) to take advantage of the current business environment prevalent in New Zealand. Expansion of lending activities will also take place in the United Kingdom via the Pegasus Joint Venture." ⁽⁾

The 1989 plan included a section headed "Beneficial's Vision", which summarised "what senior executives want Beneficial Group to achieve during the planned period". The vision included financial targets related to profitability and asset quality, and stated an intention that Beneficial Finance would:

(a) participate in selected lending markets such as the United Kingdom and the United States of America, and in the "fast growing Asian region"; and

(b) take "increasing content of equity in packaged transactions and in joint venture activities".

Its projected Corporate image included being "Independent, yet highly integrated with the objectives and ambitions of the State Bank Group".

29.3.1.2 Beneficial Finance's Business Development Objectives and Strategies

The key "high level" strategic and financial objectives of Beneficial Finance as described in its strategic plans are detailed in Appendix B. These general strategic objectives and financial objectives were supported by more detailed business development objectives for the company's various divisions.

1984

The first planning document submitted to the Board of Directors of Beneficial Finance following the establishment of the new Bank on 1 July 1984 was a revised budget for the 1985 financial year. The budget was prepared on the assumption that:

"... Beneficial will continue to increase market share with the introduction of new products and the opening of new branches and expansion of the company's representation in the eastern States, incremental business from the new State Bank in South Australia and most importantly, that employee skills will continue to develop to handle the increased volume and complexity of finance company business." ⁽⁾

The budget stated that the emphasis of Beneficial Finance in 1985 would be on "controlled growth", and budgeted for an increase in total assets of $104.3M, from $502.2M at 30 June 1984 to $606.5M at 30 June 1985, a rise of 20.8 per cent. The budget was approved by the Board on 1 August 1984.⁽⁾

At the Board meeting on 29 November 1984, a revised forecast of financial performance for 1985 was approved by the Board. The revised forecast stated that the major factors evident in the review were:

"1. Strong market competition has prevented the achievement of budget yields on sales.

2. Greater emphasis had been placed on tax-based leasing sales which improves after-tax profit but dilutes pre-tax profit.

3. Better than budget growth in receivables is achieved in the second half of the year and consequently the full profit impact of this will not be shown until 1985/86.

4. New products with higher average amounts financed, finer margins but lower operating costs and losses are being introduced in the second half to generate incremental volume and substitute for the below budget sales results on traditional mortgage products." ⁽⁾

The minutes of the Board meeting record that, in approving the revised forecast, the Board stated that:

"With the projected rapid growth rate of sales and receivables, the necessity for a strong internal audit programme was emphasised to ensure the maintenance of proper standards of loan acquisition and control. The Managing Director indicated that the internal audit department had been strengthened and that a minimum of 3 audits of each Branch will be made each year and, in cases where problems arise, a further audit will be scheduled." ⁽⁾

The total assets of Beneficial Finance actually increased in 1985 by $245.1M, or 48.8 per cent, more than double the budgeted growth.

1985

In approving the 1985 strategic plan (for the financial years 1986-1990) at its meeting on 30 April 1985, the Board made a number of comments and amendments, including:⁽⁾

(a) "The Board strongly supported a tax strategy whereby, through the legitimate use of permanent and timing tax deductions, the Company's liability for tax should be reduced to nil during the Plan period".

(b) "Future plans to be produced on the basis of sales which can be written even though this may increase Company assets above the guideline of 20% of SBSA assets. Any excess receivables can then be sold off to SBSA or other sources. The maximum sales projection for funding within the (Beneficial) Group in 1985/86 to be $600.0M."

(c) "The Board stressed the need for a maximum push in deriving income" in the form of "fee income and non-receivables based income".

The budget for 1986 was approved by the Board at its meeting on 21 May 1985, the minutes recording the Board's concern that:

"Care to be taken in seeking to achieve a higher sales plan compared with the budget of $500 million to ensure a suitable quality of receivables and effective internal controls." ⁽⁾

The budget planned for Beneficial Finance's assets to total $807.3M by 30 June 1986,⁽⁾ an 8.0 per cent increase over the actual total assets at 30 June 1985.⁽⁾ In fact, the company's assets at 30 June 1986 totalled $1,043.0M, $235.7M over the budgeted level, and an increase over the year of 39.6 per cent.

1986

A draft of the 1986 strategic plan (for the financial years 1987-1991) was reviewed at the Board of Directors meeting on 17 June 1986. Among the matters raised by Directors in respect of the draft plan were:

"... (iv) The major challenge in the plan was to reduce non-performing loans to a satisfactory level.

(v) The plan requires some comment as to how the economy will affect future sales.

(vi) Retail Market - the Board considered that the public company market should not be overlooked.

(vii) Identified weaknesses require action plans to correct." ⁽⁾

The plan in its final form was submitted to the Board on 29 July 1986, together with the budget for 1987, and a separate report which provided a "summary of risks and specific weaknesses in relation to the Corporate Plan", and "details of the strategy to be adopted to overcome these risks and weaknesses".⁽⁾

The objectives and strategies contained in the 1986 plan were stated in broad and general terms. The strategic plan noted that the company's overall objectives had "not varied significantly from the previous plan", and included the further development of the company's traditional lending base in real estate finance and commercial leasing, and ensuring that the company contributed positively to the strategic objectives of the Bank.⁽⁾

The plan identified as "major challenges facing Beneficial":

"Achieving growth in a competitive environment.

Maintaining margins in a competitive environment.

Substantially improving credit assessment techniques through appropriate training.

Improving asset management.

Achieving the goals endorsed by the State Bank." ⁽⁾

The plan included "strategic five year objectives" for the various divisions. In respect of the newly established Corporate Services division, the plan stated that the division had been formed to:

"... handle the larger and more complex transactions requiring highly skilled staff and sophisticated systems ...

The establishment of a separate division to handle corporate transactions facilitates the continued thrust by the Company away from its traditional markets into a sector of the corporate market which is considered to be inefficiently serviced by existing financial institutions." ⁽⁾

The "continued thrust by the Company away from its traditional markets" was described as being "designed to meet competition and maintain existing margins" ⁽⁾ in the increasingly competitive finance industry.

The target market for the new Corporate Services division was identified generally as:

"The company has the capacity to act as a quasi-finance arm for a number of banks and merchant banks ... The rationale for the above proposition reflects the willingness of these institutions to act as wholesalers with relatively high facility sizes and also their perceived reluctance and/or inability to take risk positions which may be acceptable to Beneficial - whether that risk relates to credit, product or security."

The "short term objectives" of the division were to:

"... achieve controlled and profitable growth ... The division will concentrate on sales in the established markets of the company where the staff have most experience. ... Growth will be tightly controlled until it can be demonstrated that the problem loans are being satisfactorily account managed and non-performing loans have been reduced to satisfactory levels. The appointment of adequately qualified staff cannot be over-emphasised." ⁽⁾

In respect of the company's management of its joint ventures, the plan noted that:

"Effective account management of existing joint ventures is essential if the division is to capitalise on other potential ventures and new product initiatives which will add significant volumes."

Although a separate paper described strategies to address Beneficial Finance's perceived risks and weaknesses, the plan did not include any particular strategic programs, or specific action plans in which responsibilities, performance indicators and deadlines were detailed. The plan acknowledged that one of its major weaknesses was that:

"... strategies are frequently stated in general terms without providing a means to achieve those objectives. The department's objective is to ensure all strategies in the 1987/92 Corporate Plan are quantified." ⁽⁾

The plan projected that the company's total assets would increase during the year ended 30 June 1987 by only $84.0M, from $997.0M to $1,081.0M - an increase of 8.4 per cent. Total net receivables were projected to increase by 10.9 per cent, from $933.0M to $1,035.0M.

In approving the 1986 strategic plan and the budget for the financial year ended 30 June 1987, the Board stressed the "need for maximum emphasis on maintaining tight credit control".⁽⁾

1987

In its review of Beneficial Finance's "current position", the 1987 strategic plan (for the financial years 1988-1992) noted that the growth in total assets in the six months ended 31 December 1986 had been "less dynamic" than the previous six months, in part because of the "extent of business now being directed through off balance sheet operations". The review continued in respect of the performance of Beneficial Finance's joint ventures:

"The Joint Ventures and other off balance sheet operations of Beneficial are having an increasing impact on the results of the Beneficial Group ...

The receivables of the joint ventures are being progressively funded externally, rather than by Beneficial, so that the Joint Venture receivables are becoming truly off balance sheet.

In addition to these joint ventures, there are other "managed" receivables that are also off balance sheet as they are funded externally and generate fee income of the Beneficial Group." ⁽⁾

The review identified those other "managed" receivables as including receivables under reverse Principal and Agency arrangements with the State Bank totalling $82.0M as at 31 December 1986 (of that total, $57.5M were managed directly by Beneficial Finance, $10.9M by Centrelease, $7.8M by Allied Westralian and $5.8M by Pegasus), and stated that these activities were "being aggressively marketed by Beneficial to increase fee based income". Joint ventures were described as having undergone "dramatic growth", and "indications are that further growth and diversification will occur, placing even greater importance on the quality of output" of timely and accurate reports on those activities.⁽⁾ Expansion of Beneficial Finance's activities "through this type of arrangement is expected to increase in future years".

The plan stated, however, that during the planned period "the growth of joint ventures and contingent liabilities will be limited" in order to "ensure Beneficial Finance will continue to control the direction the Beneficial Group will move in the future".

The plan's analysis of the economic outlook identified tourism as an industry to be targeted, but thought that "real estate activity is unlikely to provide major opportunities throughout the plan period other than a possible pick up in the residential market area".⁽⁾

In the introduction to its discussion of Beneficial Finance's strategy, the plan stated that:

"The major objective of the strategic plan is to document the position we want to have in five years and how we can best achieve that position. In short, we will be able to manage the future rather than reacting to it in an undisciplined manner.

Through the ongoing monitoring of strategic programs senior management will be made accountable for the programs developed in their respective areas. The major advantages of a regular assessment of strategic programs are -

. Commitment by Management to the strategic programs.

. Beneficial will be able to refine strategies efficiently in times of continual change.

. A strategically orientated culture will emerge." ⁽⁾

The strategy of the Corporate Services division, as outlined in the strategic plan, foreshadowed a further move away from Beneficial Finance's traditional business toward larger, more complex transactions, involving equity participation:

"The major strategic initiative for the Corporate Services Division will be a redirection of business activity. Corporate Services Division will concentrate on large, complex and specialised transactions with an emphasis on fee based activities and equity participation rather than product-driven income." ⁽⁾

The "major growth areas" for the Corporate Services division included the taking of equity positions, more complex specialised transactions, and joint ventures.

The 1987 plan budgeted for on-balance sheet asset growth in 1988 of $204.0M, or 18.0 per cent. The rate of growth of the company's risk assets over the five years of the plan was projected to decline from 21 per cent to 13 per cent per annum, reflecting:

"i. Strong competition expected in the financial services industry.

ii. Redirection of Beneficial business activities away from product based income to fee based/packaging income.

iii. An emphasis by Beneficial on the acquisition of high quality business rather than a large volume of business." ⁽⁾

The 1987 strategic plan included particular action plans, called "strategic programs", in respect of the various business units. The introduction to the strategic programs stated that:

"This document represents the first stage of the implementation of the 1987-1992 strategic plans. The implementation of the strategic programs will be the most difficult aspect of strategic planning. Once the programs have been implemented there must be a complete commitment to the programs by senior management.

A six monthly assessment of each program will take place in February and August each year. Regular assessment of programs will measure the progress made and identify what refinements are needed to the initial strategy. That is, the strategic plan is intended to be flexible.

The monitoring function and commitment by senior management to the strategic programs will ensure that the required objectives are achieved."

The strategic programs for each business unit provided a brief description of the program and its objectives, and provided an action timetable and allocated responsibility for implementation of the program. The programs for the Corporate Services division were the generation of fee income, the provision of merchant banking facilities and services to targeted markets (not specified in the plan), the provision of investment banking services, overseas market expansion (targeting New Zealand, Asia, United States of America and Europe) and development of the quality of human resources.

The 1987 strategic plan, and the budget for 1988, were approved by the Board on 31 July 1988. As was noted earlier (Section 29.2.2), Mr Clark had advised the Beneficial Board in June 1987 that the Bank was seeking a higher return on capital, of 15 per cent. In approving the budget for 1988, the Board stated that it "strongly supported the higher profit objectives". The minutes record that although the budgeted profit after tax was $12.0M, Management had "a commitment" to achieve at least $13.0M, and the Managing Director advised that at the business planning conference in June, "it was considered that a $15 million net profit after tax is possible. This will more than achieve the objective of a 15% ATROE" (After Tax Return on Equity).⁽⁾

1988

The 1988 strategic plan (for the financial years 1989-1993) gave particular emphasis to the need to control the rate of asset growth. In describing the vision of Beneficial Finance as at 30 June 1993, the plan stated that Beneficial Finance would have total assets of $3.1B, a profit of $35.0M, and would have an 8 per cent share of finance company receivables. The final target was in fact achieved by 30 June 1989, just one year later, and four years ahead of plan.

A summary of Beneficial Finance's strategies included a "controlled asset growth of 15 per cent per annum over the plan period (subject to prudential group limits)", with emphasis on:

"(a) improved quality of assets;

(b) diversification of product range and fee based services;

(c) trend to larger commercial loans away from small retail/consumer transactions;

(d) procuring assets on behalf of Group members;

(e) tax effective transactions being booked to minimise tax liability." ⁽⁾

With the increased focus on strategic planning by Beneficial Finance (and the Bank) in 1988 (refer Section 29.2.2), the plan highlighted the current short-term focus of Beneficial Finance, and stated an intention to improve long-term planning. Under the heading "Beneficial's Future Position", the plan stated that:

"Beneficial's culture is presently centred around getting on with the job "at hand". During the plan period our corporate culture must continue to be orientated towards the key values of profitability, customer service, respect for employees and performance. Beneficial's culture orientation will be assisted by improving its planning and communication links to ensure all opportunities are assessed and dealt with in the most appropriate manner." ⁽⁾

In describing Beneficial Finance's preferred position by the end of 1993, the plan stated that Beneficial Finance would continue to diversify and develop market niches. Diversification was to be pursued in order to increase fee income to insulate Beneficial Finance against volatile movements in interest rates and real estate markets, and to ensure that after tax, return on equity was consistently above industry average.⁽⁾ An aspect of its "strong and positive corporate image" was to be its "independence" from the Bank, while remaining highly integrated with the Bank's objectives and providing a complementary range of services.

The plan noted that a new Investment Banking division was to be established on 1 July 1988, with a charter to undertake diversification and acquisition opportunities with an emphasis on generating fee income. The new division was to be responsible for all receivables-based transactions in excess of $10.0M, all tax-based and structured finance transactions, and all existing joint ventures. The "major strategic thrusts" for the new division included:

(a) To develop and implement a formalised "off balance sheet" strategy, which was identified as "an urgent need".

(b) Continue product diversification, including:

(i) packaging/syndication of real estate and equipment lease transactions;

(ii) underwriting;

(iii) property development and investments;

(iv) joint venture investments;

(v) operating leasing and rental agreements; and

(vi) property trusts.

(d) Acquire, develop and retain highly skilled staff.

(e) Respond to incremental profit opportunities in overseas markets (initially New Zealand).

(f) Develop a stronger relationship with both Ayers Finniss and State Bank's Corporate division to enhance group profitability and facilitate joint involvement in transactions with a sharing of resources.⁽⁾

The plan anticipated that there would be "strong growth" in Beneficial Finance's joint venture operations over the plan period:

"Investment Banking Division will establish a separate Joint Venture Department to assess the viability of future joint ventures in recognition of this anticipated growth. In addition, all present joint ventures will be analysed to ensure that returns to Beneficial Finance on this growing investment area, are adequate.

Joint Ventures are seen as the ideal vehicle for Beneficial Finance to diversify into new market niches with an associated high level of specialisation." ⁽⁾

Major objectives were identified as being a development of overseas opportunities such as New Zealand, and the exploitation of Beneficial Finance's traditional market strengths such as real estate financing. It was also an objective to pursue "selected opportunities" in the tourism industry, which have a "high likelihood of success".

In its analysis of the economic environment, the plan stated that the tourism industry should be targeted, and expressed the view that:

"Despite the current boom in some areas, real estate activity is likely to remain relatively static in the case of commercial property development where Beneficial has a large exposure. There is a possibility that this sector could contract in the 1990s if Australia experiences a recession, particularly if accompanied by high interest rates." ⁽⁾

Among the perceived weaknesses of Beneficial Finance were:

". No formalised product and research development functions.

. Lack of formalised asset/liability management.

. Excessive loan losses in recent times.

. Systems need further development.

. Corporate culture concentrates on the "job at hand"." ⁽⁾

The plan projected that asset growth in 1989 would be $204.1M (the same increase as had been budgeted for 1988), or 13.1 per cent. The growth in risk assets was projected to decline over the period of the plan, citing the same reasons as were noted in the 1987 plan for a lower growth rate:

(a) strong competition in the finance industry;

(b) redirection of business away from product based income to fee based packaging income; and

Like the 1987 plan, the 1988 plan included a number of strategic programs, many of which were in identical terms to those in the 1987 plan (although with revised timetables). It was again stated that six-monthly assessments of the programs would be undertaken.

The 1988 strategic plan was approved at the Board meeting on 27 May 1988, subject only to "discussions with State Bank regarding future dividend policy". The budget for 1989 was approved at the same meeting, with the Directors noting that "key factors will be the quality of business written and the extent of overall control".⁽⁾

A separate strategic plan was prepared for the Investment Banking division, which was distributed to Directors in October 1988 (although the minutes do not record any discussion of the plan at a Board meeting). The major objectives of the division included the diversification of the asset portfolio both geographically and on a product basis, and diversification of sources of income to emphasise fee and profit based income to minimise capital requirements.

The Investment Banking division's plan referred expressly to its willingness to take risk as a competitive advantage, stating:

"An advantage Investment Banking Division has over many competitors is the ability to provide funds (equity or debt) or take risk by way of guarantees in addition to providing the services of structuring and managing financial transactions. This differentiates Investment Banking Division from many competitors who are reluctant to take risks of any note. Flexibility to quickly refocus provides Investment Banking Division with the unique advantage to optimise profitable opportunities." ⁽⁾

Among the perceived weaknesses of the division were:

". Inadequate management information systems which hinder improvements in portfolio planning, strategic and financial planning and management controls;

. Confused market image;

. Inadequate and unstructured approach to staff training;

. Level of industry experience and business acumen below optimum requirements in some instances." ⁽⁾

The threats identified included a "downturn in the Australian or International economies or specific market segments (eg real estate sectors such as tourism related real estate)".⁽⁾

1989

The 1989 strategic plan (for the financial years 1990-1994) noted that Beneficial Finance was now the fifth largest finance company in Australia, and had experienced "strong growth in profit and business volumes in recent years". The plan stated that:

"During the plan period, Beneficial will build on this foundation with a mission to be a highly profitable organisation which will have a solid base of market-driven finance company products complemented by strategic developments in equities and real estate."

In its analysis of Beneficial Finance's current position, the plan noted that Beneficial Finance's group risk assets had grown 38 per cent, from $2,094.0M to $2,893.0M in the twelve months to June 1989. In 1988, the asset growth was 58 per cent.

The plan identified as weaknesses of Beneficial:

(a) "inadequate management information systems which hinder portfolio planning, strategic and financial planning and management controls";

(b) "corporate culture tends to concentrate on job at hand";

(d) "increasing reliance in real estate exposures".⁽⁾

Among the opportunities identified by the plan were "lending and equity investment opportunities in growth industry such as tourism, leisure and real estate project management".

In defining Beneficial Finance's "vision", the plan stated that "many diverse and unique opportunities will be pursued by Business Units", including a greater emphasis on non-recourse fee income, and increasing content of equity in packaged transactions and in joint venture activities.⁽⁾

The plan stated that "it is perceived the strong growth experienced in recent years will continue in future years", and a corporate restructure had been undertaken to "provide flexibility to enable Beneficial to respond to changes in the market place effectively ... and remain competitive in the deregulated environment", and to "remain in control of the Group's diverse activities and future growth".⁽⁾

The key issues identified in respect of the Northern and Southern business divisions of Beneficial Finance included an emphasis on "developing a balanced and profitable portfolio. Tailor made real estate products and a second string of market-driven products will be developed".⁽⁾

Key issues for the Investment Banking division included the "refinement of the investment policy", and the "development of systems to enable account management, budgeting, planning and communication".⁽⁾

The environmental analysis in the plan identified the tourism industry as a key growth sector. Stating that during the planning period tourism was "expected to grow to the largest industry" in Australia, the plan anticipated that "an increasingly higher level of resources will be dedicated to this growth industry to ensure appropriate strategies are in place to respond to all opportunities". The analysis warned, however, that:

"Continued high interest rates, accompanied with an oversupply of office accommodation in all capital cities, suggests property/development market will be placed under pressure during the plan period. Beneficial will need to closely monitor this market and assess the overall direction of its lending policies to ensure the mix of the lending/exposure portfolio is balanced to minimise risk and maximise profitability." ⁽⁾

The plan projected that total assets would increase in 1990 by 14.0 per cent, an increase of $318.7M from $2,269.6M to $2,588.3M.

1990

The strategic planning procedure was overtaken in 1990 by the rapidly developing problems confronted by Beneficial Finance as the economy generally, and the commercial property market in particular, declined. Although a five year strategic plan was drafted in 1990, it was not approved. A budget for 1991 was approved in August 1990, and a special business plan was prepared for the eighteen months ended 30 June 1992.

Having regard to the special circumstances in which they were prepared, the only matter of interest in the 1990 plans is their identification of the perceived reasons for Beneficial Finance's difficulties, and of the weaknesses of Beneficial Finance at that time.

The eighteen month business plan addressed the reasons for the development of the special plan:

"The strength in the property market throughout the latter half of the 1980s and our commitment to growth combined with an innovative approach enabled Beneficial to report profit and receivables growth that far exceeded that of the finance industry. Our peers on average have been able to double profit and receivables in the five years to 30 June 1989 whereas Beneficial has increased receivables by three times and profit by six times. At 30 June 1989, Beneficial held at 8.1 per cent share of the finance company market compared to 3.9 per cent in 1984.

Beneficial's position today is vastly different to that of one year ago. A depressed economy, a large downturn in the property market, depressed tourism and record bankruptcies and corporate failures have refocussed the Company's direction. As a result the Company has strategically reviewed its position and has taken four key strategic steps:

. the seriousness of the current situation has been recognised...

. core key business has been defined as leasing, real estate and financial investment services...

. superior customer service has been recognised as essential to the future growth and prosperity of the Company...

. the Company and each division have clearly defined their mission and have set measurable objectives and business plans." ⁽⁾

Apart from a high level of non-performing loans, the weaknesses identified by the plans included:

". High exposure to property market.

. Short term attitude to long term investments caused by desire to have even profit growth

. Inadequate management information systems which hinder portfolio planning, strategic and financial planning and management controls.

. Corporate culture sales orientated.

. Inadequate commitment to formalised planning process." ⁽⁾

29.3.2 PLANNING FOR MANAGEMENT SYSTEMS, HUMAN RESOURCES AND CAPITAL ADEQUACY

Beneficial Finance's strategic plans were not limited to consideration of how Beneficial Finance could grow and diversify its businesses, improve market share, and increase profitability. The plans addressed, as well, various aspects of Beneficial Finance's internal resources, including management information systems, human resources, legal resources and capital needs. Consideration of these matters was essential to ensure that the planned asset growth could be achieved prudently, and that long-term profitability would be achieved.

These aspects of Beneficial Finance's planning are referred to in the strategic plans in two ways:

(a) In the form of general comments in the strategic plans regarding the need for these resources. In particular, the sections of the plans which addressed Beneficial Finance's current position and weaknesses highlighted the deficiencies in the company's internal resources.

(b) In 1987 and 1988, in specific strategic programs directed at establishing those resources.

In 1989, various divisions of Beneficial Finance produced their own five year strategic plans, their resource needs to sustain prudent and profitable growth.

The details of Beneficial Finance's strategic planning in relation to the forgoing subjects are examined in subsequent Chapters of this Report, in respect of the particular aspects of Beneficial Finance's management of its business growth.

For present purposes, it is to be borne in mind that there is a necessary relationship between the rate of growth and diversification of Beneficial Finance's business and assets, and the resources which are necessary to ensure that the growth can be adequately managed. An important purpose of strategic planning is to ensure that the growth and diversification of the company's business does not outstrip the capacity of its information systems to monitor those businesses, the skills of its staff to manage the businesses, and the ability of the company to obtain funds of an appropriate price and maturity schedule. In addition to these matters, it is imperative that there is adequate capital to support the asset growth.

As is described below, the key feature of Beneficial Finance's planning and budgeting is that the actual growth in total assets was about double that which was planned. In effect, about half of the company's asset growth was unplanned. This clearly raises the issue as to whether the planning for Beneficial Finance's internal management systems and controls, based as it was upon growth rates that were only half that actually achieved, could be adequate to ensure adequate controls.

29.3.3 SUMMARY

The important aspects of the content of Beneficial Finance's strategic plans and budgets are:

(a) The principal characteristic of the strategic plans is that they were quite general in nature, describing the objectives and business strategies of Beneficial Finance and its various divisions in broad terms. The strategic plans performed the function of identifying and summarising the strengths and weaknesses of the company and the opportunities and threats confronting it, focusing attention upon the preferred direction for the future of the company's business, forging a corporate culture, and focusing attention upon some key objectives, particularly the attainment of an adequate rate of return on capital.

(b) Although broadly stated, the strategic plans did identify the principal features of the development of Beneficial Finance's business. In particular, they described:

(i) the intended diversification of the company's business by acquisitions, both in Australia and in New Zealand;

(ii) the shift of the company's activities away from its traditional business toward larger, more complex, transactions that needed specialised "financial engineering";

(iii) the development of structured finance projects, particularly tax-based transactions relating to real estate;

(iv) the intended use of joint ventures as a means of diversification; and

(v) the pursuit of equity participation in commercial property projects and financing businesses.

(c) The general nature of the objectives and strategies contained in the strategic plans does not mean that those plans were therefore not appropriate. Rather, it indicates the function of the strategic plans in setting in broad terms how the company's business should develop. Detailed aspects of the development of that business were to be formulated by Management, to be implemented as and when appropriate opportunities arose during the year.

(d) A recurring objective in the strategic plans was the restraining of asset growth, using the term "controlled growth" to describe the projected rate of asset acquisitions. A key strategy to achieve profitability growth, while limiting asset growth, was the development of fee-based income from syndications, packaging and project management services.

(e) As shown in the table below, the strategic plans, in themselves, planned for a rate of asset growth that exceeded the actual rate of growth of finance companies generally in most years, with 1989 being a notable exception. Nevertheless, although the planned rate of growth could be described as aggressive, it cannot reasonably be regarded as excessive or imprudent when compared to the actual growth rate of other finance companies:

Budgeted Year Ended 30 June	Actual Assets Asset Growth %	Growth of All Finance Companies %
1985	20.1	20.7
1986	8.0	6.3
1987	8.4	7.0
1988	18.0	12.4
1989	13.2	25.4
1990	14.0	6.6

However, as indicated in Section 29.4 of this Chapter, the actual growth was well in excess of that budgeted.

29.4 IMPLEMENTING THE STRATEGIC PLANS

29.4.1 IMPLEMENTING BUSINESS DEVELOPMENT AND DIVERSIFICATION OBJECTIVES

As described in the previous Section, the strategic plans of Beneficial Finance were drafted in broad and general terms in respect of the company's business strategies and objectives. For example, although the plans refer to the intention to utilise joint venture arrangements to diversify the business, no details of particular businesses, or of the number of, or capital commitment to, such structures are included in the plans. Similarly, although an intention to seek opportunities to diversify through acquisitions of receivables' portfolios was included in the plans, there was no analysis in the plans of the size or timing of such acquisitions, nor of the preferred nature or geographic location of the portfolios.

Further, some important business developments are described in the plans as having already been put into place, without having been specifically proposed in a previous strategic plan. The divisional restructure of Beneficial Finance in 1988, entailing the establishment of the Investment Banking division and the Regional Business divisions (Northern and Southern), was not foreshadowed in the 1987 strategic plan.

The general nature of the strategic plans in this regard does not necessarily mean that the growth and diversification of the business was not adequately and prudently controlled. Beneficial Finance did have guidelines and policies in place which were to guide the acquisition of assets - both loans and equity holdings - as opportunities arose. For example, on 30 April 1985, the Board approved guidelines for the evaluation of proposed equity investments, the minutes recording that the approval was subject to the Board's view that it:

"... did not necessarily agree with the need for Beneficial representatives to be appointed to the Boards of companies in which we have equity investments in view of the possible time commitment of Executives." ⁽⁾

There are, however, two matters related to the strategic plans which have important implications for the supervision and control of Beneficial Finance's acquisitions of assets.

The first is the suggestion, contained repeatedly in the strategic plans, that Beneficial Finance lacked a "formalised product development process and research capacity", and that Beneficial Finance had "inadequate management information systems which hinder portfolio planning, strategic and financial planning and management controls". Further, the plans repeatedly cite as a weakness Beneficial Finance's corporate culture, which "tends to concentrate on the job at hand", with an "inadequate commitment to the formalised planning process". The Investment Banking division strategic plan, circulated to Directors in October 1988, identified as weaknesses a below optimum level of experience and business acumen, and an inadequate and unstructured approach to staff training.

While not necessarily meaning that Beneficial Finance's acquisitions were inadequately researched and planned with a long-term view, such references to Beneficial Finance's organisational weaknesses, which were still being made in the plans approved in 1989, should, in my opinion, reasonably have raised a suspicion in the minds of directors and senior executives that proposed asset acquisitions may not have been planned in the context of a long-term view of prudent growth and sustainable profitability. The weaknesses identified by the strategic plans would, at least, require additional care and diligence in reviewing asset acquisition proposals, if not a temporary halt to growth until such weaknesses were redressed.

The former non-executive directors of Beneficial Finance do not share my opinion. They informed me that no suspicion was raised in their minds regarding the adequacy of Beneficial Finance's long-term planning in respect of its asset acquisitions and growth, and that the comments in the strategic plans that there were weaknesses were taken by them to mean that things were capable of improvement. The former non-executive directors submitted that:

"(The) Strategic plans in most organisations normally highlight strengths and weaknesses and the mere highlighting of a weakness should not raise a suspicion. Rather it should, in the first instance, in the mind of a non-executive director, raise a question of management that such weaknesses will be addressed. The non-executive directors consistently raised such questions with management and were satisfied by the assurances given."⁽⁾

Whether or not the directors took adequate steps to satisfy themselves that the weakness identified in the strategic plans were being adequately addressed by Management is examined in later Chapters of this Report. What is important for present purposes is that the strategic plans themselves acknowledged a lack of commitment to long-term planning, and a culture that focussed on the job at hand. Whether such references should have reasonably given rise to a suspicion that Beneficial Finance's growth lacked a coherent long-term focus and strategy might be arguable but for the second matter having implications for the supervision and control of its growth - the excessive rate of growth over and above that which was planned or budgeted.

As noted earlier, there is a necessary link between the rate of asset growth, and the development of internal systems, resources, and skills, able to support that growth. Those divisions responsible for Beneficial Finance's internal support systems will necessarily plan and budget for the acquisition and allocation of resources based upon budgeted asset growth and diversification. Where budgeted growth is exceeded, the risk arises that the essential information systems and resources will not be available to manage the growth, a situation suggested by the weaknesses identified in the strategic plans.

The major asset acquisitions undertaken by Beneficial Finance required the approval or ratification of the Board of Directors. Appendix C provides a listing, compiled from the minutes of the meetings of the Beneficial Finance Board of Directors, of the principal proposals considered and approved by directors in respect of the growth and diversification of the company's business. These acquisitions were within the broad terms of the strategic plans, although they were not expressly foreshadowed in the plans.

The strategic plans are, however, relevant to such acquisitions, for the reasons described above. These acquisitions must necessarily be considered in the context of the planning for, and adequacy of, the internal systems essential to adequate evaluation and subsequent management of the assets.

29.4.2 IMPLEMENTATION OF INTERNAL SYSTEMS AND MANAGEMENT RESOURCES

At Section 29.3.2, it was noted that the strategic plans did address, both in general and sometimes in more particular terms, many of the information systems, human resources, and capital resources requirements, of Beneficial Finance to enable it, prudently and profitably, to manage growth. In 1987 and 1988, specific action plans were developed, and in 1989 the divisions prepared divisional strategic plans.

It was also pointed out (at Section 29.2.2), however, that the Board was not provided with reports on the progress of implementing the strategic programs. Indeed, the strategic plans themselves suggested a lack of commitment to long-term planning, citing as weaknesses the short-term focus of the corporate culture, and the deficiencies in information systems, which hampered portfolio planning.

I have reviewed the minutes of the meetings of the Beneficial Board of Directors to identify the recorded instances of reporting to the Board regarding the adequacy of Beneficial Finance's internal systems. The minutes record four such reports, three of them in 1985:

30 July 1985: Approval of a paper regarding Beneficial Finance's succession planning.

29 October 1985: An indicative paper regarding a major review of Beneficial Finance's strategic plan for computerised systems development was considered by the Board.

17 December 1985: Directors reviewed a corporate hardware and software strategy for a funding and receivables system which "will meet most of the company's information system requirements".

29/30 October 1987: The Board reviewed a report which provided, "for the first time", a comprehensive summary of Beneficial Finance's human resources profile.

The former non-executive directors of Beneficial Finance submitted to me that the adequacy of Beneficial Finance's internal systems was discussed many times at Board meetings, although those discussions were not noted in the minutes.⁽⁾ Nevertheless, there was no formal or regular reporting to the Board regarding the steps taken by Management to address the internal infrastructure needs identified in the strategic plans. The actions taken by the Board of Directors in respect of particular aspects of Beneficial Finance's internal systems and resources are examined in later Chapters of this Report.

29.4.3 PLANNED GROWTH AND ACTUAL GROWTH

A key indication of the effectiveness of strategic and business planning in guiding and controlling the development of Beneficial Finance's business may be obtained by comparing the actual rate of growth of Beneficial Finance's assets to the budgeted rate.

This comparison shows that, between 1984 and 1990, the actual growth of Beneficial Finance's on balance sheet assets was far in excess of that which was planned.

Appendix D1 provides a comparison of the long-term asset projections from Beneficial's strategic plans with the actual total assets between 1985 and 1990. These figures show that the actual growth in the total assets of Beneficial Finance substantially exceeded that which was planned after 1984. The 1986 strategic plan, for example, projected that Beneficial Finance's total assets at 30 June 1990 would be $1,344.0M. In fact, assets grew to $2,675.0M, almost double the anticipated level. Even the 1988 plan's projection of total assets as at 30 June 1990, of $2,219.0M was exceeded by $456.0M, or 20.5 per cent.

A comparison of the growth in assets on a year-by-year basis with that budgeted shows that the growth was substantially in excess of budget for all years after 1984, with the exception of 1987:

Budgeted and Actual Asset Growth

Year Ended	Budget			Actual
30 June	$M	%	$M		%

1985	104.3	20.1	245.1		48.8
1986	n/a	n/a	295.7		39.6
1987	84.0	8.4	95.5		9.1
1988	204.0	18.0	526.3		46.6
1989	204.1	13.2	595.2		36.0
1990	318.7	14.0	412.9		18.3

These figures show that, over the three years 1988-1990, the actual growth in total assets of $1,534.4M exceeded the planned growth of $726.8M by $807.6M, or 111.1 per cent; the actual asset growth was more than double that which was budgeted over those three years.

The unbudgeted growth in Beneficial Finance's assets required, and was facilitated by, contributions of additional capital by the Bank that were likewise unbudgeted. Appendix D2 shows the projected and actual shareholders' funds of Beneficial Finance for the years 1987 to 1990. As can be seen, the unbudgeted growth was accompanied by an unbudgeted need for additional capital, supplied by State Bank.

The asset growth, over that planned, was accompanied by profits significantly in excess of budget in 1988 and 1989:

Projected and Actual Profit After Tax

Year Ended 30 June	Budgeted $M		Actual $M

1985	6.5	7.0
1986	7.7	8.2
1987	9.4	10.0
1988	12.0	17.4
1989	22.5	30.0
1990	35.0	4.7

Despite the rapid growth of Beneficial Finance's on balance sheet assets, greatly in excess of budget, the similarly rapid growth in the total assets of the Bank meant that Beneficial Finance did not breach the guideline limiting its assets to 20 per cent of the Bank's, at least after 1985:

Year Ended 30 June	Total Assets Bank $M		Total Assets Beneficial $M		Ratio of Beneficial to Bank Assets %

1984	2,690.6	502.2		18.7
1985	3,430.0	747.4		21.8
1986	5,470.7	1,043.0		19.1
1987	6,839.4	1,128.9		16.5
1988	9,532.2	1,655.2		17.4
1989	12,688.2	2,261.7		17.8
1990	17,300.0	2,674.6		15.5

The rapid growth of Beneficial Finance's assets was plainly apparent from the monthly operating reports provided to the Board of Directors, and was the subject of repeated expressions of concern by the Board.

The most forceful expression of concern was the earliest. At its meeting on 20 August 1985, the Board, in reviewing reports on the company's operations in July 1985:

"... queried whether too much emphasis is being given to high sales volumes rather than profit margins. The answer to this is of prime importance in deciding on the need for further capital.

There appears to be a tendency to chase business at low margins and this is not giving the required profit return on assets. Greater attention must be placed on the risk/reward ratio as commented upon at the previous meeting.

Management must ensure that it has a sufficient number and quality of account managers to properly control the growth in the Company's receivables base.

The Executive Committee was requested to consider the direction of its lending philosophy and the parameters for future business development and to report back to the Board. After a year of unprecedented growth, the Company's growth must now be carefully controlled to ensure a proper return on quality assets. There is also a need to ensure that the benefits of the lower cost offshore funds are retained by the Company." ⁽⁾

The rapid increase in assets had created a need for additional capital:

"Capital Planning: The Board discussed the advice received from Management that an increase in the capital of the Company will be required during 1985/86. This is a decision which must not only be approved by the Beneficial Board but also the Board of the State Bank of South Australia. Management was therefore requested to update the Budget for 1985/86 and the Corporate Plan in the light of the recent growth in receivables and likely future sales, taking into account the various factors relating to risk/reward ratios, margins and asset control discussed earlier in the meeting. The revised budget and plan, together with future capital projections, is to be discussed with the State Bank's Planning Department to enable submissions to be presented to each of the Boards prior to the end of 1985. Emphasis is to be placed on providing for controlled growth." ⁽⁾

Similar, although less forceful, concerns were expressed from time to time after August 1985, usually in the context of an increase in non-performing loans.

At the Board meeting on 30 January 1986, concern was expressed at the "worsening trend" in loan arrears. The minutes record that the Board stated that:

"... current problems are partly a product of too high a level of growth. It is difficult to effectively service a 50% growth rate ... the next Corporate Plan should contain a lower growth rate but a higher ATROE (After Tax Return On Equity)." ⁽⁾

In reviewing Beneficial Finance's results for the month of December 1986 at its 30 January 1987 meeting, the Board:

"... recognised the record sales performance for December of $112.6 million which was $52.0M better than budget. The question was asked whether our lending policies are tight enough in the current economic circumstances. The Managing Director advised that the Company's lending policies are currently being reviewed and any recommendations will be submitted to the February or March meeting of the Board." ⁽⁾

At the next meeting, on 27 February 1987, the above budget performance in sales was again queried. The minutes record that:

"... the Managing Director advised that currently there appears to be less competition from other finance companies providing our Company with greater financing opportunities." ⁽⁾

Again, in June 1988, the Board raised the matter of the company's rapid growth. The minutes of the Board of Directors' meeting on 24 June 1988 record that:

"The question of whether Beneficial is growing too quickly was raised in view of the volume and complexity of sales during 1987/88. Mr Reichert responded that there had been a major change in the product range with higher unit sales in the business finance products, equity funding and unit trust financing. These covered a much lower number of transactions although it was recognised that they were more complex and required strong and detailed account management. On the other hand, the higher volume account activity in equipment finance, commercial hire purchase and leasing directed through the State Bank Reverse P&A arrangement were well below budget. The need for an effective control of growth was a matter of continuing review by Management." ⁽⁾

At the next meeting on 29 July 1988, the Board stated that:

"In view of the dramatic growth in sales, both on and off balance sheet, for 1987/88, it was considered desirable to cut back the rate of growth in the year ahead to ensure that tight controls are maintained." ⁽⁾

The Board also warned of the risk inherent in larger financing transactions. The minutes of the Board meeting on 29 July 1988 record that:

"Management was cautioned in relation to possible future exposure which could be caused by over-runs on the larger financing transactions now being undertaken, particularly by the Investment Banking Division. Tight controls must be maintained at all times. These larger transactions will be subject to quarterly reporting to the Board and should include the cost to complete compared with the original cost estimate and any changes in completion dates." ⁽⁾

The minutes of the Board of Directors' meetings do not record any further expressions of concern by the Board regarding the growth of Beneficial Finance's assets at a rate which was well in excess of that planned. Indeed, the minutes of the Board meeting of 30 June 1989 record:

"Group Risk Asset Sales: Year to date sales of $1,519.1 million were $223.9 million above budget. A significant factor in this over budget result had been the performance of Queensland. Sales of $177.2 million were $76.3 million above budget, and together with low losses and arrears the operations in Queensland were very commendable. It was agreed that a letter of congratulations be sent from the Chairman on behalf of the Board to ... State Manager Queensland." ⁽⁾

In submissions made to me on behalf of certain of the former non-executive directors of Beneficial Finance it was said that throughout the years 1985 to 1989 the Board continued to seek assurances from Management as to their capacity to handle the rate of growth and were continually given such assurances.

It was also submitted that notwithstanding the acknowledgments made by Management in certain documents presented to the Board that weaknesses in Beneficial Finance's information systems had been identified, the Board was comforted by assurances from Management that the systems were generally more than adequate and that Management was committed to rectify those defects which had been identified.

The minutes I have quoted above show that the Board of Directors did question and caution Management regarding Beneficial Finance's rate of asset growth. In my opinion, however, such seeking of assurances was not enough. The position can, I think, be accurately stated as follows:

(a) It was a function of the Board of Directors to set goals for the company, oversee Management's plans for obtaining the necessary resources, and reviewing the company's progress toward attaining those goals.

(b) The excessive growth of Beneficial Finance over and above that which was planned or budgeted meant that the strategic planning and budgeting procedures could not be relied on by the Board of Directors in performing those functions. That necessarily required that the Board of Directors adopt some other method of adequately and properly performing its functions. The occasional seeking of assurances does not amount to an adequate method of performing those functions.

(c) Whether the Board of Directors did take steps to ensure that it adequately and properly performed its functions in supervising, directing and controlling Beneficial Finance with respect to specific transactions is examined in later Chapters. On the basis of the matters referred to in this Chapter, in my opinion, it can be concluded that the strategic planning and budgeting procedure did not amount to an effective system of supervision or control, and that that fact should have been apparent to the Board of Directors from the substantially unbudgeted growth throughout the period from 1984 to 1990.

29.4.4 SUMMARY

The principal matters associated with the implementation of the strategic plans and budgets of Beneficial Finance are:

(a) The strategic plans described, in broad terms, the main features of the change in Beneficial Finance's business after 1984.

(b) The strategic plans did not provide sufficiently detailed plans or criteria to guide the acquisition of assets by Beneficial Finance. Guidelines were prepared regarding loan acquisitions and equity acquisitions which provided criteria for evaluation of those assets.

(c) The Board of Directors of Beneficial Finance was responsible for approving major asset acquisitions by Beneficial Finance, in response to proposals and submissions prepared by Management.

(d) Major asset acquisitions must necessarily be judged according to the company's overall strategic direction and objectives, and with regard to the adequacy of its internal evaluation and management systems.

(e) The strategic plans contain repeated references to weaknesses in Beneficial Finance's internal systems for identifying appropriate assets for acquisition, and to weaknesses in Beneficial Finance's systems essential to managing its portfolio, and planning for long-term profitable growth.

(f) The Board of Directors did not receive regular or complete reports regarding the status of important features of Beneficial Finance's internal management and information systems. There is no evidence that any reports were received regarding the implementation of strategic programs, or of the implementation, by Management, of the key internal resource requirements identified in the strategic plans.

(g) Beneficial Finance's growth in assets very substantially exceeded that which was budgeted, and was well in excess of that of other finance companies.

(h) The Board of Directors were aware of the significant extent of unplanned growth, and from time to time, expressed concern regarding this growth rate, and its implications, particularly for the quality of loan assets.

(i) Despite these expressions of concern, and the repeated intentions stated in the strategic plans to limit growth, Beneficial Finance's asset growth continued to exceed that which was planned. In the three years ended 30 June 1990, unplanned growth actually exceeded that growth which was budgeted.

29.5 CONCLUSIONS AND FINDINGS

My conclusions regarding Beneficial Finance's strategic planning and budgeting are:

(a) Beneficial Finance utilised a procedure for strategic planning and budgeting which entailed the commitment of considerable resources, and the establishment of a formalised Planning department, and of Management strategic planning and budgeting conferences. The strategic planning and budgeting procedure was, therefore, an important part of the means by which the Board of Directors set policy for Beneficial Finance, reviewed Management's plans for the commitment of resources to implementing that policy, and reviewed the progress of Beneficial Finance in meeting its objectives.

(b) Beneficial Finance's strategic planning procedure required substantial consultation with, and occasional direction from, the Bank. This consultation and direction occurred, both at a Management level and at the level of the Board of Directors through the Bank's representatives on the Beneficial Finance Board of Directors.

(c) The procedure of strategic planning and budgeting, which culminated in the approval by the Board of Directors of the strategic plan and budget, was extensive. The Board of Directors were entitled, in the absence of reasonable grounds to suspect otherwise, to rely on the extensive procedure to produce plans that were reviewed by all senior management, and which had the support and commitment of senior management.

(d) The strategic plans were high-level documents, drafted in broad and general terms. Details regarding the evaluation and implementation of strategies and strategic programs were not included in the plans. The implementation of the strategies and programs was the responsibility of Management. In the absence of suspicion, the Board was entitled to rely on Management to implement all aspects of the plans in a timely and prudent manner.

(e) The rate of asset growth budgeted (in contrast to that actually achieved) in the strategic plans was, judged by the standard of the actual rate of growth of other finance companies, not unreasonably aggressive or imprudent.

(f) Notwithstanding the foregoing, the Board of Directors had before it information which in my opinion should reasonably have raised a suspicion that the Board could not place reliance on the strategic planning and budgeting procedure in undertaking its functions of policy setting, overseeing Management, and reviewing progress. Most importantly, the actual growth of Beneficial Finance's total assets very substantially exceeded that which was planned, significantly undermining the very foundations upon which the planning for management systems and controls was based. In addition:

(i) there were recurring references in the strategic plans to key weaknesses in Beneficial Finance's internal systems; and

(ii) Management did not provide to the Board any strategic monitoring reports describing the progress being made in implementing the key internal systems requirements identified in the strategic plans.

(g) The Board of Directors was aware of, and raised concerns regarding, the excessive growth of Beneficial Finance's assets. Despite the raising of these concerns, the excessive rate of growth continued.

(h) In the circumstances, the Board was not able to place reliance on the strategic plans and budgets, and their implementation by Management, in discharging its functions of setting policy, overseeing Management's plans and monitoring progress. The excessive rate of growth was such as to render the strategic plans and budgets largely irrelevant as any reasonable basis for reviewing the detailed planning of Beneficial Finance, particularly where there were reasons to doubt that the implementation of the plans was adequate or effective.

(i) The rapid growth, which exceeded that of other finance companies in Australia, over and above that planned, gave rise to an increased obligation on the directors in adequately and properly undertaking their task of approving asset acquisitions by Beneficial Finance. In particular:

(i) the rapid growth in assets, at a rate in excess of that of other finance companies and most other financial institutions, in new market areas where Beneficial Finance had little previous experience, clearly raises a suspicion that Beneficial Finance's credit assessment standards were imprudently low. This was a concern expressly raised by the Beneficial Finance Board in respect of the excessive growth;

(ii) the unplanned growth had clear implications for the ability of Beneficial Finance to adequately manage its asset portfolio; and

(iii) the rapid growth, and the increasingly diversified nature of Beneficial Finance's businesses, had clear implications for the adequacy of its information systems.

29.6 REPORT IN ACCORDANCE WITH TERMS OF APPOINTMENT

The matters examined in this Chapter do not, by themselves, allow me to make conclusive findings regarding any of my Terms of Appointment, since any of the deficiencies in respect of the strategic planning and budgeting procedure might conceivably have been compensated for by other aspects of the Board's and Management's activities. The adequacy and appropriateness of actions taken by the Board and by Management in respect of the important aspects of Beneficial Finance's businesses are considered in the following Chapters. Notwithstanding these matters there are nevertheless findings that can be made.

I herewith make the following findings in respect of the relevant Terms of Appointment regarding the Direction Setting and Planning undertaken by Beneficial Finance:

29.6.1 TERM OF APPOINTMENT A(b)

The processes which led Beneficial Finance to engage in operations which have resulted in material losses, or holding significant assets which are non-performing, included, very broadly, the strategic planning of Beneficial Finance, which expressly planned to engage in most aspects of the business activities which resulted in the acquisition of such assets. The actual acquisition of a majority of assets was, however, in quantitative terms, unplanned.

29.6.2 TERM OF APPOINTMENT C

Based on the evidence reviewed in this Chapter, I find that the procedure of strategic planning and budgeting did not amount to an adequate or proper system for supervision, direction and control of Beneficial Finance's activities. The excessive rate of growth over and above that budgeted, essentially meant that the strategic plans and budgets became largely irrelevant to the procedure of supervision, direction and control. In particular, in accordance with the actual allocation of functions within Beneficial Finance and with the tests laid down by Mr Justice Rogers in AWA Limited v Daniels (1992):

(a) The functions of the Board of Directors of Beneficial Finance included:

(i) setting goals for Beneficial Finance;

(ii) overseeing the plans of management for the acquisition and organisation of financial and human resources towards attainment of those goals; and

(iii) reviewing, at reasonable intervals, the Beneficial Finance's progress towards attaining its goals.

(b) The functions of Beneficial Finance's management included:

(i) to prepare proposals and submissions for consideration by the Board, including, annually, five-year strategic plans and one-year profit budgets;

(ii) to reduce to writing if appropriate, and to communicate, the policies and strategies adopted by the Board;

(iii) to implement the policies and strategies adopted by the Board; and

(iv) to establish proper internal controls, management information systems and accounting records.

(c) The directors of Beneficial Finance were justified in trusting management to perform their functions, and to rely without verification on the judgment, information and advice of the officers so entrusted. However, such trust and reliance would be unreasonable if the directors were "aware of circumstances of such a character, so plain, so manifest and so simple of appreciation that no person, with any degree of prudence, acting on his behalf, would have relied on the particular judgment, information and advice of the officers" (Rogers J, AWA Limited v Daniels (1992)).

I am of the opinion that:

(a) The strategic planning and budgeting process was not of such a nature as to, by itself, allow the Board of Directors to fulfil its function of setting goals for the corporation, overseeing the plans of management, and reviewing the corporation's progress.

(b) In particular, the discrepancy between the budgeted asset growth of Beneficial Finance and its actual asset growth in all of the years from 1984 to 1990, was a circumstance of such a plain character, so manifest and simple to understand, that it should have raised in the minds of the directors the suspicion that Beneficial Finance's growth, including both its acquisition of assets and the associated increase in its liabilities, was unplanned and unbudgeted, and so may have exceeded the ability of the corporation to prudently control and manage that growth.

(c) That accordingly, in considering the performance by the non-executive directors of their function of overseeing management's plans and reviewing Beneficial Finance's growth, the conduct required of the directors must be determined in the light of the essential irrelevance of the formalised system of strategic planning to Beneficial Finance's planning for, and control of, its growth, and to the need for further inquiry by the directors arising from the fact that Beneficial Finance's actual rate of asset formation and acquisition was more than twice that which was planned.

29.7 APPENDICES

APPENDIX A TO BE INSERTED HERE

CORPORATE STRATEGIC PLAN 1986-1991

Overall Objectives for . To provide a broad range of financial services and

Beneficial Finance facilities which can be tailored to meet the individual needs of specific borrowers or particular groups within commerce, industry or the professions.

. To further develop the Company's traditional lending base in real estate finance and commercial leasing.

. To offer a high degree of personal service.

. To provide innovative financial assistance tailored to meet each client's financial requirements and capacity.

. To further improve the Company's borrowing status to optimise funds availability through retail and wholesale offshore and local markets at minimum cost.

. To ensure the Company contributes positively to the strategic objectives of State Bank of South Australia.

. To develop an environment whereby the professional skills and the well-being of all members of the Company's staff can be enhanced by ensuring that Beneficial's people management and development activities satisfy the personal and professional aims of staff members.

. To operate the Company's affairs in accordance with:

- accepted principles of financial management; and

- the achievement of a level of profitability that will allow a yield on shareholders' funds which exceeds the average for the industry and provides for the continued growth of the Company's asset base.

State Bank Objectives . Assets of approximately $1,500.0M by 1990-91.

for Beneficial Finance

. Increase the current finance company market share of 3.2 per cent in Australia to 5 per cent by 1991.

. Increase the current finance company market share of 7.3 per cent in South Australia to 15 per cent by 1991.

. Reduce operating costs to 2.0 per cent of average net receivables.

. Achieve an after tax return on equity of 15 per cent by 1988/89.

Financial Performance . Achieve an after tax return on shareholders' funds of 15

Objectives per cent per annum within the Plan period.

. Achieve a minimum after tax net margin of 1.0 per cent.

. Pay management fees of 20 per cent of net profit after tax to State Bank.

. Increase the provision for doubtful debts to 1 per cent of net receivables, on the basis of being totally unallocated.

. Build retained earnings and reserves to a level in excess of ordinary share capital (to correct the imbalance that resulted from Hong Kong package).

. Maintain growth of net receivables to within a limit of 20 per cent of total State Bank Group assets.

CORPORATE STRATEGIC PLAN 1987-1992

Mission . To be a highly efficient and profitable medium size national financial institution with international representations.

. To earn a minimum after tax return on equity 5 per cent greater than the inflation rate and be in the top 10 per cent of similar financial institutions measured by return on shareholders' funds.

. To support State Bank in attainment of its objectives, by providing a broad range of complementary financial services and facilities in an effective and innovative manner.

. To provide superior and competitive customer service through highly skilled/trained staff and use of state of art technology.

Markets . To participate in national lending markets including capital cities and selected provincial regions; to participate in the Pacific region, including New Zealand. Participate in national and international funding markets which will include New Zealand, Asia, United States of America, United Kingdom and Europe; to possibly participate in the Pacific region, including New Zealand.

. To target niches in both asset and liability acquisition with emphasis on wholesale markets (domestic and international), government instrumentalities, banks, strong corporate entities, and high net worth individuals.

. Continue to develop and foster Beneficial Finance's traditional asset and liability products;

. To place greater emphasis on non-recourse fee income through the introduction of packaging and securitisation products and services; and

. To develop products horizontally and vertically to remain a principal innovator amongst comparative financial institutions.

Customers . To provide superior customer service by:

- identifying needs and wants of customers/ intermediaries in defined target markets through use of a structured product development process;

- using market surveys and formalised product development processes to identify the strengths and weaknesses of products, services and business opportunities;

- rigorous marketing of products which have customer appeal and offer a competitive edge.

People . Develop an organisational culture characterised by commonality of thoughts between management and staff with:

- professionalism;

- salesmanship;

- dedicated customer focus;

- respect for the individual;

- strong performance orientation; and

- good communication;

as key elements in human resources policies and culture.

Organisation . Foster individual strategic business units which will progressively assume increased autonomy for their function and profitability.

. Develop systems and technology on a continuing basis to ensure Beneficial Finance has the most modern and effective systems in Australian financial markets consistent with requirements.

Corporate Image . The corporate image will be:

- innovative, reflecting a wide variety of quality market oriented products on offer;

- one of integrity, efficiency and competitiveness;

- independent (yet highly integrated with the objectives and ambitions of the State Bank);

- dynamic, reflecting excellence in its planning, business analysis and business systems; and

- strongly promoted to the external market place in Australia and overseas.

CORPORATE STRATEGIC PLAN 1988-1993

Company Objectives . To be a highly efficient and profitable medium size national financial institution with some international representation.

. Earn a minimum after tax return on equity equivalent to 15 per cent or a minimum real after tax return on equity of 2-3 percentage points above the long term bond rate.

. To minimise Federal income tax payable throughout the plan period.

. To be a top performer in the industry achieving a high level of excellence.

. Support State Bank in the attainment of its objectives, by providing a broad range of complementary financial services in an effective and innovative manner.

. To provide superior and competitive customer service.

. Effectively manage human resources to ensure "the right people are in the right place" and staff are able to achieve job satisfaction.

. Identify and develop profitable market niches for both asset and liability acquisition.

. Develop a corporate culture which ensures commonality of thought between management and staff with an emphasis being placed on key values of:

- profitability;

- customer service;

- respect for the employee; and

- performance.

. Develop a strong and positive corporate image incorporating the following elements:

- innovation and competitiveness;

- professionalism and efficiency;

- dynamism;

- integrity; and

- independence (yet highly integrated with the objectives and ambitions of State Bank).

CORPORATE STRATEGIC PLAN 1989-1994

Financial Objectives . Beneficial Group will achieve a minimum after tax return on equity of 5 per cent over the ten year Commonwealth Bond Rate.

. Beneficial Group will achieve an after tax profit of $74.0M in 1993-94 and an after tax return on equity of 24.9 per cent.

. Beneficial Group will achieve a compound annual after tax profit growth of 20 per cent during the plan period.

. Beneficial Group will maintain expenses/managed risk assets ratio below 2 per cent.

. Beneficial Group will contain net losses within 0.6 per cent of finance assets.

Non-Financial . Beneficial Group will commit to the provision of superior customer service.

. Beneficial Group will commit to developing highly skilled performers to ensure excellence of service is second to none in the finance industry.

. Beneficial Group will develop a management information system incorporating sophisticated technology and systems to ensure all credit, equity and exposure risks are managed and controlled in an effective manner.

. Beneficial Group will develop a corporate culture which ensures commonality of thought between management and Performers with an emphasis being placed on the core values of:

- profitability;

- customer service;

- respect for individual; and

- performance.

. Beneficial Group will develop a strong and positive corporate image.

. Beneficial Group will identify and develop profitable market niches via affiliate companies, acquisition or expansion as autonomous units.

. Beneficial Group will develop a flexible corporate structure to "house" all future strategic developments.

STRATEGIC STATEMENT 1990-1992

Mission . To be a lending finance company supplying real estate and leasing products, as well as other financial services, to the public and private sectors.

. To be distinguished from all competitors by a commitment to excellence through quality, in providing innovative and flexible products in a timely manner, reflecting superior customer service.

. To continue to be an important contributor to the profits of the State Bank of South Australia Group.

Principal Objectives . To be recognised as a leading finance company in selected market segments through the provision of excellent service quality.

. To maximise profit by directing the attention of the Business division to opportunities in quality core business and utilising a separate division to professionally manage and resolve problem accounts.

. To develop a performance culture within Beneficial through the improvement of operational efficiency, greater employee motivation and the development of customer orientated work practices leading to optimum profits.

. To improve the penetration of the company's core lending and borrowing business by informing the market of our strengths and providing products that are innovative, flexible and in line with client requirements.

. To develop information systems that provide accurate and up to date output on key indicators of our business in a format that conveys the message quickly and in a manner that is to the level of management or the client to which it is directed.

. To effectively use capital to provide an above average return on shareholders' funds.

Key Tasks . Reduction in non-accrual loans while minimising losses.

. Be recognised as a provider of excellent service.

. Develop new products and enhance product profitability.

. Improve return from quality core business.

. Develop systems to provide key management information.

KEY STRATEGIC OBJECTIVES					APPENDIX B
SUMMARY OF OBJECTIVES

	1986-91	1987-92	1988-93	1989-94		1990-92
FINANCIAL

Achieve an appropriate return on shareholders’ funds	x	x				x
Achievement of minimum after tax return on equity	x	x	x	x
Maximise profit/achieve minimum profit level		x	x	x		x
Support the Bank’s objectives	x	x	x
Contain losses/reduce non-performing loans				x		x
Manage costs/maintain expenses -managed risk assets ratio	x			x		x
Minimise Federal income tax			x
Achieve agreed level of assets, margin, growth of net recievables, reserves	x
Pay 20 per cent of net profit after tax as management fees to the Bank	x
Increase provision for doubtful debts	x
Improve Company’s borrowing status	x
Operate Company’s affairs with accepted principals of financial management	x

ORGANISATIION

Provide superior customer service		x	x	x		x
Develop positive corporate image		x	x	x
Develop corporate culture to ensure job satisfaction/service excellence	x	x	x	x		x
Develop flexible corporate structure/structure to foster business units		x		x
Develop appropriate management information systems		x		x		x
Effectively manage human resources/develop highly skilled staff		x	x	x

MARKETS

Achieve/maintain market position	x	x	x			x
Develop innovative products	x	x				x
Develop target (profitable) market niches		x	x	x
Improve penetration of markets for borrowing business	x	x				x
Meet customer needs	x	x
Provide broad range of financial service	x	x
Be represented internationally		x	x

X indicates in which plan the objective was stated

APPENDIX C

APPROVAL BY THE BOARD OF DIRECTORS OF BUSINESS

DEVELOPMENT AND DIVERSIFICATION INITIATICES

Year Ended 30 June 1985

17 October 1984: Approval given to participation in a luxury vehicle leasing arrangement involving the purchase of a $15.0M portfolio of luxury vehicle lease receivables.

29 November 1984: Approval to enter into operating lease partnerships with other financial institutions, up to a maximum initial limit of $20.0M.

15 April 1985: Authority given to enter into Heads of Agreement to form a joint finance company with Centrelease Equipment Rental Pty Ltd, subject to specified conditions being satisfied. The venture was to be off-balance sheet.

21 May 1985: The minutes record that:

"Pegasus Securities Limited: An offer letter has been issued to Pegasus and this will be referred to in the Part B statement which is being issued by that Company shortly. Care will be taken to ensure that Beneficial does not become locked in with a minor holding".

Year Ended 30 June 1986

20 August 1985: Approval, subject to conditions, for management to continue negotiations regarding possible purchase of Australian Card Services Pty Ltd.

29 October 1985: Approval given for Beneficial to evaluate, with the State Bank, the establishment of a group controlled credit card operation.

A proposal to purchase a loss recovery portfolio was rejected by the Board "unless adequate collateral security could be obtained".

The Board was informed that an agreement in principle had been reached regarding a possible joint venture with a Western Australian lease broker. A detailed submission was to be given to the Board for consideration.

The Board was given preliminary details of a possible joint venture with Mortgage Finance Australia Limited, a mortgage broker, with a detailed submission to be presented at the next Board meeting.

17 December 1985: Approval for the acquisition of a 51 per cent interest in Mortgage Finance Australia Limited, through an off-balance sheet arrangement.

20 May 1986: Approval of a proposal to form, together with Mortgage Finance Australia Ltd, a company to be called Mortgage Finance Securities Ltd through which an off-balance sheet joint venture would engage in new secondary mortgage markets in a trading capacity, and take over the existing managed portfolio of Mortgage Finance Australia.

17 June 1986: Approval for management to proceed with negotiations for purchase of NAFA, a motor vehicle fleet management business.

Year Ended 30 June 1987

29 July 1986: Approval for continuing discussions with Fletcher Challenge regarding a possible joint venture operation with the restructured NAFA for the management and redefinition of objectives of the Wheelease partnership.

Approval to establish a joint venture finance operation with Equiticorp Unit Trust.

30 September 1986: The Managing Director reported on the possibility of acquiring an existing finance company operation in New Zealand. The Board indicated that it was prepared to consider a suitable business opportunity subject to 100 per cent ownership by Beneficial Finance.

16 December 1986: Approval to take a 50 per cent participation in a joint venture to develop Mindarie Keys, an ocean-front resort project.

30 January 1987: Approval to establish a joint venture financing business with Goldsmith & Co.

27 February 1987: Approval to proceed with the establishment of a joint venture with Fletcher Challenge and NAFA to act as a lessor and insurer of other lessor's asset risk positions.

Resolved to enter into a mortgage banking joint venture.

Year Ended 30 June 1988

31 July 1987: Approval of a proposal that subsidiaries of Beneficial Finance be capitalised by up to $100.0M to enable them to invest in tax-based real estate transactions.

Approval to acquire 100 per cent of Brenim Pty Ltd.

28 August 1987: Approval to establish an insurance broking joint venture, the Board stressing the need for a detailed business plan.

29/30 October 1987: Approval to establish a joint venture to purchase an office building in the Melbourne central business district.

29 January 1988: The Managing Director advised that $47.0M of receivables of the Associated Midland Group in South Australia had been purchased, and that Beneficial Finance was proceeding with acquisition of the Western Australian receivables portfolio of $67.0M. There was recourse back to the parent company, Equiticorp Australia, in relation to any doubtful accounts.

10 February 1988: Approval for management to continue negotiations for acquisition of a portfolio of real estate secured receivables in New Zealand for NZ $100.0M from Equiticorp.

26 February 1988: The Board was informed that a further $55.0M of Equiticorp receivables were being purchased in New South Wales and Victoria.

Approval to increase the capitalisation of subsidiaries to invest in tax based unit trust transactions from $100.0M to $150.0M.

29 April 1988: Approval of a proposal to acquire a 75 per cent interest in Pacific Rim Leisure, a tourist property development, and 25 per cent of an associated tourism property management company.

12 May 1988: Approval of a proposal to establish a joint venture to acquire and develop the East End Market.

27 May 1988: Approval in principal to establish a New Zealand operation, subject to discussions with State Bank regarding its participation.

Year Ended 30 June 1989

29 July 1988: The Board was advised that Southstate Corporate Finance Ltd had been incorporated in New Zealand, as an off-balance sheet company, to operate as a merchant bank and financier in New Zealand.

26 August 1988: Approval to establish a joint venture with Interlease (Australia) Pty Ltd to conduct a lease financing operation in Victoria.

17 October 1988: Approval for acquisition of Campbell Capital Limited.

25 November 1988: Ratification of management's decision to acquire Fletcher Challenge's 50 per cent interest in Asset Risk Management Ltd.

Approval to establish a joint venture to finance real estate and thoroughbred partnerships.

24 February 1989: Approval to establish a joint venture to finance motor vehicle purchases.

31 March 1989: Endorsement of proposal to acquire IBIS Information International Limited

26 May 1989: Approval for Southstate Corporate Finance Ltd to purchase Wheelease Ltd.

30 June 1989: Approval to establish a joint venture to finance motor vehicle purchases.

PROJECTED AND ACTUAL TOTAL ASSETS APPENDIX D1

			Total Assets Projected in The strategic Plans for the Years:

Year Ended 30 June	Actual	1986		1987	1988	1989

1986	1,043
1987	1,129	1,081
1988	1,655	1,140		1,337
1989	2,262	1,233		1,602	1,752
1990	2,675	1,344		1,866	2,219	2,588

PROJECTED AND ACTUAL SHAREHOLDERS' FUNDS APPENDIX D2

				Shareholders’ Funds Projected in The Strategic Plans for the Years:

		Actual		1986	1987	1988	1989

1986:	Issued Capital		50
	Reserves		30
			80

1987:	Issued Capital		50	60
	Reserves		34	23
			84	83

1988:	Issued Capital		85	50	70
	Reserves		42	34	29
			127	84	99

1989:	Issued Capital		125	50	70	90
	Reserves		43	46	35	43
			168	96	105	133

1990:	Issued Capital		150	50	80	100		140
	Reserves		40	61	45	55		57
			190	111	125	155		197

CHAPTER 29 DIRECTION-SETTING AND PLANNING