CHAPTER 20
THE MANAGEMENT OF SENIOR EXECUTIVES AT THE STATE BANK
TABLE OF CONTENTS
20.1 INTRODUCTION
20.2 THE RECRUITMENT PRACTICES OF THE STATE BANK AND THE DEVELOPMENT OF THE SENIOR EXECUTIVE TEAM
20.2.1 THE POWERS AND RESPONSIBILITIES OF THE BOARD AND OF THE CHIEF EXECUTIVE OFFICER IN RELATION TO THE RECRUITMENT OF PERSONNEL
20.2.2 THE NEED FOR ADDITIONAL RESOURCES
20.2.3 THE RECRUITMENT OF SENIOR EXECUTIVES
20.2.4 CONCLUSIONS ON THE RECRUITMENT OF SENIOR EXECUTIVES
20.3 ASSESSING THE PERFORMANCE OF SENIOR EXECUTIVES
20.3.1 INTRODUCTION
20.3.2 ASSESSING THE PERFORMANCE OF SENIOR EXECUTIVES: PROCESS AND RESPONSIBILITIES
20.3.3 OBSERVATIONS ON THE PERFORMANCE ASSESSMENT PROCESS AS APPLIED TO SENIOR EXECUTIVES
20.3.4 CONCLUSIONS ON THE PERFORMANCE ASSESSMENT PROCESS
20.4 DRIVING THE PERFORMANCE OF THE SENIOR EXECUTIVE: REWARDS AND REMUNERATION
20.4.1 THE MAKE-UP OF THE REMUNERATION OF SENIOR EXECUTIVES
20.4.2 THE SETTING OF REMUNERATION: RESPONSIBILITIES AND STANDARDS
20.4.3 THE SETTING OF BONUSES: STRUCTURE, RESPONSIBILITIES AND STANDARDS
20.4.4 THE MANAGEMENT OF REMUNERATION FOR SENIOR EXECUTIVES
20.4.5 APPLICATION OF THE REMUNERATION REVIEW AND MANAGEMENT PROCESS TO THE ORGANISATION
20.4.6 OBSERVATIONS AND CONCLUSIONS ON THE REMUNERATION SETTING, MANAGEMENT AND REVIEW PROCESSES AS APPLIED TO SENIOR EXECUTIVES OF THE STATE BANK
20.5 DESIGNING AND MANAGING THE ORGANISATION STRUCTURE OF THE STATE BANK AND OF THE STATE BANK GROUP
20.5.1 EVOLUTION OF THE DIVISIONAL AND DEPARTMENTAL STRUCTURE OF THE BANK: A CHRONOLOGICAL OVERVIEW
20.5.2 OBSERVATIONS AND CONCLUSIONS REGARDING THE EVOLUTION OF THE ORGANISATION STRUCTURE OF THE STATE BANK AND OF THE STATE BANK GROUP FROM 1984 TO 1991
20.5.3 REGARDING THE ROLE OF THE MANAGING DIRECTOR IN THE STRUCTURING AND RESTRUCTURING OF THE ORGANISATION
20.5.4 REGARDING THE ROLE OF THE BOARD IN THE STRUCTURING AND RESTRUCTURING OF THE ORGANISATION
20.6 FINDINGS AND CONCLUSION
20.7 REPORT IN ACCORDANCE WITH TERMS OF APPOINTMENT
20.7.1 TERMS OF APPOINTMENT A
20.7.2 TERM OF APPOINTMENT C
20.8 APPENDICES
A Method of Recruitment - Group Managing Director and Selected Senior Executives
B Recruitment Documentation Information - Group Managing Director and Selected Senior Executives
C.1 State Bank Organisation Structure 1984
C.2 State Bank Organisation Structure 1985
C.3 State Bank Organisation Structure 1986
C.4 State Bank Organisation Structure 1987
C.5 State Bank Organisation Structure 1988
C.6 State Bank Organisation Structure 1989
C.7 State Bank Organisation Structure 1990
D Selected Senior Executives and Line Managers - Position History 1985-1991
E Remuneration Summary - Group Managing Director and Selected Senior Executives 1988 - 1990
20.1 INTRODUCTION
The starting point for any analysis of the management of senior executives at the Bank is the statutory framework within the State Bank of South Australia Act, 1983 (as amended) ("the Act"). In so far as it is relevant to the topic of this Chapter, the Act provides:
"14. (1) The Board is the governing body of the Bank and has full power to transact any business of the Bank.
...
15. (1) In its administration of the Bank's affairs, the Board shall act with a view to promoting-
(a) the balanced development of the State's economy; and
(b) the maximum advantage to the people of the State,
and shall pay due regard to the importance both to the State's economy and to the people of the State of the availability of housing loans.
(2) The Board shall administer the Bank's affairs in accordance with accepted principles of financial management and with a view to achieving a profit.
...
16. (1) There shall be a Chief Executive Officer of the Bank.
(2) The Chief Executive Officer is, subject to the control of the Board, responsible for the management of the Bank.
(3) The Chief Executive Officer shall be appointed by the Board.
17. (1) The Board may appoint such officers of the Bank as it thinks necessary for the effective operation of the Bank.
(2) The officers of the Bank are not subject to the provisions of the Public Service Act, 1967.
(3) The provisions of the second schedule of this Act (which are incorporated with, and shall be read as part of, this Act) shall apply to officers appointed under this section.
18. (1) The Board may delegate any of its powers or functions under this Act.
(2) The Chief Executive Officer may delegate any of his powers or functions under this Act.
(3) A delegation under this section-
(a) may be absolute or conditional;
(b) is revocable at will; and
(c) does not derogate from the powers of the delegator.
The Second Schedule to the Act provided, in so far as it is relevant:
2 Subject to this Act, the Board may-
(a) employ officers and other persons subject to such conditions as it thinks fit;
(b) transfer an officer from one office to another office having the same classification; and
(c) terminate the employment of an officer or employee.
3 (1) The Board may declare any office in the Bank to be a prescribed office.
...
4 (1) The Board may, pursuant to this clause, classify an office in the Bank (other than a prescribed office) by reference to the level of salary payable in respect of that office.
...
11 (1) If, after making a full inquiry, the Board is satisfied that an officer is guilty of misconduct it may impose one or more of the following penalties.
(a) it may reprimand the officer;
(b) it may transfer him to another office in the Bank at a lower classification;
(c) it may reduce the salary or allowances payable to him;
(d) it may suspend him from office with or without pay for a period fixed by the Board;
or
(e) it may dismiss him."()
Under the State Bank of South Australia Act, 1983 the Bank Board is thus identified as the governing body of the Bank(), bound to administer the affairs of that organisation "to the maximum advantage to the people of the State", and in accordance with "accepted principles of financial management with a view to achieving a profit ".() In the period under review by the Investigation, the Board exercised its powers as the governing body of the Bank through the Managing Director, Mr T M Clark, who was, "subject to the control of the Board, responsible for the management of the Bank".()
The business of the Bank was carried on through both operational and non-operational units. By operational units, I mean business-generating units such as Retail Banking, Corporate Banking, and International Banking. By non-operational units, I mean the non-business generating (or `supporting' units) such as finance, accounting, internal audit, personnel, etc. Activities are carried out within those units under the direction, supervision and control of senior executives and, in a number of instances, of senior line staff with specialist skills.()
In the course of this Investigation, I have identified numerous deficiencies regarding the manner in which key functions of the State Bank were managed. I refer, in particular, to shortcomings identified in the following management functions: in the setting of the Bank's direction(); in the monitoring of risks within the Bank(); in the management of its assets and liabilities, as well as its Treasury(); in the management of credit(); in the management of parts of its overseas operations(); and in the management of a range of controls, both internal and external.() I have found, as indicated elsewhere in this Report, that these deficiencies in management functions have resulted in material losses and, both directly and indirectly - depending on the nature of the function involved - have caused the Bank to hold significant assets which are non-performing.
To enable Mr Clark to manage the affairs of the Bank, the Board was authorised to, and did, delegate part of its statutory managerial power to the Managing Director, in accordance with the Act.() In turn, the Managing Director, as authorised under the Act, delegated certain powers to his immediate subordinates who formed the senior executive team. The senior executives, either in their capacity as heads of various divisions and departments of the Bank or by virtue of their position as members (at different times and in different capacities) of the key decision-making bodies of the Bank, were required to monitor and manage the day-to-day business of the Bank.
The day-to-day business of the Bank, as indicated earlier, included, in particular, the management of credit, and the financial planning and control of the organisation. Proper management of its lending business and effective planning and internal controls were essential to the sound operation of the Bank. As a corollary, the competence and diligence of the managers of those functions, both as individuals and as members of decision-making bodies (such as the Executive Committee, the Lending Credit Committee, or the Asset and Liability Management Committee) were essential to the proper functioning of the Bank. The competence of those senior executives and the due and diligent performance by those senior executives of their duties were of critical importance to the management of the Bank's affairs "with a view to achieving a profit and for the benefit of the people of the State in accordance with accepted principles of financial management ".() I have found, as indicated in earlier and subsequent Chapters of this Report, that the lack of competence and the poor performance of certain senior executives have contributed materially to the position of the Bank as described in February 1991, and to the Bank holding a number of significant assets which are non-performing.
I have investigated the manner in which the Board, through the activities of the Managing Director, managed the senior executive echelon of the Bank, that is to say:
(a) the manner in which the Board and the Managing Director established and developed the senior executive tier;
(b) the manner in which the Board and the Managing Director reviewed the performance of the senior executives, rewarded their performance, and dealt with demonstrated poor performance; and
(c) the manner in which the skills, experience and expertise, of senior management were deployed through the organisation of the Bank and the impact of the Bank's structure on the management of the affairs of the Bank.
I have done so under Terms of Appointment A(a), A(b), A(c) and C.
Term of Appointment A (a) requires me to investigate and inquire into 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."
Terms of Appointment A(b) and A(c) require me further to investigate and inquire into and report on:
"... what were the processes which led 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 holdings significant assets which are non-performing"
and
"... whether those processes were appropriate".
Under Term of Appointment C, I am also required 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:
(a) the Board of Directors of the Bank;
(b) the Chief Executive Officer of the Bank;
(c) other officers and employees of the Bank;
(d) the Directors, officers and employees of the members of the Bank Group".
20.2 THE RECRUITMENT PRACTICES OF THE STATE BANK AND THE DEVELOPMENT OF THE SENIOR EXECUTIVE TEAM
20.2.1 THE POWERS AND RESPONSIBILITIES OF THE BOARD AND OF THE CHIEF EXECUTIVE OFFICER IN RELATION TO THE RECRUITMENT OF PERSONNEL
One of the principal tasks confronting the Chief Executive Officer of the Bank from the date of the merger in 1984 was the development of a management team able to guide and support the proposed activities of the new Bank. This was clear from as early as September 1983, at the time when the Merger Advisory Group and its Recruitment Sub-Committee() were shaping the brief to the first Chief Executive Officer of the Bank. The powers which the Board and the Chief Executive Officer respectively could exercise with regard to personnel in the course of their governance and management of the affairs of the State Bank are defined in the State Bank of South Australia Act, 1983 as amended by the State Bank of South Australia Act Amendment Act, 1984. On the topic of recruitment of Bank personnel, the Board is empowered, under Section 16(3), to appoint the Chief Executive Officer. In the second instance, it is empowered
"... to appoint such officers of the Bank as it thinks necessary for the effective operation of the Bank." ()
The State Bank of South Australia Act Amendment Act, 1984 enlarged upon the Board's power to appoint officers and the conditions under which that power could be exercised. These changes were included in the Second Schedule.() Under the terms of the Second Schedule, the Board could:
"...
(a) employ officers and other persons subject to such conditions as it thinks fit;
(b) transfer an officer from one office to another office having the same classification; and
(c) terminate the employment of an officer or employee." ()
It could, moreover, declare any office in the Bank to be a "prescribed office", ie an office which stood apart both from the broader designation of "classified offices" and from the terms of employment (including remuneration) which applied thereto.() By and large, "prescribed offices" came to represent positions in the senior echelon of the Bank. The importance of the distinction between the categories "classified" and "prescribed" is material to the present discussion only in so far as it assists in distinguishing between the delegations granted to the Chief Executive Officer, as opposed to those powers which the Board retained, regarding the management of personnel.
The Act also authorised the Board() and the Chief Executive Officer() to delegate any of its or his powers or functions. Within the structure thus provided for by the Act for the recruitment of personnel (and other related functions), the Board refined the distribution of responsibilities between itself and the Chief Executive Officer. In June 1984, the Board resolved at its inaugural meeting that:
"... the Board will appoint all prescribed officers on the recommendation of the Chief Executive and will approve all items of their remuneration. Below prescribed officers, the Board will approve policy, but Management will have the right to recruit, terminate, transfer and remunerate staff." ()[Emphasis added]
The Board thus allocated different responsibilities to itself and to the Chief Executive. This delegation to the Chief Executive Officer as a practical matter carried, by implication, an authority provisionally to agree upon salary matters with proposed appointees to prescribed offices, reserving to the Board the theoretical power to veto a particular appointment to a prescribed office, and to modify the terms of that appointment. The Board expressly retained, however, the power to appoint, and to control the remuneration of, the senior tier of management.
This resolution was part and parcel of a broader set of measures which set out the modus operandi agreed to by the Board and by the Chief Executive. The delegation regarding the recruitment and remuneration of what I shall refer to as "non-prescribed" personnel was one of those which remained unchanged throughout the period considered by this Investigation, even though the mechanism used by the Board to review and agree the remuneration of upper management was modified in 1990, with the establishment of the Remuneration Sub-Committee(), and even though the role of the Managing Director was substantially altered in September 1990(), when it was decided that Mr Clark should "become more of an Executive Chairman".()
This Section of the Chapter examines only those issues relevant to the recruitment and development of the senior executive tier in the State Bank, as a matter contributing to the Bank's engagement in operations which resulted in material losses, and to the Bank's accumulation of a substantial portfolio of non-performing assets. Issues related to the performance, promotion, and remuneration, of the senior executive tier are dealt with in other Sections of this Chapter.
20.2.2 THE NEED FOR ADDITIONAL RESOURCES
It was generally accepted, at the time of the merger that resulted in the formation of the Bank that the staff of the merged banks would be inadequate, numerically and in skills, training and experience, to the task of managing the new Bank, given the change of direction intended to be ushered in by the merger.
A substantial and dramatic shift in business direction was envisaged for the new State Bank. The State Bank, from 1984 onwards, aimed to, and did, shift the business thrust of the predecessor institutions from personal lending, retail housing loans and rural loans to a greater involvement in the corporate banking sector.()
There was to be a sharp contrast between the business orientation of the predecessor institutions and that of the new State Bank. The predecessor Banks were "two very small parochial, traditional banking operations - one, a savings bank and one a rural bank. Both were quite small. These two traditional and parochial institutions were brought together, and asked to adopt a business culture which was different from the culture of each of them, and to become, rather than a very small, regional operation, a dynamic, comprehensive bank competing with the major banks across the country and, shortly afterwards, overseas.()
The resources required to underpin the diversification and expansion of the State Bank were not to be found internally, at least in the short-term(). It followed that the skills would have to be brought into the organisation, through recruitment.()
A large number of officers with perceived specialist skills, particularly in Corporate Banking, were recruited continually from 1984 to 1990.() The Bank did not have, in 1984 (and it accepted in 1984 and thereafter that it did not have), a base of qualified people with the academic or professional skills necessary for some of the more specialist areas of banking, particularly those in the Corporate and Treasury areas.() The training of existing staff, while desirable in the longer-term, did not, and could not, provide the Bank with sufficient protection against the risk of error associated with ill-experienced staff engaged on a protracted learning curve. There was a need to bring into the organisation people who already possessed the necessary skills.
Furthermore, the Board and the Managing Director were aware, from the very outset, both of the need to develop a suitably qualified and experienced management team, on the one hand, and of the limitations on the management resources in the predecessor institutions on the other.
The Board and the Managing Director were aware, from the very outset, of the substantial cultural and operational gap which the predecessor organisations would have to bridge in order to meet the charter and strategies developed for the new State Bank.
In order to compensate for the perceived limitations of the management skills base, and at the same time to permit the rapid growth planned for the Bank, the Board and the Managing Director turned, quite wisely, to external recruitment, as opposed to an exclusive reliance on the development of internal resources. External recruitment was carried out to complement senior executive management and line management also, in areas requiring specialist skills, such as treasury, corporate banking, and international banking. The decision to recruit externally was driven by two key strategic considerations:
(a) The objective of the Board and the Managing Director to expand into new business areas and the consequent need to support this expansion with the required skills, experience and expertise.
(b) The objective of the Board and the Managing Director to accomplish this expansion and diversification quickly, although with respect to the former I accept that it was continually assured by management that growth was occurring in a planned and co-ordinated manner.
The Board and the Managing Director, along with some members of the senior executive team, appreciated the direct correlation between the Bank's ability to engage in new business and the need for appropriate resources to execute such business.
The Board and the Managing Director had it within their power, at all times, to monitor the implementation of business strategies against the development of the necessary resource infrastructure, and thus to vary the strategy or the speed of its implementation according to the progress made in the development of the resource infrastructure. I have elsewhere in this Report expressed the view that the Bank was permitted by the Board to expand too rapidly, when one had regard to the extent and quality of internal controls on the Bank's lending. I am also of the view that the Bank's growth in lending was excessive in that the Bank grew beyond the collective ability of its management to ensure that its lending was safe, satisfactory, and profitable.
20.2.3 THE RECRUITMENT OF SENIOR EXECUTIVES
In seeking to acquire, through external recruitment, staff possessing the skills, experience and expertise which the Bank lacked, so as to facilitate its growth, diversification and expansion the senior executives of the Bank had to contend with two factors which made the task more difficult. First the Bank was expanding its activities at a time when, as a result of the deregulation of the financial markets, some sixteen new banks had either established operations in Australia, or were in the process of doing so. Experienced banking staff, particularly those with specialist skills or expertise, were in high demand. The consequent scarcity of resources had, as one of its effects, substantial increases in the levels of remuneration which skilled banking professionals could command. Secondly, the State Bank had to overcome the perceived disadvantage of its location in Adelaide, away from the financial hubs of Sydney and Melbourne.()
These factors and their practical consequences were known to the Bank and to the Board.()
The practical consequences of these two factors in combination were, first, that, in many instances, the Bank had no choice but to recruit young and relatively inexperienced staff to fill senior positions, and, secondly, that it had to pay very high salaries to young and relatively inexperienced staff. To senior executives these factors posed a substantial problem as early as 1985() although I observe in this regard the Bank was consistently assured that experience of banking staff was adequate.
The problem, of course, was exacerbated by the rate at which the corporate banking business, among other businesses of the bank, was intended to and did grow. The 1986 Strategic Plan, for instance, foresaw that, by 1991:
"... there [would] be between a 200% and 300% increase in business getting staff within the specialist areas of Wholesale Banking, Corporate [Banking], International [Banking] and Treasury." ()
Recruitment of the more senior executives and line managers was carried out, with few exceptions, via a two-tier system. Vacancies arising for positions below the level of General Manager (or, as some would later become known through the evolution of the organisation structure, `Chief General Manager') were filled under the authority delegated by Mr Clark to the divisional heads.() Mr Clark himself did not take an active role in recruitment at that level.() In conformity with the allocation of responsibilities agreed to in June 1984, and to the relevant delegation of powers and functions(), the Board did not participate in recruitment at that organisational level unless exceptional circumstances arose.
Recruitment for positions whose incumbents reported directly to Mr Clark was carried out by the Managing Director.() Moreover, as many - if not most - of these positions came under the designation of "prescribed offices" (), Board participation() was required under the 1984 resolution which contemplated that the Board would:
"... appoint all prescribed officers on the recommendation of the Chief Executive and will approve all items of their remuneration."
In fact, the Board had little to do directly with the appointment of the most senior managers in the Bank, other than, from time to time by ratifying the recommendations of the Managing Director.()
Typically, the directors would be advised by the Managing Director of either a short list of candidates for a given position and, subsequently, of the identity of the proposed appointee, or would be simply advised of the identity of the proposed appointee.() In the majority of instances, a curriculum vitae would be tendered at a Board meeting in support of the nomination, to which Mr Clark would speak.() Appointments in this category were recorded in the minutes as being "noted" or "approved".() Mr Barrett referred to their being "ratified" by the Board.() Some of the directors gave evidence that they saw such appointments as the responsibility of the Managing Director, rather than a shared responsibility.()
There was an occasion in 1990 when a member of the Board vetoed the appointment of a candidate recommended by Mr Clark for appointment to the position of Group Finance Manager. This occurred, however, during an overseas absence on the part of Mr Clark, who was reportedly appalled at such a turn of events.() Mr Simmons told the Investigation that the recommendation was vetoed, not because the Board disapproved of the nominated individual, but rather because the selected person would (it was proposed by Mr Clark) be reporting to Mr K L Copley rather than directly to the Board, an arrangement which the Board was not prepared to accept.
As part of its examination of the manner in which the Managing Director and his immediate subordinates recruited personnel, the Investigation has reviewed the methods used to fill twenty-two senior management positions (from Managing Director to General Manager) in the years 1984 to 1991.() Of those twenty-two, only five (or 23 per cent) were filled by persons employed by the predecessor banks. Fifteen (or 68 per cent) were filled through external recruitment. Records were unavailable in two instances. In the case of the fifteen positions filled externally, recruitment occurred as a result of direct approach(), advertised selection() and executive search.() All methods are commonly used and acceptable.()
The diversity of methods used also reflects, in part, some of the difficulties experienced by many banks and financial institutions in the eighties when seeking staff, and more particularly, experienced senior managers. The `boom' climate of the period, when coupled with the resource demand generated by the entry into the Australian market of numerous foreign banks in the wake of deregulation, resulted in a situation where experience was to be bought at a substantial premium, if it was to be bought at all. In addition to this difficulty, those attempting to recruit staff for the State Bank would have had to overcome the lesser attraction of Adelaide as a financial centre somewhat removed from the more active Sydney and Melbourne `hubs'.()
The Investigation has found that, over the first four years of the period under review, from 1984 to 1988, little formality was associated with the process of recruitment. From 1985 to 1988, Heads of Department and Divisions recruited their senior staff largely on their own initiative, with peripheral contribution only from the Personnel division.() At that time, the Personnel function was being decentralised,() and many of its responsibilities were redistributed among the various business units, under the successive management of Mr S G Paddison (1985 to 1986) and of Mr C W Guille (1986-1987), following the removal of Mr G N White from the position of Chief Manager Personnel to that of Chief Manager Organisational Change, in 1985.() In appointing Mr Paddison, Mr Clark was keen:
"... to change the personnel culture in the bank and I thought you can't do that with the existing personnel people and I wanted a total change, and I asked Steve Paddison to go and run personnel, and he said: I know nothing about personnel, and I said: I want you to use common sense and nothing else. I said: I don't want you to know the way banks are run or the way banks look after people. I said start from scratch and then you've got to go and work it all out and, you know, find people and talk to people and come up with the best way to run personnel, and I thought he did an outstanding job in restructuring our personnel division." ()
The "tabula rasa" approach was audacious. Few professional personnel staff, however - and perhaps not surprisingly - saw eye to eye with it, no more than they would endorse Mr Clark's assessment of its purported success, seeing it rather a neutral period or even a setback in their department's history.
It is appropriate to note, moreover, that Mr Clark's statement that he did not want Mr Paddison to know the way in which "banks look after people" is somewhat disingenuous, in that Mr Clark demonstrated, over time, a keen and consistent interest in the way in which banks "looked after their people" by way of remuneration.
In the inevitable turmoil of a merger, and in the light of such an unorthodox approach to personnel management, particularly at a time of devolution of responsibilities and diminishing involvement of the central Personnel function, it should come as no surprise that there were no common standards or procedures imposed across the organisation with regard to the recruitment of senior executives or senior line managers. This was partly a consequence of the devolution of recruitment authority and the non-involvement of Personnel division.
At the senior executive level and, more particularly, in the new business areas, such as Corporate Banking, International Banking and Treasury, recruitment activity was, therefore not supported or guided by job descriptions, duty statements or skills profiles, other than those which might have been prepared as notes on an ad-hoc basis to brief recruitment consultants in their task.() The Investigation has found that the recruitment documentation gathered and filed varied considerably from one instance or one department to the next, as did the extent to which, and the manner in which, references were taken, checked, and filed.()
On the whole, the approach to recruitment in that period reflects a policy of divisional and departmental autonomy, in line with Mr Clark's general philosophy of delegation within a divisionalised business structure(), with little or no reference from one area to the next, other than that which could be achieved through bodies such as the Executive Committee. Mr Clark's decision to permit divisional autonomy, with its accompanying devolution of responsibilities, and the concurrent weakening of a corporate personnel function, deprived the organisation of the means through which minimum standards and norms could have been imposed or monitored. In particular, it deprived the organisation of the means through which policies set by the Board could have been communicated, implemented, and monitored.
Under the delegations of powers and authorities referred to earlier, the Board had reserved to itself the power to set policy in matters of recruitment below the senior executive level ("prescribed offices"). The management approach described above made the application of any such policy problematic and unlikely to succeed.
In late 1987, Mr Clark appointed Mr G D Abbott as Chief Manager, Group Human Resources; he took up his duties in August 1988. Mr Abbott was the first experienced Human Resources Manager appointed to the new State Bank since 1985. Under his management , the work of the Human Resources division grew substantially with regard to the recruitment of senior executives, by means of the development of job definitions and descriptions, co-ordination with external recruitment consultants, the commissioning of assignments designed both to analyse and grade positions and to introduce performance evaluation and management programmes, and the provision of reference information on remuneration levels. Except for one position,() all appointments to the senior executive tier had been made by the time Mr Abbott joined the State Bank.
20.2.4 CONCLUSIONS ON THE RECRUITMENT OF SENIOR EXECUTIVES
I have formed the opinion:
(a) That the Board, by delegating to the Chief Executive Officer the power to recruit, remunerate and otherwise control classified (as opposed to "prescribed") officers in the manner in which it did, failed adequately and properly to supervise, direct and control, the affairs of the Bank.
(b) That the Board, by delegating to the Managing Director extensive powers to staff the senior echelon without effective review by the Board and without institutionalising any other checks and balances on the exercise of the Chief Executive's powers, was left with only little or no direct part to play; permitted the Bank to operate with inadequate organisational controls for the recruitment of senior executives; and to that extent, did not adequately contribute to the recruitment of additional senior executives necessary to bring about the successful penetration of the Bank into new business areas, and necessary to sustain the growth projected in the Strategic Plans and Profit Plans which the Board approved from time to time.
(c) That the Managing Director, by delegating extensive powers to his subordinates for the recruitment of classified staff, without having either prescribed or caused the adoption of policy, standards, or procedures, appropriate to the task, failed adequately and properly to supervise, direct, and control, the affairs and operations of the Bank.
(d) That the Managing Director displayed, a lack of understanding of the role and functions of Human Resources Management and of the concomitant need for common procedures and standards across the organisation, so as to protect the integrity of the recruitment function at senior level, and so as to provide the required basis, through those procedures and standards, for the definition of responsibilities; for the allocation of duties and the design of organisation structures; and for the review, monitoring, and control, of performance.
20.3 ASSESSING THE PERFORMANCE OF SENIOR EXECUTIVES
20.3.1 INTRODUCTION
As I have already found, the brief given in 1983-1984 to the Chief Executive Officer of the new State Bank called for the development, within the organisation, of a senior management team capable of ensuring the survival and the growth of the Bank.() The execution of the merger, and the shaping of the new organisation, would involve the bridging of a substantial cultural and operational gap between the two former institutions and the new State Bank.() The senior management teams of the predecessor institutions did not have the skills, experience, or expertise, required, numerically or otherwise, to address the business diversification and expansion strategies defined by the Managing Director, in consultation with the Executive Committee, and approved by the Board.() The scope and pace of the growth programme envisaged for the Bank precluded achievement of the objectives and targets through the development of existing staff, given the limitations in numbers and skills; and thus external resources had to be brought in to complement, guide and train existing staff.() Notwithstanding the skills, experience, and expertise limitations of staff of the amalgamating Banks, the senior management team and specialist line management officers would be required to operate under sustained pressure in order to meet ambitious growth targets, whilst embarked on a self-education campaign. There were limitations on Mr Clark's own experience as a Chief Executive Officer and as a `mainstream' banker (although it must be conceded that he did have considerable experience in the management of senior executives in other organisations, and had come highly recommended to the Board).() Under these conditions, the Bank and its management required close direction, control, and supervision, by the Board.()
I have, therefore, examined the question whether, and to what extent, the Managing Director and the Board guided and controlled the performance of the senior executive tier of the organisation as to ensure that management was sound and that errors in judgment and breaches of duty were and could be corrected.
I have done so under the following Sections:
(a) Section 20.3.2 - Assessing the Performance of Senior Executives: Process and Responsibilities.
(b) Section 20.3.3 - Observations on the Performance Assessment Process as Applied to Senior Executives.
(c) Section 20.3.4 - Conclusions on the Performance Assessment Process.
20.3.2 ASSESSING THE PERFORMANCE OF SENIOR EXECUTIVES: PROCESS AND RESPONSIBILITIES
The Managing Director did review the performance of the senior executive tier. The review process described by Mr Clark was one whereby, once a year, he would have:
"... individual one-on-one sessions with the people that [sic] reported to [him], where we'd talk about the objectives that they set themselves for the coming year ..." ()
Once set, the performance of the senior executive against the agreed objectives would be reviewed on a quarterly basis.() Mr Clark indicated that three types of objectives would be set and discussed: objectives related to the discharge of one's responsibilities, as well as more personal objectives related to one's individual development, and one's family and/or community roles.() The `management-by-objectives' approach applied by Mr Clark encompassed more, therefore, than profit-focussed objectives.() No minutes or records were maintained of any performance review,() except for those notes which a senior executive may have taken for his or her own purposes.() The participation of the Board in the performance review process (as distinct from the remuneration review process, which the performance review feeds and supports in a typical resource management model) was only indirect or peripheral. This participation, moreover, occurred, with very few exceptions, as a prelude to discussions on the topic of annual remuneration reviews.()
The directors were able to, and no doubt did, form their views regarding the performance of senior executives through the perusal of the minutes of those committees (eg Executive Committee, Lending Credit Committee, Asset and Liabilities Management Committee), which were required to be transmitted to the Board, through presentations made to the Board by senior executives at Board meetings, and through a mix of client feedback and informal discussions.() Clearly, though, this type of exposure by Board members to senior management would not equip the Board to form an accurate and comprehensive view of the competence, diligence and abilities of particular officers.
The Managing Director did, from time to time, seek the views of directors on senior executives, and inform them of appraisals.() These consultations took place in the confines of the annual remuneration review. They were both brief and cursory.() Some evidence elicited by the Investigation was to the effect that the directors were asked to accept and approve the recommendations of the Managing Director, rather than review them.() In the course of the annual remuneration review, Mr Clark would comment briefly on each of the senior executives at the time he presented to the Board his recommendations for the yearly adjustment to the remuneration packages of the senior executives.()
The Board was the only monitor - and its role was limited - of Mr Clark's decision-making on this topic. The Human Resources division of the Bank Group had no participation in the review of performance of senior executives. It must be borne in mind that the Human Resources function was, at the time of the merger, one of limited scope as reflected perhaps in its designation of `Personnel'. The activities of the function at the time of the merger were more administrative (ie concerned with pay and conditions) rather than truly managerial, let alone strategic.() After the movement, in 1985, of its first Chief Manager, Mr White, to the position of Chief Manager, Organisational Change, the responsibilities of the Human Resources function fell to Mr Paddison, before being passed on, some months later, to Mr Guille. When Mr Guille was promoted in 1987, the position of Manager of the Human Resources department remained vacant until, as indicated above, the first professional Human Resources Manager, Mr Abbott, took up his new duties in August 1988. Mr Abbott expanded the scope of the function and was responsible for establishing it as a fully-fledged Human Resources unit.() Even after Mr Abbott's appointment, however, and in spite of the increasing amount of information supplied by Mr Abbott to Mr Clark regarding remuneration levels for senior executives, there was no participation from Human Resources in the performance review process for senior executives.() That process remained "secretive".() No-one in the unit was apprised of the outcome of the assessments, nor was any documentation received for the relevant personnel files.
In examining the matters and events which caused the financial position of the Bank to degenerate and in reviewing those processes which led the Bank to suffer material losses and to hold a substantial portfolio of non-performing assets, I have considered those assessments which the Bank made, through its Managing Director and the Board members, of the banking skills and performance of its senior executives, upon whose shoulders fell the responsibility, either singly or in committees, of making the decisions and recommendations which led the Bank to undertake lending and other transactions, subject, as appropriate, to the approval of the Board.
In his comments to the Investigation, Mr Clark indicated his belief that the recruitment of staff had been successful until 1990, at which time a problem had been encountered regarding the appointment of a Finance Director. The problem, in this instance, and in Mr Clark's opinion, was not one of recruitment as such, but rather one of approval of the candidate by Board members, one of whom at least expressed sufficient reservations as to have the candidacy rejected.()
A number of former non-executive directors expressed the opinion to the Investigation that Mr Clark had been successful at recruiting good people.()
Such expressions of confidence were not limited to the directors. They were equally to be found in the Bank's own documents. The 1986-1991 Strategic Plan identifies one of the Bank's key strengths as its employment of "a number of highly qualified and experienced staff".() That corporate belief in the skills, expertise, and experience, of staff served as the justification for the granting of increasingly high levels of lending and other delegations. The collective confidence in the skill, expertise and ability of the staff of the Bank was, in my opinion, misplaced.
There was a clear need for the careful recruitment, management, and monitoring of performance of staff and, more particularly, of senior executive staff, given their decision-making powers and their power, acting either alone, or as members of a Committee (such as the Lending Credit Committee), to bind the Bank to transactions.
Mr Clark frequently held out - at least to the Board - strong and positive views as to the capability of his senior executives, who made up an "outstanding team", and some of whom he believed to be able to ensure his succession, should that need arise.() Yet, in summing up his views as to the reasons for the Bank's financial predicament of February 1991, he stated that the situation had arisen as a result of a failure:
"... to manage our prudential controls, management systems and people resources in line with our growth." () [Emphasis added]
The paragraphs below explore some of the more detailed reasons advanced for the failure to manage the Bank's "people resources".
The Shortcomings
Analysis of the managerial shortcomings identified within the Bank belong in a number of different categories. Some of the weaknesses identified related to the competency or performance of particular persons. Others related to gaps in the organisation structure. For example, for some years there was no Director of Finance.()
Consequently, the financial planning and monitoring of the Bank and the Bank Group's activities, from a strategic perspective, were inadequate. Nominally, responsibility for financial planning within the Bank attached to the position of General Manager, Finance and Planning (or as the position was later styled, General Manager, Group Finance and Administration), held by Mr Copley. Doubts were entertained by the directors and others as to whether the skills and experience of the incumbent were appropriate to the position.()
At least one member of the Board held reservations, in the financial area, vis-a-vis the competency of the incumbent General Manager, Global Risk Management, in 1989, and of a Chief General Manager, who numbered financial planning and Reserve Bank relations among his responsibilities, before being named to the position of Chief General Manager, Group Risk Management in 1989.()
Reservations were also held by others regarding the performance of the officer who was, at various times, Chief Manager Finance, General Manager Corporate and International Banking, General Manager Group Services, General Manager Personal and Business Banking and General Manager Retail Banking(); regarding the performance of the officer who was Chief Manager and later General Manager Corporate Banking, from 1984 to 1990(); and regarding the capacity of the person appointed to lead Australian Banking (a major divisional responsibility), to assume the responsibilities allocated to him by Mr Clark.()
Some of the weaknesses commented upon related to a more general lack of skills, experience, or expertise, in a given area, such as Financial Planning and Management, as indicated above, or Corporate Banking. Weaknesses related to the latter held particular significance. It was in the Corporate Banking area that, in dollar terms, the Bank accumulated such significant non-performing assets.
The amalgamating banks had, in 1983-84, very limited experience in the field of corporate banking.() Corporate lending was, nevertheless, pin-pointed as a growth area for the new State Bank.
Contemporaneous Bank documents indicate that Corporate Banking was chronically understaffed. In the Lending Credit Committee minutes of 16 May 1985, reference is made to staff shortages in Corporate Banking. The minutes noted that:
"It was pointed out that whilst Corporate Banking accepts ... responsibility [to monitor accounts] as part of its credit control procedures, concern was raised that the number of accounts now requiring close monitoring is placing increasing pressure on the workload of the skilled officers within the department. It was suggested that it may be necessary to employ further skilled officers in the area of account relationships within the department to ensure proper control of accounts of this nature. General Manager, Retail Banking also indicated his similar concerns in the Retail Lending area."
The minutes of this meeting of the Lending Credit Committee were noted by the Board at its meeting on 23 May 1985.
To like effect are the Executive Committee minutes of 17 May 1985, which contain an observation that branch staff were experiencing difficulties in attending staff training sessions, and attending to new procedures, because of demands made upon their time. It is also noted, in those minutes, that the General Manager of Retail Banking reported to the meeting that staff numbers and the seniority and experience of branch staff were being reviewed. These minutes were noted by the Board also at its meeting on 23 May 1985. The Lending Credit Committee meeting minutes of the following week, that is to say, of the meeting of 22 May 1985, again contained observations that the Bank's ability to monitor corporate loans was "currently constrained by a shortage of officers skilled in applying Credit Control procedures". These minutes were noted by the Board on 27 June 1985.
Again, at about the same time, a paper, dated 21 May 1985, addressed to the Executive Committee at its meeting on 24 May 1985, referred to the shortage of staff, and to the lack of expertise of staff, in the area of post settlement control of lending transactions. The paper commented that:
"... a large percentage of the Bank's staff have not been trained in a commercial lending environment and as a consequence they have not been exposed to situations to enable development of skills to identify early warning signs in failing companies."
This paper to the Executive Committee was not specifically brought to the attention of the Board.
Executive Committee Paper 85/594 of 25 October 1985, prepared by Mr D C Masters, Chief Manager Corporate Banking, referred to a restructure of the department in order to address the growth in business, and the consequent appointment and promotion of staff. The 1986-1991 Strategic Plan of the Bank, released in March 1986, asserted that:
"... corporate activities have been the fastest growing area of the Bank ... More personnel are being moved into the Corporate area; 26 new positions have been created since merger ...".()
Looking to its five-year horizon, the plan foresaw, as quoted earlier, that:
"... there will be a 200% to 300% increase in business-getting staff within the specialist areas a Wholesale Banking, Corporate [Banking], International [Banking] and Treasury ..." ()
Executive Committee Paper 86/306 of 6 June 1986, prepared by Mr Masters, referred to the fact that:
"... since merger Corporate Banking has demonstrated outstanding growth ... Given the past growth of Corporate Banking and the projected growth in 1986/1987 it is essential that a structure be approved now to enable a recruitment programme to be undertaken to fill vacancies on a progressive basis." ()
The topic of staff shortages, and of the inadequacies of skills in existing staff members was also the subject of discussion at the Executive Committee meeting on 9 August 1985; in the Board Minutes of 22 August 1985 (where there was a discussion on the topic of the need to increase the expertise of the Bank's internal auditors in the area of corporate and international banking); at the Executive Committee meetings on 10 January 1986; at the Board meeting on 24 September 1987; at the Board meeting on 26 November 1987 (where the Board discussed the review of lending quality to which reference is made in Chapter 8); at the Executive Committee meeting on 4 December 1987, at which the Chief Executive Officer expressed concern at the level of staff expertise in relation to the analysis of balance sheets and financial statements, steps vital to the analysis of any proposed business loan; at the Executive Committee meeting on 18 November 1988 where the concern expressed was specifically directed to the "cohesiveness and effectiveness of the top management team". The minutes of the meeting record that "it was considered that there may be a diversion of resources resolving inter-divisional and inter-group issues rather than proceeding with the job at hand ".
Expansion and growth continued in Corporate Banking throughout 1987 and 1988. Acknowledged staffing problems existed. Those problems were acknowledged as early as 1985, when Mr Masters commented on the "disappointing" response to job advertisements "with regard to [the] quality" of the candidates.() Expressions of concerns regarding the level of skills in the department surfaced again in 1989 in a memorandum to the Chief General Manager Australian Banking, Mr Paddison, in which Mr Masters wrote:
"... the challenge has been to train people to accept more responsible roles ..."
Four months later, similar concerns were forcibly and urgently expressed to the same person, to whom Mr Masters wrote:
"I have for some time ... become increasingly concerned with the operations within Corporate Banking which are placing undue pressure on specific individuals. There are a number of issues which must be immediately addressed before the position becomes totally unmanageable ...
We lack a body of well seasoned credit people ...
The growth in assets from $400 M in 1984 to in excess of $4B ... has resulted in rapid promotion of some people, to the detriment of both the individual and the Bank. This is because some of our people have been placed in or have grown into responsible positions without firstly gaining the required depth of both managerial and technical expertise." () [Emphasis added]
There was no evidence tending to suggest that this memorandum, or the substance of it, was relayed to the Board.() From the directors' perspective, some directors perceived a lack of quality in loan proposals submitted to the Board, and entertained their doubt about the skills and expertise of their authors, doubts which management sought to assuage.()
At its meeting on 26 January 1989, the Board resolved to approve the appointment of named external management consultants to undertake, as a matter of urgency, a review of, among other things:
(a) The planning, analysis and evaluation of all senior levels of management within the State Bank, and all executive levels of management within Bank's subsidiaries.
(b) A narrative detail of position dimensions (SRC).()
At its meeting on 17 April 1989, it is recorded that a number of members of the Board expressed concern at the rate of growth of the Bank, and the ability of staff to cope with the pressures caused by this growth. The minutes record that the directors were advised that the Bank was currently undertaking a major review of its organisational structure in conjunction with PA Consultants, and in addition, that external consultants had been engaged to review the structure of Corporate Banking. These reviews were being carried out, it was said, to ensure that the Bank had appropriate personnel to meet the demands of the Bank's operations.() The Bank Board resolved at its meeting on 25 May 1989, to approve the organisational restructure later proposed by PA Consulting.()
Mr Masters gave evidence to the Investigation that the competence of some account managers was barely adequate. Yet such was the rate of growth of business that no resources, even though poorly skilled, could be dispensed with.()
Some of the weaknesses commented upon were broader in their scope, and related to the dilution or progressive "demotion" of traditional banking skills in favour of a more "academic" approach. One director, expressed the view that, at senior levels, the Bank was increasingly staffed by "technocrats", ie people with technical, rather than banking, skills.() Mr Masters, has asserted that one of the reasons for the Bank's difficulties was attributable to the fact that it:
"... kept bringing in personnel from areas outside banking and replacing traditional bankers with "wizz-kids" ..." ()
Mr Paddison in a submission to my Investigation has asserted that senior recruits in 1989 and 1990 were almost universally better professionally qualified and industry experienced than their predecessors. In view of the performance of the Bank during these years I reject this submission.
Some of the weaknesses commented upon related to a more general level of dissatisfaction with the skills available at senior executive level. A number of directors have expressed the view, since February 1991, that senior management lacked requisite skills.()
In 1986, the Executive Committee comprised the following executives:
(a) Heading the business-generating functions of the State Bank:
(i) Mr S G Paddison, General Manager, Retail Banking;
(ii) Mr G S Ottaway, General Manager, Corporate and International Banking;()
(iii) Mr J T Hazel, General Manager, Treasury and Capital Markets; and
(iv) Mr J A Baker, Managing Director, Beneficial Finance Corporation Limited. (Mr Baker's experience, as Managing Director of Beneficial Finance Corporation, is not relevant in the present context, and will therefore not be discussed here.)
(b) Heading the support functions of the State Bank:
(i) Mr J B Macky, General Manager, Information Systems and Subsidiaries;()
(ii) Mr K P Rumbelow, Chief Manager, Property;
(iii) Mr R S Dent, Chief Manager, Marketing;
(iv) Mr C W Guille, Chief Manager, Personnel;
(v) Mr G N White, Chief Manager, Organisational Change; and
(vi) Mr K S Matthews, Chief General Manager, Planning, Budgeting, Audit, Accounting, etc.
Under one organisational arrangement or the other(), the business-generating functions of the Bank, identified above, and the Corporate Banking area, in particular, transacted the whole of the Bank's business. Of the three persons heading those business-generating functions of the Bank, only two had substantive experience in the field under their control. In fact, one of the three, Mr Paddison, had virtually no first-hand management experience whatsoever in banking, other than that which he would have acquired since joining the Bank in 1985. Mr Paddison had become known to the Bank through his work as an Arthur Andersen information technology consultant, responsible for the implementation of a general ledger system in the Retail Banking division. His performance in that capacity had impressed Mr Hazel, and subsequently Mr Clark, who had proceeded to recruit Mr Paddison into the service of the Bank, where he offered him responsibility for either the systems area or the human resources area. Mr Paddison chose the latter.() After a short term in that position, he was entrusted by Mr Clark with the responsibility for the Retail Banking operations of the Bank. Indeed Mr Paddison's career progression within the Bank is astounding, for its speed, and the scope of responsibilities entrusted to him.() The wisdom of the use made of Mr Paddison's skills, and of the responsibilities assigned to him has, however, been criticised in other quarters, largely on the grounds that Mr Paddison's virtually complete lack of prior banking experience imposed serious limitations on the effectiveness of his work, as did the rapidly changing focus of his activity.() In a submission to my Investigation Mr Paddison has said that in the roles assigned to him he was effective in recognising the scope of the "problem" and mobilising solutions. In my opinion if he did mobilise solutions they did not "solve" the problems.
Mr Ottaway, General Manager, Corporate and International Banking, had pursued, in contrast, a long career with one of the amalgamating banks, rising to the position of Assistant General Manager. The business of Corporate and International Banking on the scale practiced at the new Bank was, however, quite new to him.
Mr Hazel, General Manager, Treasury and Capital Markets, was of all three persons, the most experienced with regard to the specific functions under his supervision. The Bank had to overcome a shortage of skills and experience among `Management' with regard, particularly, to new business areas. It was faced with an equal or greater lack of experience on the Board's part in the same areas. This lack of perceived expertise or experience, as indicated in the previous Chapter(), would cause the Board to rely on that of `Management'. This situation called for caution and paced growth. It was not one which is easily accommodated by a management style that does not focus on detail;() that encourages delegation and autonomy; that supports a `divisionalised' and competitive approach within different business areas;() and - perhaps least of all - that drives for quick and ambitious growth.
An expression within the Bank of the lack of skill and experience within the senior executive team is to be found in the 1986 Strategic Plan. Released in March 1986, the Plan contained a review of the current situation within the Bank regarding human resources. One of the charts set out an assessment of the "staff whose performance is marginal or requiring substantial skill upgrade". Under the heading of `Management' it estimates that in 1986, some 35 to 40 per cent of management fell into that category.()
In December 1990, Mr Clark noted "the longer term concerns which will need to be continually addressed", in a document summing up the "problem areas of the State Bank". The first of those concerns was the need to improve:
"... the depth of our management expertise by identification and rapid development of high potential candidates." ()
Shortcomings in the skills and competency of senior executives were a significant, if not a key, factor in the deterioration of the Bank. Evidence elicited by the Investigation tended to show that:
(a) In the opinion of numerous Directors, and of several senior executives, weaknesses had existed in the skills, experience and expertise base of the Bank from the inception of the Bank's operations although I accept that when the Board sought assurances from management on these issues such assurances were readily given.
(b) These weaknesses existed in a number of areas, some of which were of critical importance either to the quality of the financial transactions entered into by the Bank, or to its capacity to monitor and control its financial position.
The regime of assessment of the competency, and of the performance, of senior executives did not provide the guidance and control which could have otherwise have been expected of it.
20.3.3 OBSERVATIONS ON THE PERFORMANCE ASSESSMENT PROCESS AS APPLIED TO SENIOR EXECUTIVES
I make the following observations on the performance assessment process, as applied to senior executives of the Bank:
(a) The performance assessment process applied by Mr Clark to the senior echelon of the organisation was an informal one. Its informality rendered it ineffectual.
It may well be that to Mr Clark's mind, the quarterly and annual discussions with his senior executives to which I have previously referred may have formed part of an established management process and, as such, was seen as carrying a measure of formality. This perception was not shared by those participating in the assessment process, including certain of the senior executives at the head of key business-generating or financial control functions, whose activities were, indeed, intended to be directed and controlled by this very process.()
I have formed the opinion that the review process implemented by Mr Clark can only be described as an informal one, and that it was one which was neither appropriate to, nor effective for, the long-term guidance and monitoring of the senior executives, many of whom had only limited (and, in some instances, no) experience in the area for which they were responsible.
(b) The performance review process as applied to senior executives, was virtually a closed one. Moreover, it excluded participation by Human Resource professionals, who could have given the process an objective point of reference through the application of an appropriate assessment methodology (or at least should have been in a position to do so, had the function been staffed by suitably qualified practitioners). No balancing perspective was to be had from the Board either, given its distance from the process.
(c) In consequence of the above, the performance review process could not be other than subjective, in that at its core lay the perceptions of the Managing Director alone, without the benefit of any checks and balances. Assessments were, therefore, personal and potentially idiosyncratic .()
Considered together, these three weaknesses (informality, secretiveness, and subjectivity) in the performance review process, as applied to senior executives by the Managing Director, vitiated the process. Its outcome would not have inspired confidence. The weaknesses of the performance review process undermined the integrity of the process of promotion and placement of senior executives in the organisation, and of their remuneration as a function of their assessed performance.
I have formed these conclusions having regard to two axiomatic propositions:
(a) The promotion and placement of senior executives in the organisation (as indeed in any organisation) ought to be inextricably linked with their assessed capability.
Given that the assessment of the capability of senior management was to all intents and purposes, that of the Managing Director alone, career progression would have been dependent on his positive assessment of the senior executive's performance. This placed a premium, for the organisation as a whole, and its ability to carry out its business successfully, on the judgement, discernment, and objectivity of the Managing Director. The significance of the Managing Director's assessment was further heightened by the fact that promotions, the allocation of responsibilities within the business structure of the Bank, and the very shaping of that structure were all in the hands of the Managing Director.
(b) The setting, review, and adjustment, of the remuneration of senior executives are also processes which ought to be inextricably linked to an assessment of the results achieved by the senior executive, on the one hand, and of his capability, on the other hand.
Until the establishment in 1990, of the Remuneration Sub-Committee by the Board at the instigation of Mr Simmons the setting, review, and adjustment, of the remuneration of senior executives was, for the most part, in the hands of the Managing Director alone.() For some six years, therefore, his were the recommendations that went to the Board regarding base salaries and bonuses. Even after the establishment of the Remuneration Sub-Committee, his advice carried great weight. The Board invariably approved those recommendations.
The role which Mr Clark reserved to himself in respect of the linked processes of performance assessment, promotion, and remuneration setting, made for an unhealthy concentration of power in the hands of Mr Clark. That concentration of power and influence could not but have repercussions on the day-to-day management of the operations of the Bank. Those repercussions occurred at two levels: at the level of the senior executive and at the level of the Board. I explore each of these in turn in the paragraphs that follow.
Impact at the Senior Executive Level
The concentration of power arising from the informality, secretiveness, and subjectivity of the performance assessment process - particularly when considered in the light of its ancillary processes of promotion and remuneration review - had the potential to create - and did, I am satisfied, create - an unusually strong and far-reaching dependency, on the part of the senior executive echelon, on the Managing Director and on the satisfaction of his expectations, which were then seen, by default, to be those of the organisation.
The Investigation received evidence lauding the quality of the relationship Mr Clark was able to develop with his staff from the early days of the merger.() The all-encompassing, isolated and subjective nature of Mr Clark's dealings with senior management, however, had the potential to create - and did, I am satisfied, create - an autocratic environment. The dependency thus generated between senior executives and the Managing Director was unhealthy, and hence inappropriate. The inappropriateness of the concentration of power lay in the risk that this ensuing dependency would sway the judgement of senior managers or stifle the criticisms or dissent which individuals or groups might otherwise have felt free to express.
Without information there can be no accountability. In an atmosphere of secrecy or of inadequate distribution of information, inappropriate and ever improper activities can flourish. Wherever secrecy exists, there will be people who are prepared to manipulate it. Secrecy is a major impediment to accountability. Accountability is a prerequisite for the proper functioning of any publicly-owned business enterprise.
It would be unlikely that one whose career depended on the Managing Director's positive assessment would, in a submission to the Board, or in comment in support of it, either purpose, plot, or steer, a course different from that seen as commending itself to the Managing Director.
There was anecdotal evidence of the cost of opposition to the views of the powers-that-be. In 1988, at the Wirrina strategic planning conference, Mr Ottaway had voiced opposition to the growth-oriented and expansionist views expounded by the Managing Director among others as the strategic path for the Bank. He argued, rather, that the time had come to consolidate and digest the considerable growth which had occurred in the first four years of the Bank's existence.() A few months later, and as a result of a major restructure of the Bank, Mr Ottaway was relieved of his duties as General Manager, Corporate and International - a key business-generating unit of the Bank which he had headed since 1986 - and put in charge of a support function designated Group Services. He returned to a position in Retail Banking the following year, prior to his retrenchment in 1990. At a meeting approximately two weeks before he was retrenched he is reported to have said that the Bank "lacked leadership" and in fact "was going backwards".()
I have not investigated and I make no finding as to the reasons for Mr Ottaway's transfer and his eventual retrenchment nor am I concerned to establish the exact degree to which his stance against the direction set for the Bank by the Managing Director contributed to those events. Suffice it to say that the events to which I have referred created a certain perception among Bank officers. Nor am I implying that senior executives merely adopted a supine attitude before Mr Clark at all times. Evidence elicited by the Investigation was to the effect that the Executive Committee engaged, on occasion, in vigorous and heated discussions and that Mr Clark personally favoured an open style of management where "no punches were pulled"() and was receptive to criticism from his senior executives.() Yet the vigour of a discussion does not necessarily signify independence and fearlessness.()
While one might accept the avowed preference of Mr Clark for an open exchange of views, one nevertheless has to reckon with the recognised strength and forcefulness of his personality(), as well as the simple fact of his power. All that need be said here is that Mr Clark's power was, for some senior executives, at least, a factor to be reckoned with and a force of sufficient strength as to influence behaviour and judgement.
Impact at Board Level
The approach adopted by Mr Clark in relation to the performance assessment of senior executives, as well as to its ancillary processes of promotion and remuneration setting, had an impact, not only on the senior executive echelon, but also on the Board.
From 1984 to 1988 in particular, the review of senior executives' performance was the province of the Managing Director. If the Board touched at all upon the issue of individual executives' performance, it was in the context of the approval of the remuneration levels recommended annually by the Managing Director. Until the emergence, in 1989, of the first wave of sizeable non-performing loans, the directors had little contact with senior executives, outside Board meetings, and thus little opportunity to develop their own perceptions as to their competency or to form a reliable view as to the quality of their performance.()
In such a situation, the reliability of the assessment performed by Mr Clark in relation to the calibre of staff took on a critical importance, which must not be underestimated. Apart from the lack of checks and balances (which led to the subjectivity which I have already noted), it is to be remembered that:
(a) Mr Clark recommended the appointment of the senior executives to key business and revenue generating functions of the Bank.
(b) The appointees would have wide powers and delegations and considerable scope within which to exercise those powers in an environment which favoured delegation, divisionalisation and competitiveness between divisions within the Bank and the Bank Group.
(c) A number of the appointees had only limited experience either in banking or in the particular specialist area under their supervision.
(d) The appointees, in most instances, did not have an organisational structure, or a set of tested processes and procedures to fall back on, in order to guide their decision-making.
(e) They were expected to exercise those powers under sustained pressure to meet growth targets.
The Investigation received evidence that Mr Clark was rarely adversely critical of officers recruited by him, and may have lacked objectivity in his dealings with staff.()
Former non-executive directors gave evidence that they encountered resistance from Mr Clark when the Board suggested that a senior executive be transferred on the grounds that he was not equipped to discharge the duties of his office.() It is to be observed, moreover, that, in a few instances, there occurred, not only unwillingness to recognise poor performance, but also failure to deal with poor performance once recognised. In its submission to this Investigation, the State Bank refers to an "inability to confront poor performance at a senior level".() The case of Mr K S Matthews has been held out as an instance of such a "failure to confront poor performance". Mr Matthews was moved by Mr Clark, in 1986, from the head of Retail Banking to a general support portfolio, on the grounds that Mr Matthews "was not a good line operator". Having regard to his former position in one of the predecessor banks, he was made Chief General Manager in charge of a diversified financial and administrative portfolio, with a direct reporting line to Mr Clark. Over the years, Mr Clark recommended and secured substantial increases in the remuneration of Mr Matthews, which went from a total package of $68,500 in 1985 to $200,000 in 1990. In addition, bonuses were paid to Mr Matthews on four occasions: in 1986 ($10,000); in 1988 ($12,000); in 1989 ($38,000); and in 1990 ($15,000). Mr Matthews salary was thus consistently increased and bonuses paid, at a time when the profitability of the Bank was diminishing as a result of massive increases in the level of its non-performing assets, particularly in 1989 and 1990, and when the directors were becoming increasingly disenchanted with his performance.()
There is, therefore, room to doubt the reliability of Mr Clark's method of performance assessment.
20.3.4 CONCLUSIONS ON THE PERFORMANCE ASSESSMENT PROCESS
I have formed the opinion:
(a) That when one takes into account the empirical connection between performance review, promotion, and remuneration, as well as the noted characteristics of Mr Clark's personality and the lack of banking experience of many senior executives, the approach taken by Mr Clark to the review of performance created an environment where there was a risk of senior executives compromising the independence of their judgement and that was thus wholly inappropriate, given its potential impact on the quality of decision-making within the Bank.
(b) That the informal and subjective character of the performance management approach adopted by Mr Clark was inappropriate and imprudent for the Bank, in that, for all practical purposes, it left the Managing Director as the only repository of information within the Bank to which the Board could readily refer to in order to elicit facts and opinions in matters of senior executive performance.
(c) Although the Board in 1984 had reserved to itself a power to appoint prescribed officers and approve their remuneration, and did not specifically reserve power to review the performance of the senior executives, I find it difficult to understand, how, if one is to approve all items of remuneration (as the directors did), this could rationally be done without a better insight into the performance of the senior executives than the Board had, given the very limited contacts it had with those individuals over a period of some four years, - from 1984 to 1988(), ie until such time as serious performance problems began to surface.()
The fundamental and ultimate responsibility for the governance of the affairs of the Bank lay with the Board, whatever delegations of power and authority it may have made to the Managing Director.() Such delegations could not affect the basic requirements of organisational governance or the Board's responsibility.
20.4 DRIVING THE PERFORMANCE OF THE SENIOR EXECUTIVE: REWARDS AND REMUNERATION
I have previously referred to the relationship between the assessment of the performance of senior executives, and the yearly adjustment of their remuneration. This Section of the Chapter explores two features of the relationship between performance assessment and annual review of remuneration of senior executives. The first to be considered is the process used for the setting or review of senior executive remuneration by the Managing Director and by the Board. I am not, in that regard, concerned with the levels of remuneration approved for senior executives as such. I am, however, concerned with the manner in which remuneration was set and reviewed. It was one important element in the overall management of human resources. For that setting and reviewing was used in order to support the appraisal of performance and the achievement of particular objectives, as well as to encourage particular behaviour, including the achievement of group, divisional, and departmental, financial targets in line with group performance.
The second feature of remuneration setting and adjustment which I have considered relates specifically to the award of bonuses and substantial salary increases as a reflection of the attainment, by an officer, - be he/she the head of a division or one of its key staff, - of growth and/or profit targets.
In that regard, I have addressed the issue whether the remuneration setting and adjustment practices that applied to senior executives were, or were perceived by staff to be, such as to encourage growth in assets, on a Group or divisional basis, as a means or pre-condition to personal reward (as opposed to improved profitability of the Group or of the division).
It is necessary that I set out some background information regarding the composition of the remuneration of senior executives and their increments from time to time.
20.4.1 THE MAKE-UP OF THE REMUNERATION OF SENIOR EXECUTIVES
As was (and remains) the practice for upper-bracket salaries, the remuneration paid to the senior executives of the State Bank was structured in a `package' designed to be as `tax effective' as possible. In essence, the remuneration package of a typical senior executive was made up of three distinct parts: a salary component (the `salary'); a benefits and allowances component (the `benefits'), which together made up the individual's total remuneration package; and thirdly a bonus component (the `bonus').
20.4.2 THE SETTING OF REMUNERATION: RESPONSIBILITIES AND STANDARDS
I deal here only with the determination of the total value of the remuneration package for senior executives, ie their salary as well as their benefits or allowances. The setting of the bonus component is discussed in the next Section.
Section 17(1) of the State Bank of South Australia Act, 1983, authorises the Board to "appoint such officers of the Bank as it thinks necessary". Clause 2 of the Second Schedule to the Act empowered the Board to "employ officers and other persons subject to such conditions as it thinks fit" [Emphasis added]. Under the delegations passed by the Board in June 1984, the Board had resolved that it would,
"... appoint all prescribed officers on the recommendation of the Chief Executive and [would] approve all items of their remuneration." () [Emphasis added].
Under the terms of this resolution, it therefore fell to the Managing Director to propose to the Board a recommended level of remuneration for prescribed officers for the directors' approval.
A number of comments can be made regarding the setting of the remuneration level of senior executives. I have reported previously in this Chapter that, in seeking to attract candidates into its service, the Bank was seeking to do so in the deregulated environment of the early 1980s, marked, as it was, by a scarcity of experienced professional bankers. This shortage of resources, had a number of consequences: first, the widening of the earlier State-oriented recruitment campaign widened into a national campaign; secondly, staff who were recruited externally from interstate and overseas had, generally, to be employed at a substantial premium over salaries paid to staff drawn from the merged banks.
In specific terms, the shortage in Adelaide of professional bankers compelled recourse to national banking and finance remuneration surveys in setting the level of compensation for senior executives of the State Bank.()
Mr Clark has stated that he endeavoured to reward executives at the 75th percentile mark, as defined in various surveys of Australian banks. That the remuneration level was pitched to the third quartile is, in part, a reflection of Mr Clark's expressed desire to forestall any raids on his key staff by executive search consultants.() The degree of reality of this perceived threat of raids is open to question, given comments such as the following in a Board Paper prepared in May 1987:
"Since the launching of the Bank in 1984, not one senior executive has resigned from the Bank to join another organisation."
Senior executive positions were defined as prescribed offices, ie positions which were not affected by the salary constraints of `classified' positions.() The differences in remuneration levels, which arose as a result of that distinction and of consequential distinctions between `old' and `new' State Bankers and between external recruits and `old(er) State Bankers', were at times a source of friction within the organisation. The desire to avoid such frictions was one of the reasons which motivated Mr Clark to establish strict confidentiality requirements surrounding remuneration information and management.() The remuneration levels recommended by Mr Clark, and approved by the Board, also attracted unfavourable comments from external entities(), and remained a sensitive topic, particularly in later years, in the face of a deteriorating performance on the part of the Bank.
20.4.3 THE SETTING OF BONUSES: STRUCTURE, RESPONSIBILITIES AND STANDARDS
While Bank records reviewed by the Investigation show that there were instances of bonus payments as early as 1986() and 1987(), the restructured bonus scheme for all senior executives came into force in 1987. The first payments under the restructured scheme occurred in financial year 1988, in recognition of performance achieved over the previous twelve months. Mr Clark did not participate initially in the bonus scheme. He agreed a separate scheme with the Board in 1988(), and received bonuses in 1989 and 1990 in respect of the financial years 1988 and 1989, respectively.
The structure of the bonus itself deserves additional explanation. It was made up of two components, the combined value of which could represent as much as 30 per cent of the total remuneration package of the senior executive.() The first part of the bonus, (set at two thirds of its total value), was a payment based on the profits achieved by the State Bank Group(), and can thus be described as a profit-sharing scheme.() The second part of the bonus, (one third of its total value), was a payment based on individual performance. It was granted at the discretion of the Managing Director, and reflected his assessment of the personal contribution made by the senior executive to the business of the Bank and to the management team() in the course of the previous twelve months.() To quote Mr Clark on the topic:
"... The ... bonus plan is made up of two segments, the first a bonus based on the group profit result and the second a bonus based on the chief executive and the board's assessment of the individual's performance ..." () [Emphasis added].
When Mr Clark said that the payment of bonuses was based on `profit' and not on `growth' achieved in the course of a twelve-month period() he was referring to the first component of the bonus, ie the `profit share' component thereof:
"Bonus plans when they were in were focused on the group result, not the individual result () ... Divisional profitability was [not] important in my context..." ().
Comments of Mr Clark to this Investigation indicated, however, that the application of the formula described above was flexible. I note, for example, the following remark, which prefaces the recommendation of yearly bonuses for the year ended 30 June 1987:
"For the year ended budgeted profit was not achieved but in view of the very difficult interest rate climate and the excellent job done by Senior Management in the last quarter of the year, it is recommended that bonuses be paid to some Senior Executives." ()
I note, furthermore, the observation of Mr Clark to the effect that the application of the formula was also modified in the later part of the period under review, ie from 1989 onwards, at a time when, according to Mr Clark, profits no longer provided a sufficient basis for the award of bonuses, which were then adjudged on a discretionary basis from that point on.()
20.4.4 THE MANAGEMENT OF REMUNERATION FOR SENIOR EXECUTIVES
As indicated above, there were sensitivities to be managed regarding the remuneration of senior executives of the State Bank, including that of Mr Clark, which, was said to be "way and above anybody else in Adelaide at the time".() A desire for the maintenance of the confidentiality surrounding the remuneration of the Managing Director led to an arrangement whereby matters related to that topic were to be handled outside the Bank, in a `bureau'-type arrangement established with Mr D Sharp of KPMG Peat Marwick, accountants and auditors. Under that arrangement, Mr Sharp advised Mr Clark on matters of remuneration packaging, maintained the necessary records, and acted as a private `paymaster' to the Managing Director.() In addition to the minute book, there was the chairman's personal file containing notes dealing with the annual remuneration of the Chief Executive Officer which he would personally type up and distribute to each board member.
Thereafter the Board would meet and determine the Chief Executive Officer's remuneration which decision the Chairman would then communicate to the Chief Executive Officer.
Initially, the administration of remuneration arrangements for senior executives had been handled by Mr White, (firstly in his capacity of Chief Manager, Personnel, 1985 and then as Chief Manager, Organisational Change). As the number of senior executives recruited from external sources increased, similar situations to that which Mr Clark had experienced in relation to his own remuneration arose with increasing frequency. On Mr White's retirement in 1987, the decision was therefore taken by the Managing Director, with the consent of the Chairman, to extend the Mr Sharp 'bureau' arrangement to all senior executives.() As a result, and as had been the case with Mr Clark's remuneration details, no records whatsoever were kept on the Bank's premises or in personnel files regarding the remuneration of senior executives, either determined at the time of recruitment or as subsequently modified.()
From 1987 onwards, there operated, therefore, a remuneration review, and management process which generally() operated along the following lines:
(a) Once a year, Mr Clark reviewed the remuneration (salary, benefits and allowances and bonus, if and when applicable) of his senior executive staff and proposed to the Board any amendments which he deemed appropriate to the circumstances of the time.
(b) His recommendations were set down on paper, presented to the Chairman of the Board (from 1984 to 1990) or to the Remuneration Sub-Committee (in 1990) and discussed.
(c) The recommendations would then be presented to the Board for approval.
(d) Once approved, Mr Clark would notify the senior executives of any changes or adjustments and discuss same with them.
(e) Mr Clark would notify Mr Sharp of KPMG Peat Marwick of the remuneration arrangements of senior executives for the forthcoming twelve months.
(f) Mr Sharp would then contact the senior executives individually to advise on packaging and settle administrative arrangements.()
20.4.5 APPLICATION OF THE REMUNERATION REVIEW AND MANAGEMENT PROCESS TO THE ORGANISATION
In the course of reviewing the manner in which the Managing Director applied this process of remuneration setting, review and management, the issue of the scope of its application arose.
Two factors should be noted. In the first instance, the Managing Director set and reviewed, not only the remuneration of those senior executives reporting directly to him, but also that of all senior management to the level of Chief Manager. Until February 1990 (at which point Mr Abbott played a part in the process, as Chief General Manager, Group Human Resources), it therefore fell to Mr Clark alone to set, or adjust, the remuneration of the second tier of management in the organisation. This effectively gave Mr Clark a span of control which affected in total some sixteen persons in 1986()-1987(), twenty-four in 1988-1989() and twenty-eight in 1990-1991.() The confidentiality restrictions referred to above applied to information pertinent to the remuneration of those persons. Administration of their remuneration was also handled by Mr Sharp. From a financial management perspective, their salaries were detailed only in the budget of the Managing Director, and not in the operating budgets of the various divisions to which they were assigned, where salaries were grouped to form a single line item for the entire division or department.()
As a result of the span of control exercised by Mr Clark over the setting and adjustment of remuneration on the one hand and of the confidentiality constraints imposed on that process, on the other hand, the head of a given division would not have known either the level or the details of the remuneration of his key staff. Such a situation is not consistent with the principle of bottom-line responsibility on a divisional basis, espoused by Mr Clark, let alone with common management practices.
One question which arises from this state of affairs is whether there was any fair, rational, and appropriate, connection between performance and salary adjustment, given that the person adjusting the remuneration (Mr Clark) may sometimes have been at two or three removes (in organisational hierarchy terms) from the person whose performance was being assessed. I accept that consultation did take place between the Managing Director and the Chief General Manager or General Manager who supervised the work of the Chief Manager whose performance was under review. But given the informality of the appraisal process, as much as the improbability of the Managing Director's (or, for that matter, of any Managing Director's) capability to survey effectively the performance of some twenty-five persons or more, I do not believe that the arrangement was objective, effective, or appropriate.
The state of affairs I have described had the tendency to create a latent, but nonetheless material level of influence exercisable by the Managing Director over senior executives, and a consequent dependency on the part of senior executives. The approach weakened the natural reporting line that should exist between the executive in question and the departmental or divisional head to whom the executive reports in an operational context, by introducing a second, undefined reporting relationship, with a concurrent risk of split allegiances. Neither is desirable or appropriate, or tends towards efficiency or esprit de coups.
20.4.6 OBSERVATIONS AND CONCLUSIONS ON THE REMUNERATION SETTING, MANAGEMENT AND REVIEW PROCESSES AS APPLIED TO SENIOR EXECUTIVES OF THE STATE BANK
(a) Regarding the Participation of the Board in the Process of Remuneration Setting and Review
I have referred earlier to the powers of the Board, as the governing body of the Bank, regarding the appointment of personnel and the allocation of responsibilities. The relevant resolution governed, not only of the appointment of senior executives but also of their remuneration:
"The Board will appoint all prescribed officers on the recommendation of the Chief Executive and will approve all items of their remuneration." ()
I have described the process established within the State Bank for the Board to participate in the setting and review of the remuneration of senior executives, in accordance with this resolution. I have also quoted from documents, among which is the Board Paper, presented on 7 May 1987, which reflected the spirit of the same resolution that the Board would address matters of remuneration and bonus setting. A statement in that Paper refers to the fact that bonuses, and in particular their discretionary component, are to be based "... on the chief executive and board's assessment of the individual's performance ...".()
There are at least two important elements that would govern the capacity of the Board to make such an assessment, and to approve all items of the remuneration of the senior executives: firstly, an understanding of the bonus structure and of the criteria enabling its determination; and secondly, a meaningful participation in the process of settlement and determination.
(b) The Basis for Remuneration Adjustments and Bonuses
Between 1984 and 1990 the Bank paid substantial bonuses to a large number of senior executives, which are set out below. The bonuses were resolved upon by the Board on the recommendation of Mr Clark but the criteria for the award and the quantification of bonuses in particular was never reduced to writing. Thus Mr Clark was at large (and left by the Board at large) as to the quantification of bonuses in particular cases, and as to whether a particular person should be awarded a substantial bonus or not in a given year.
With regard to the first of the two elements mentioned above, I note that, while Mr Clark was able to give a reasonably clear account of the remuneration and bonus structure, the same cannot be said of a number of his fellow directors. Mr Simmons told the Investigation that the relevant Board Papers were prepared by Mr Clark and handed out to the Directors at Board meetings, but thereafter taken back by Mr Clark.() Obviously since the Board members were, in giving evidence to me, relying solely on their memories with respect to the purport and content of these papers, the recollection of Mr Clark would be expected to be superior. One should not, therefore, necessarily conclude that the understanding of the process on the part of the former non-executive directors, at the time, was either confused or inadequate.
From 1984 to June 1989, Mr Barrett was, as Chairman of the Board, the first point of contact for Mr Clark when it came to the review and negotiation of remuneration and bonuses. It was to Mr Barrett that the Managing Director would first present his recommendations in the matter, and come to a preliminary agreement; that agreement was then to be presented to the full Board for approval. In evidence to this Investigation, it was said that remuneration and bonuses,
"... came as a written report to the board, with a recommendation from the Managing Director, and they were considered by the board on a pre-determined formula basis".()
A two-tier approach to the bonus was identified.() At the appropriate time in the year, it was said, the bonus sheets would be distributed to the board with the name of the officer and the suggested bonus next to his name, and the Managing Director would talk to this list.()
No documentation was produced to the Investigation which defined the criteria for the determination of bonuses. It remains entirely unclear how the determination of bonuses was made in the case of those persons who were not responsible for revenue - generating divisions or departments. No director could recall the Board asking the Managing Director to define and set out those specific criteria on which he based his determination of the level of bonus reward appropriate for a given senior executive. It was only after the Remuneration Sub-committee was constituted, that the Board came to scrutinise bonuses.()
In 1990, as I have said, the Board at the instigation of Mr Simmons had established the Remuneration Sub-Committee as the body which would, from that point on, review the remuneration of senior executives in consultation with the Managing Director. The Remuneration Sub-Committee, in Mr Simmons' words, was an "ad-hoc committee... consisting of Mr Bakewell, Mr Clark and myself to look at bonuses for senior executives." ()
The salary packages of senior executives were set by the Board according to the recommendations put forward by the Managing Director. The Board would review those recommendations. The determination of bonuses was essentially based on the Managing Director's assessment of the senior executives' performance as relayed to the Board.()
I have reached the conclusions:
(i) That there existed uncertainty among Board members as to the basis for the remuneration packages and bonuses to which they were agreeing.
(ii) That the Managing Director was never asked to reduce to writing for discussion and scrutiny the set of criteria (if any) which he used in fixing the increasingly significant discretionary component of bonuses, the total value of which often stood at many tens of thousands of dollars for any one senior executive, in addition to his remuneration package.
(iii) That the Board relied, until 1990 (ie until the establishment of the Remuneration Sub-Committee) in large part on the informal and subjective advice of the Managing Director in conducting its deliberations. This reliance led ultimately to the Board failing adequately to monitor the performance of its senior executives.
The Board knew of the weaknesses inherent in the predecessor organisations. It had identified the acquisition and development of the necessary new skills as one of the factors critical to the success of the Bank. It knew that Mr Clark was a Chief Executive not versed in all operational aspects of banking, and it had stated its desire to have a direct hand in the appointment of senior executives and the determination of their rewards and remuneration. The Board had the power, the opportunity, and the responsibility, to adopt a policy regarding performance review, and a policy regarding remuneration and the determination of bonuses, and to call for the development, by management, of the appropriate structures and tools to support such policies. If, as the final arbiter of the fairness and merit of recommended adjustments and bonuses calculated to encourage certain behaviour in the senior executives of the organisation, the Board was unclear as to the basis upon which those adjustments and rewards were being proposed, it follows that the top management tiers of the organisation would be uncertain as to what ultimately regulated their rewards: Was it profit margin? Was it profit budgeted for the area (ie a division) ? Was it volume (ie the number and size of transactions and `up-front business') ?() Or was it Group profit? Were bonuses paid on two criteria: the performance of the Bank, and the performance of the division?()
(iv) That, in failing to clarify (or to cause the clarification of) the basis for the incentives being provided to the senior executives, the Board also failed to clarify the objectives of the revenue-generating divisions of the Bank in particular.
(v) That, in placing the level of reliance which it did on the advice of the Managing Director in relation to the award of bonus payments and increments to senior executives, the Board failed to make any proper inquiry in respect of the assessment of senior executive performance and of the level of appropriate reward for that performance.
(c) Remuneration Adjustment and Bonus Approval Process
With regard to the second of these two subjects, namely, the remuneration and bonus approval process, I make the following observations.
The Board, as indicated earlier, was to approve all items of the remuneration of senior executives. The manner in which the bonus approval process was conducted was unsatisfactory, particularly with regard to the time allocated to the review, to the amount of information made available to support the recommended adjustments and bonuses, and to the lack of objective or alternative information available to the directors in considering the Managing Director's recommendations.()
I have reached the following conclusions:
(i) The definition of the Board role vis-a-vis that of the Managing Director in relation to the approval of bonuses was, in practical terms, unclear.
(ii) The Board did not, as a Board, approve all items of the remuneration of senior executives, as it reserved power to do.
(iii) The approval process was, by virtue of its shortcomings in terms of time, of the amount of information provided or available, and of the minimal direct input on the part of the Board, a seriously flawed process.
(iv) The Board failed, adequately and properly, to supervise, direct, and control, the processes of remuneration setting and adjustment and of bonus determination. In particular, the Board approved substantial increases in the remuneration of prescribed officers for which objective justification is, and was, lacking.
(d) Regarding the Setting of Remuneration, its Adjustment, and the Determination of Bonuses
In the course of reviewing the manner in which the performance of the senior executives was managed and rewarded through the adjustment of remuneration and the granting of bonuses, I have considered the quantum of the remuneration increases, and the bonuses granted, over certain years, in contradistinction to the profit performance of the Bank. Set out below are the salient points of this review. In Appendix E, I set out the remuneration arrangements for Mr Clark and a number of senior executives for the years ended 30 June 1988, 1989 and 1990. This information must be read in the light of the facts that, from at least 1987 onwards, the Bank was not earning a satisfactory rate of return on assets under management, and that its interest rate margins were consistently below budget. On 24 September 1987, the Operating Review for August 1987 was considered by the Bank Board.() The Operating Review showed that the contribution by the Bank to Group profit, of $2.6M, was substantially below the budgeted figure of $3.65M, largely due to the interest margin being $2.1M worse than budget. It was noted that several factors had been identified as contributing to the shortfall. The minutes of the Board Meeting record that "the Chief General Manager advised that the Management [sic] is concerned at the lack of depth of accounting knowledge in the Bank. This impacted on the quality of information provided for decision making". It is also recorded in the minutes that a number of measures had been taken to assist in overcoming the situation, including a senior appointment, the secondment of personnel from two large accountancy firms, the recruitment of accounting graduates, and the allocation of additional staff to Planning department. The Board is recorded as having expressed its concern at the interest margin variance, and as having resolved that management would present a report monthly to the Board concerning action taken to address the interest rate variance. It turned out, however, that reports on this topic were presented for October 1987, November 1987 and December 1987. No further reports were presented to the Board on this topic despite that interest rate margins continued to be significantly below budget.
1987
For the financial year ended 30 June 1987, the Bank reported an increase in operating profit, before taxes, of $7.194M or 21.4 per cent over its 1986 results.() In the context of the operating performance of the Bank for 1986-1987, early in 1987-1988, remuneration increases granted and payable during 1987-1988 to the following senior executives, exceeded the overall percentile improvement (21.4 per cent) in the performance of the Bank for 1986-1987.
(i) The total salary of Mr J B Macky had been increased by 20 per cent (from $70,000 to $84,000), and his total remuneration package by 27 per cent (from $110,000 to $140,000). In addition, Mr Macky earned a bonus of $16,000.
(ii) The total salary of Mr T L Mallett had been increased by 39 per cent (from $54,000 to $75,000), and his total remuneration package by 39 per cent (from $90,000 to $125,000). In addition Mr Mallett earned a bonus of $6,000.
(iii) The total salary of Mr S G Paddison had been increased by 35 per cent (from $78,000 to $105,000), and his total remuneration package by 40 per cent (from $125,000 to $175,000). In addition, Mr Paddison earned a bonus of $12,000.
Other significant increases in total remuneration packages occurred, albeit not to the 21 per cent threshold. They were recorded for Mr D C Masters (20 per cent) and Mr K S Matthews (20 per cent).
A total of $110,000 was paid in bonuses in 1987-1988 to eight senior executives in respect of performance in the 1986-1987 financial year. The highest bonus ($37,000) was paid to Mr D C Masters, General Manager, Corporate Banking.
1988
For the financial year ended 30 June 1988, the State Bank reported an increase in operating profit of $14.655M or 35.9 per cent over its 1987 results.
Against the background of that operating result for 1987-1988, early in 1988-1989, remuneration increases granted and payable during 1988-1989 to the following senior executives, exceeded the overall percentile improvement (35.9 per cent) in the performance of the Bank for 1987-1988.
(i) The total salary of Mr T L Mallett had been increased by 44 per cent (from $75,000 to $108,000), and his total remuneration package by 44 per cent (from $125,000 to $180,000). In addition, Mr Mallett earned a bonus of $33,500.
(ii) The total salary of Mr D C Masters had been increased by 53 per cent (from $75,000 to $115,000), and his total remuneration by 48 per cent (from $125,000 to $185,000). In addition, Mr Masters earned a bonus of $36,000.
Other significant increases in total remuneration packages occurred, albeit not to the 35 per cent threshold. They were recorded for Mr J T Hazel (29 per cent), Mr J B Macky (25 per cent), Mr G S Ottaway (29 per cent) and Mr S G Paddison (29 per cent).
A total of $393,750 was paid in bonuses in 1988-1989 to ten senior executives in respect of performance in the 1987-1988 financial year. In addition to Mr T L Mallett and Mr D C Masters, Mr T M Clark received $48,750; Mr K L Copley $31,500; Mr C W Guille $32,000; Mr J T Hazel $50,000; Mr J B Macky $35,000; Mr K S Matthews $38,000; Mr G S Ottaway $39,000 and Mr S G Paddison $50,000.
1989
For the financial year ended 30 June 1989, the State Bank reported an increase in operating profit, before taxes, of $23.053M or 41.6 per cent over its 1988 results.
The Bank also reported a $56.566M item for "net bad debts written off and charge to provision for doubtful debts".() This represents a 290 per cent increase over the reported amount of $14.541M in 1988.
Against the background of that operating performance for 1988-1989, early in 1989-1990, remuneration increases granted and payable in 1989-1990 to the following senior executives, exceeded the overall percentile improvement (41.6 per cent) in the performance of the Bank for 1988-1989.
(i) The total salary of Mr J B Macky had been increased by 43 per cent (from $105,000 to $150,000), and his total remuneration package by 43 per cent (from $175,000 to $250,000). In addition, Mr Macky earned a bonus of $26,000.
(ii) The total salary of Mr S G Paddison had been increased by 44 per cent (from $135,000 to $195,000), and his total remuneration package by 44 per cent (from $225,000 to $325,000). In addition, Mr Paddison earned a bonus of $40,000.
Other significant increases in total remuneration packages occurred, albeit not to the 41 per cent threshold. They were recorded for Mr C W Guille (29 per cent), Mr T L Mallett (39 per cent) and Mr K P Rumbelow (30 per cent).
A total of $290,000 was paid in bonuses in 1989-1990 to ten senior executives in respect of performance in the 1988-1989 financial year. In addition to Mr J B Macky and Mr S G Paddison, Mr T M Clark received $50,000; Mr G D Abbott $15,000; Mr K L Copley $15,000; Mr C W Guille $20,000; Mr J T Hazel $75,000; Mr T L Mallett $18,000; Mr K S Matthews $15,000; and Mr G S Ottaway $16,000.
1990
For the financial year ended 30 June 1990, the State Bank reported a fall in operating profit, before taxes, from $78.527M in 1989 to $35.879M, representing a 54.3 per cent drop.() In addition, the "charge for provision for doubtful debts" increased by $111.8M (or 197.8 per cent). Expressed as a proportion of operating profits, the "charge for provision for doubtful debts" of $168.446M had soared to 469 per cent.
In contrast to the 54.3 per cent drop in the 1989-1990 operating performance of the Bank, early in 1990-1991, remuneration levels proposed for a number of senior executives for the 1990-1991 financial year, represented increases on the 1989-1990 levels. The Investigation has confirmed that remuneration payments made during 1990-1991, were in respect of some executives generally consistent with those that applied in 1989-1990, or in relation to some other executives generally in line with the proposed increases determined in early 1990-1991.
(i) The total remuneration package for Mr G D Abbott for 1990-1991 was $175,000 ($175,000 actual in 1989-1990). In addition a bonus of $20,000 was proposed ($15,000 actual in 1989-1990). The 1990-1991 package and bonus combined represented an increase of 3 per cent over 1989-1990.
(ii) The total remuneration package for Mr C W Guille for 1990-1991 was $180,000 ($180,000 actual in 1989-1990). In addition a bonus of $20,000 was proposed ($20,000 actual in 1989-1990).
(iii) The total remuneration package for Mr T L Mallet for 1990-1991 was $300,000 ($250,000 actual in 1989-1990). No bonus was proposed for 1990-1991 ($18,000 actual in 1989-1990). The 1990-1991 package and bonus combined represented an increase of 12 per cent over 1988-1989.
A total of $202,500 in bonus payments was proposed in early 1990-1991 to the following senior executives in respect of performance in the 1989-1990 financial year, namely, Mr G D Abbott $20,000; Mr C W Guille $20,000; Mr M G Hamilton $37,500; Mr J T Hazel $50,000; Mr S G Paddison $25,000; and Mr S C Targett $50,000. Documentary evidence available to the Investigation shows that Mr Simmons noted schedules, dated July 1990 outlining these bonus payments and the above proposed remuneration packages.
In light of the evidence presented to this Investigation in regard to the setting of remuneration, its adjustment, and the determination of bonuses for senior executives, and taking into account the information set out above, I have reached the following conclusions:
(i) That the Managing Director acted contrary to accepted management practices in that he devised, established and operated, until 1990, a remuneration adjustment and bonus determination process in an informal, obscure, arbitrary, and subjective manner.
(ii) That the remuneration adjustment and bonus determination processes devised, established, and operated by the Managing Director until 1990, did not provide the Board with a rational, objective basis upon which to approve all items of the remuneration of senior executives, or to assess their performance relevant thereto, as per the agreed delegation of 28 June 1984.
(iii) That the remuneration, adjustment, and bonus determination processes devised, established and operated by the Managing Director until 1990, when considered in association with the performance appraisal process, created a unhealthy and hence inappropriate dependency between the senior executives and the Managing Director; created an highly imprudent and hence inappropriate concentration of power in the hands of the latter; and created, furthermore, an internal environment where the risk of senior executives compromising the independence of their judgement was inappropriately high, with a consequent potential impact on the quality of the decisions and business entered into by the Bank.
(iv) That the Managing Director, in granting remuneration increases and bonuses without due accountability, failed adequately and properly to supervise those affairs of the Bank committed to his charge.
(v) That the Board of Directors in delegating as it did to Mr Clark permitted the existence of a process of approval of remuneration increases and of bonuses which lacked adequate justification.()
20.5 DESIGNING AND MANAGING THE ORGANISATION STRUCTURE OF THE STATE BANK AND OF THE STATE BANK GROUP
In the course of my examination of those matters and events which brought the Bank and the Bank Group to the financial position reported in February 1991, I have considered the manner in which the operations, affairs, and transactions, of the Bank were supervised, directed, and controlled, through the development, by the Board and the Managing Director, of the senior tier of the managerial infrastructure of the Bank. The senior executives constituted the essential chain of command through which the operations of the Bank were conducted and, conversely, the reporting structure of the Bank to the Board, through the office of the Chief Executive. I have reviewed the evolution of that tier of management over the period from July 1984 to February 1991.
The members of the Merger Advisory Group, who appointed Mr Clark as Chief Executive, and later as Managing Director of the Bank in 1984, prepared a brief comprising three basic objectives, all of which would impact upon the organisational structure to be put in place in the new Bank. The first objective was concerned with the successful execution of the merger of the two amalgamating banks; the second, with the establishment and development of a suitable management team for the long term; and the third, with the `commercialisation' of the new Bank, ie its endowment with those commercially-oriented attributes that would enable it to survive and grow in a deregulated and competitive banking system.
The first objective would impact upon the organisation structure of the new Bank through the inevitable merging of divisions and departments which existed in the two predecessor institutions. The second would impact upon it through the establishment of those positions required to direct, manage, and control, the divisional and departmental structure agreed upon. The third would impact upon it through the need to establish divisions and departments in such a way as to enable the Bank to venture into new business areas, while maintaining and enhancing its older lines of activity.
In his statement to the Royal Commission, Mr Clark elaborated on the approach he followed to meet those three goals to which I have referred above. He referred in particular to a set of six subsidiary objectives, the first five of which are relevant to the topic of organisation structure. In "building up management personnel and structures", Mr Clark said that he saw that it was his task:
"1. To establish the necessary business divisions.
2. To recommend to the Board the appointment of the requisite senior executives to head up those divisions.
3. To delegate authority to those senior executives.
4. To co-ordinate the activities of the Bank through the Planning Process and through the appropriate committees.
5. Subject always to Board control, to manage most of the Bank's operations through these committees, and put important matters of policy and administration [including major loans and all acquisitions] up to the Board." ()
For each year, from 1984 to 1991, I have set out below, a narrative explaining the broader organisational changes which occurred in the twelve-month period. At the end of this narrative, I have included a summary of the impact of the changes on the distribution of functional responsibilities within the senior executive structure; on reporting lines to the Managing Director; and on the key positions themselves.
To assist the reader in following the extensive changes which took place during the period under review, two sets of explanatory diagrams and tables are included as Appendices to this Chapter. Appendix C, titled "State Bank Organisation Structure", consists of a series of seven tree-diagrams, each of which depicts the senior executive structure of the Bank and Bank Group for the years 1984 to 1990.() It will assist the reader to appreciate the extent of the distribution and redistribution of functions across the top organisational tier. Appendix D, titled "Selected Senior Executives and Line Managers - Position History 1985-1991", consists of a set of tables which trace, over the years 1985 to 1991, the career progression within the Bank Group of twenty-nine key senior executives.
The twenty-nine names were selected for two reasons. In the first instance, these persons collectively constituted, from time to time, the senior executive team responsible to Mr Clark for the management of the Bank and some of its subsidiaries. By virtue of their level of responsibility, those same persons constituted also, in a majority of instances, the membership of the more influential decision-making bodies in the Bank (eg the Executive Committee and the Lending Credit Committee). In the second instance, a number of those persons occupied positions of responsibility (ie second-tier management) in the corporate and international lending environment, which entered into a large number of the loans and facilities which subsequently became non-performing.
The tables will assist the reader to assimilate, from a different perspective, the impact of the changes described, and equally to appreciate the career progression patterns which emerged. Those patterns are discussed briefly in the Section of this Chapter which deals with performance review, promotion, and remuneration practices, at the senior executive level within the Bank.()
20.5.1 EVOLUTION OF THE DIVISIONAL AND DEPARTMENTAL STRUCTURE OF THE BANK: A CHRONOLOGICAL OVERVIEW
During the period from July 1984 to February 1991, the deployment of Bank personnel across the divisional and departmental structure of the Bank underwent numerous changes, as did the staff establishment levels and the allocation of responsibilities within that structure.
1984
For ease of comprehension, the reader is directed to Appendix C.1, "State Bank Organisation Structure 1984". The senior executive structure of the Bank implemented in 1984 demonstrates that the Managing Director, Mr Clark, had divided the operations of the Bank into seven departments, the heads of each of which reported directly to him:
(a) Finance (Chief Manager, Mr G S Ottaway);
(b) Administrative Services (Chief Manager, Mr K P Rumbelow);
(c) Marketing (Chief Manager, Mr R S Dent);
(d) Personnel (Chief Manager, Mr G N White);
(e) Planning (Chief Manager, Mr J B Macky);
(f) Corporate and International Banking (General Manager, Mr P E Byrnes); and
(g) Retail Banking (General Manager, Mr K S Matthews).
This particular arrangement had been arrived at by Mr Clark as a result of a one-day workshop attended by the senior managers of the merging banks. The decisions made during the workshop related solely to the division of functions within the Bank and to the allocation to particular departments of responsibility for specific areas of operations. The identity of the incumbents of the several offices of Chief Manager and General Manager was settled at a later date.()
1985
In March 1985, the first five-year strategic plan (1985-1990) of the Bank set out an ambitious growth and diversification path. The main objectives of the plan were translated into a set of "strategic programs", one of which was intended to "decrease business risk". That particular strategic program was in turn subdivided into five subsidiary initiatives, one of which was simply titled "Organisational Restructuring", the detail of which was intended to impart to the reader an understanding of the structural implications of the growth strategies promoted in the earlier Sections of the same planning document. In what constitutes a blueprint for sustained (if not constant) change, the "organisational restructuring" initiative identified six operational and ancillary areas within the Bank:
"... for on-going restructuring to meet growth requirements over the next three to five years." ()
These six areas were identified as information systems, retail banking, corporate banking, international banking, personnel and premises. The "organisational restructuring" initiative concluded with the recommendation that:
"...Department heads review restructuring requirements on an on-going basis and report any desired restructuring to Executive Committee.
A major review of the Bank's overall structure be deferred until next year at which time a major review of organisational structure and effectiveness may be appropriate and an appropriate consulting organisation would be approached to perform such a review." ()
Responsibility for the execution of that initiative was assigned to the Managing Director, Mr Clark.
In April 1985, the Board approved the restructure of the Corporate and International Banking department, owing to "... the rapid growth in Corporate business and the future developments planned for the Department", as well as the appointment of Mr R L Wright as Chief Manager, London Office.()
In August 1985, the Board approved a minor restructure of the Retail Banking division, with one office being declared a prescribed office, and redesignated better to reflect the increased responsibilities of the position.()
In October 1985, the Board approved another restructure of the Corporate Banking department, following difficulties in recruitment of additional staff. As part of the restructure, the authorised staff establishment was raised by six, with five persons to be promoted and two to be transferred.
In November 1985, the Board approved an extensive restructure of the Treasury function of the Bank, to unfold in stages in October 1985, December 1985, December 1986 and December 1987. The expansion was requested by Mr Paddison on the grounds of:
(a) The further development of professional expertise within the Treasury area.
(b) The need to maximise joint economies of scale between the various members of the Bank Group.
(c) The need to deal with the increasing volume of business. Over the period of the restructure, staff numbers were expected to increase from 19 to 30-31.()
In December 1985, the Board approved two changes to the organisation structure. In the first instance, following the death of Mr D F Hosking, Chief Manager, International Banking, and the "absence of Mr P E Byrnes, General Manager, Corporate and International Banking, for an indeterminate period", a redistribution of duties was agreed to within the Corporate and International Banking department. The redistribution affected the work of Mr Masters, Mr Mallett, Mr A Roff and Mr Ottaway.() In the second instance, owing to the increase in the workload of the Chief Manager, Administrative Services, (as a result of the Bank's decision to build the State Bank Centre, `Project S'), and to the recognition by Management of the "critical role of the data processing operation", the Board approved a redistribution of responsibilities which resulted in the merger of the departments of Finance and Planning. As a result, Mr K P Rumbelow was required to dedicate his efforts to the management of Project S, and to relinquish his former administrative responsibilities to Mr J B Macky, to whose duties were added those of the management of the Bank's information systems.()
In respect of the latter restructure, I note that, at the time of the announcement, the services of the firm of Cordiner King Warburton had been retained for the purposes of assessing the suitability of the senior management structure of the Bank. The assignment was not complete at the time the Board agreed to the restructure described above, a fact which is recorded in the Board Minutes in the following terms:
"... In making the resolution Directors noted that the firm of Cordiner King and Warburton [sic] had been consulted and it was understood the re-organisation would proceed, notwithstanding any additional recommendations they may make at the conclusion of their review".()
For ease of comprehension, the reader is directed to Appendix C.2, "State Bank Organisation Structure 1985", where the senior executive structure of the Bank is depicted. In 1985, that structure was modified. The revised distribution of responsibilities shows that the Managing Director, Mr Clark, had increased his span of control, and, as a result of the restructure, now had nine departmental heads reporting directly to him.
The nine departments were:
(a) Finance (Chief Manager, Mr G S Ottaway)
Within his 1984 portfolio, Mr Ottaway also had the Treasury functions reporting to him. This remained unchanged in 1985. To those functions, however, were added those of Foreign Exchange and Money Markets, in addition to Accounting.
(b) Administrative Services (Chief Manager, Mr K P Rumbelow)
Mr Rumbelow's functional portfolio remained unchanged.
(c) Marketing (Chief Manager, Mr R S Dent)
Mr Dent's functional portfolio remained unchanged.
(d) Organisational Change (Chief Manager, Mr G N White)
Mr White ceased to be responsible for the Personnel function. Responsibility for that function was given to Mr Paddison.()
(e) Personnel (Chief Manager, Mr S G Paddison)
The specific areas entrusted to the supervision of Mr Paddison were listed as employee relations, human resources development and personnel operations.
(f) Planning (Chief Manager, Mr J B Macky)
Mr Macky's portfolio remained unchanged.
(g) Corporate and International Banking (General Manager, Mr P E Byrnes)
Mr Byrnes' portfolio remained unchanged.
(h) Retail Banking (General Manager, Mr K S Matthews)
Mr Matthews' portfolio remained unchanged.
(i) Beneficial Finance Corporation Limited (Managing Director, Mr J A Baker)
Under this new arrangement, the Managing Director of Beneficial Finance Corporation came to report directly to the Managing Director of the Bank.
1986
In February 1986, the Board approved an expansion of the structure of the Bank to include resident representative offices in New South Wales (Sydney) and Victoria (Melbourne), so as to support the lending and borrowing activities of the Bank in those States. The expansion affected the activities of the Corporate Banking department and of Treasury.()
In March 1986, the second five-year Strategic Plan was released. Its thrust was one of growth, development and expansion of the activities of the Bank and the Bank Group. Reviewing progress over the previous twelve months, the document asserted that:
"... Corporate [Banking] activities have been the fastest growing area of the Bank [with] lending commitments increased from $400 M to over $1 billion during 1984-1985...More personnel are being moved into the corporate area; 26 new positions have been created since merger...A major restructure of Corporate Department has been proposed..." ()
The second volume of the document addressed the development of the strategies which were intended to support the growth plan. Two key strategic areas of effort were identified: personnel and information services. Regarding the Corporate Banking department in particular, the Plan asserted that:
"... there will be a 200% and 300% increase in business getting staff within the specialist areas of Wholesale Banking, Corporate [Banking], International [Banking] and Treasury." ()
In May 1986, the Board approved a "revised organisational structure" under which were effected the following changes in responsibilities: Mr Matthews became Chief General Manager, State Bank; Mr Baker was made Managing Director, Beneficial Finance Corporation Limited; Mr Ottaway became General Manager, Corporate and International; Mr Paddison was made General Manager, Retail Banking; Mr Macky became General Manager, Information Systems and Subsidiaries; and Mr Hazel was made General Manager, Treasury and Capital Markets.()
In May 1986, the Executive Committee agreed in principle, subject to the approval of the Board, to a recommendation for the employment of thirteen additional staff in the International Banking department, to enable achievement of the 1986-1987 Profit Plan, at an additional cost of $0.273M in salaries which it was planned to offset through the generation of increased revenue. The restructure affected the functions of Offshore Banking, Trade Finance, and Administration Support.()
In July 1986, the Board noted a paper of the Executive Committee "outlining a restructure of the Corporate Banking Section", as approved by the Executive Committee on 6 June 1986.() The Board Paper provided was prepared for the "information of Directors". The restructure had already been approved by the Executive Committee. The paper outlined the five objectives of the restructure, among which were the "employment of suitable corporate personnel as and when they are located"; the development of "an internal training process" so that senior officers could train their subordinates; the enhancement of the Bank's marketing and service activities as provided to the corporate sector; and the upgrade of the Administration Section "to ensure that effective control is maintained over fee collections and funding requirements". The restructure carried with it a significant cost ($763,098) which, it was foreseen, would be "more than off-set by the projected increase in income as per the budget plan".()
In October 1986, the Executive Committee:
"... endorsed the Managing Director's approval for the Commercial Lending Section of Retail Lending Department to be restructured by the introduction of a District Commercial Lending Team concept ...".()
The proposal, approved by the Managing Director, subject to endorsement by the Executive Committee, went on to outline the required changes to reporting lines, product management and delegations of authority. The Executive Committee Minute closed with the recommendation that:
"... a paper advising of the proposed restructure ... be submitted to the Board for information."
For ease of comprehension, the reader is directed to Appendix C.3, "State Bank Organisation Structure 1986". In 1986, the senior executive structure of the Bank was modified again. The revised distribution of responsibilities shows that the Managing Director, Mr Clark, had further increased his span of control, and, as a result of the restructure, now had ten divisional heads reporting directly to him. The 1986 restructure was the first of four sweeping restructures the Bank was to experience between 1984 and 1991.
The ten divisions created or continued by the 1986 restructure were:
(a) Information Systems and Subsidiary Companies (General Manager, Mr J B Macky)
Under this arrangement, responsibility for information systems was transferred from the Administrative Services portfolio of which it was part in 1985. In addition, Mr Macky was charged with the supervision of Executor Trustee & Agency Company of South Australia Limited, and SVB Day Porter Pty Ltd.
(b) Property (Chief Manager, Mr K P Rumbelow)
Mr Rumbelow's responsibilities were now focused on Project S (the State Bank Centre building). His former responsibilities for internal audit, legal, and stationery, were transferred to a new position, held by Mr Matthews.
(c) Marketing (Chief Manager, Mr R Dent)
Mr Dent's portfolio remained unchanged.
(d) Organisational Change (Chief Manager, Mr G N White)
Mr White's portfolio remained unchanged.
(e) Personnel (Chief Manager, Mr C W Guille)
Mr Guille had been appointed in place of Mr Paddison, who was named General Manager, Retail Banking. To the responsibilities held in the portfolio in 1985 were added those of training and development.
(f) Retail Banking (General Manager, Mr S G Paddison)
Formerly head of Personnel, Mr Paddison replaced Mr Matthews as the head of Retail Banking. Changes were also made in the allocation of responsibilities and the direct reporting to the head of Retail Banking.
(g) Corporate and International Banking (General Manager, Mr G S Ottaway)
Mr Ottaway replaced Mr Byrnes as head of the division. Mr T L Mallett became Chief Manager, International Banking, in place of Mr Hosking.
(h) Treasury and Capital Markets (General Manager, Mr J T Hazel)
For the first time, Treasury and Capital Markets became a first-tier portfolio, with a direct reporting line to Mr Clark. In 1985, the head of this department reported to Mr Ottaway, as General Manager, Finance.
(i) Financial Planning, Budgeting, Accounting, Audit, Legal and Stationery (General Manager, Mr K S Matthews)
Mr Matthews, formerly head of Retail Banking, was succeeded in that position by Mr Paddison. Mr Matthews' position, as shown on the organisational charts, is represented as an `off-line' position, reporting to Mr Clark.
(j) Beneficial Finance Corporation Limited (Managing Director, Mr J A Baker)
Mr Baker's portfolio remained unchanged.
1987
For ease of comprehension, the reader is directed to Appendix C.4, "State Bank Organisation Structure 1987". After the extensive changes wrought to the structure in 1986, the allocation of responsibilities remained virtually static in 1987. No change was made to the roles of General Manager, Information Systems and Subsidiary Companies; Chief Manager, Property; Chief Manager, Marketing; Chief Manager, Personnel; Chief Manager, Organisational Change; General Manager, Retail Banking; General Manager, Corporate and International Banking; General Manager, Treasury and Capital Markets; and Chief General Manager, Planning, Budgeting, Audit, Legal, Reserve Bank Relations, Stationery.
The single notable change consisted in the establishment - or, more correctly, the re-establishment - of a distinct Finance and Planning function, under the leadership of the newly appointed Chief Manager, Mr Copley.
1988
In April 1988, the Board noted an information paper submitted by the Managing Director "... regarding the abolition of the Asset and Liability Management Committee (ALMAC) and the Pricing Committee". The role of ALMAC and the significance of its abolition is a topic explored in detail in Chapter 7 - Treasury and the Management of Assets and Liabilities at the State Bank" of this Report. ALMAC was a committee established at the inception of the Bank in July 1984. Many of the decisions taken by senior executives in their conduct of the Bank's affairs were taken by the executives acting not individually but rather as members of committees such as ALMAC. The abolition of any one of those Committees was therefore a matter of significance.
The decision taken in 1987 to abolish ALMAC was that of Mr Clark and the Executive Committee. The Board was required merely to note "the new committee structure" put in place by the Managing Director, on the grounds that (as advanced by Mr Clark), "the structure would be effective and would make the decision-making process much quicker", quite apart from the fact it met a perceived need "to reduce the amount of time spent by Senior Management in committee meetings." ()
A subsequent Executive Committee Minute and its supporting Paper, dated 16 and 13 September 1988 respectively, however, revived the idea - seemingly jettisoned too quickly - of a body responsible for the critical banking function of asset and liability management. The introduction to the paper of 13 September 1988 called for:
"... an Asset and Liability Management Committee (ALMAC) [to] be formally constituted within the Bank...[and] a dedicated Asset and Liability Management Support Group [to] be constituted within the Treasury Division to provide technical support to the Asset and Liability Management Committee..." ()
In April 1988, the Board approved a major reshaping of the corporate structure to take into account the range of entities now operating under the umbrella of the Bank. The significance of the restructure is indicated by the extent of changes which flowed from it. In the first instance, senior executives of the Bank were appointed to directorships in the subsidiaries or had the status of their directorships of those subsidiaries modified in consequence of the changes.() In the second instance, it was decided to alter the make-up and role of the Lending Credit Committee, perhaps the most important business committee of the Bank:
"... following the recent changes to the Bank's organisational structure and as a result of the lending expertize (sic) built up since merger, it was considered necessary to review the structure of the Lending Credit Committee, in order that the Bank retain its competitive edge with prompt loan approvals." () [Emphasis added]
In the third instance,
"... it was considered appropriate to again review the levels of discretions as a consequence of the re-organized (sic) senior management structure, further experience gained by staff and the growth of the Bank." ()
It was perceived that the increased delegations "... would considerably improve flexibility in meeting loan approval deadlines, whilst still maintaining appropriate prudential and internal control". New lending delegations were recommended for the Lending Credit Committee; for the General Managers of Personal and Business Banking, of Corporate Banking and of Treasury and International Banking; for the Chief Managers of Retail and Corporate Banking; and for officers below the level of Chief Manager. Capital expenditure delegations were also modified.
The above illustrate the far-reaching ramifications of organisation restructures, which often appear otherwise to entail little more than a change in title. The fact of the matter is that any substantive modification of a business structure has repercussions on the manner in which the day-to-day business of the organisation is carried out; on the responsibilities attaching to the positions affected by the changes; on the supporting processes and procedures; and on information systems requirements.
In December 1988, the Board was advised that the Managing Director:
"... had been giving consideration to revising the organisational structure of the Group".()
The Board was informed that the contemplated changes arose as a result of discussions within the Executive Committee on 5 December 1988.() The growth of the Bank it was said "... had created tensions, pressures and challenges". The directors, moreover, had indicated "... that they wanted better reporting on the total Group and more focus on strategic issues and major areas of risk ...". ()
For ease of comprehension, the reader is directed to Appendix C.5, "State Bank Organisation Structure 1988". In 1988, at a time where a period of consolidation was clearly called for to enable the organisation to digest the consequences of the rapid pace of growth and expansion experienced over the previous four years, and the effects on the economy of the 1987 stock-market crash, the Bank underwent the second of its four sweeping restructures.
The Bank was now divided into thirteen divisions, as follows:
(a) Group Information Systems (General Manager, Mr J B Macky)
Of his 1987 portfolio, Mr Macky retained only his information systems responsibilities. Under the new arrangements, the new Managing Director of Ayers Finniss, Mr Hazel and the new Managing Director of Executor Trustee and Agency Company of South Australia Limited, Mr Guille, now reported independently to the Managing Director of the Bank, Mr Clark.
(b) Ayers Finniss Limited (Managing Director, Mr J T Hazel)
In 1987, Mr Hazel had been General Manager of the upgraded `first-tier' division of Treasury and Capital Markets. That position was abolished in 1988 and replaced by that of General Manager, Treasury and International Banking (Mr Mallett).
(c) Executor Trustee and Agency of South Australia Company Limited (Managing Director, Mr C W Guille)
In 1987, Mr Guille had been General Manager, Personnel. That position, restyled Chief Manager, Human Resources, was in 1988 occupied by the newly recruited Mr Abbott.
(d) Group Services (General Manager, Mr G S Ottaway)
In 1987, Mr Ottaway had been General Manager, Corporate and International Banking. That division was sub-divided in 1988.
(e) Treasury and International (General Manager, Mr T L Mallett)
In 1987, Treasury was grouped with Capital Markets as a `first-tier' division, while International Banking formed part of the Corporate and International Banking unit. Under the 1988 re-arrangement, the Treasury function was transferred to International Banking. Two additional functions were assigned in 1988 to the head of Treasury and International Banking. The first was the supervision of the London Office of the Bank. This was formerly a part of Corporate and International division. The second was supervision of the New York office of the Bank, under the leadership of Mr R Sewell, Executive Vice-President United States of America and Chief Manager.
(f) Corporate Banking (General Manager, Mr D C Masters)
In 1987, Corporate Banking division included International Banking and the London Office. Under the 1988 redistribution, responsibility for both these functions had now been moved to Treasury and International Banking.
(g) Personal and Business Banking (General Manager, Mr S G Paddison)
This division essentially gathered, under a different name, those functions which in 1987 were allocated to the Retail Banking division.
(h) Group Finance (Chief Manager, Mr K L Copley)
Mr Copley's responsibilities had been revised, as reflected in his title. His portfolio remained largely unchanged, however.
(i) Planning, Budgeting, Audit, Legal, Reserve Bank Relations and Stationery (Chief General Manager, Mr K S Matthews)
Mr Matthews' responsibilities had been revised to a minor extent. Essentially, his portfolio remained unchanged.
(j) Group Human Resources (Chief Manager, Mr G D Abbott)
In 1987, the position (under a different designation, ie Personnel) had been held by Mr Guille. Following the appointment of Mr Guille to the post of Managing Director of Executive Trustee, the position of head of Human Resources remained vacant for five months, at which point Mr Abbott took up his duties as Chief Manager, Human Resources.
(k) Property (Chief Manager, K P Rumbelow), Group Marketing (Chief Manager, Mr R S Dent) and Beneficial Finance Corporation Limited (Managing Director, Mr J A Baker)
The responsibilities associated with the above portfolios remained unchanged in 1988.
I remind the reader of the suggestion made in December 1988 in an Executive Committee Paper that the structure outlined above was quite unsuited to the organisation. Members of the Executive Committee had been, according to evidence put before this Investigation and referred to earlier, particularly vocal in regard to the conflicts and inconsistencies which the structure was generating. As a result of these difficulties, the firm of PA Consulting was retained to assist the Bank in reshaping its structure.
1989
In January 1989, following on from the December resolution referred to above, and after preliminary discussions with McKinsey & Co and the PA Consulting Group, the Board commissioned PA Consulting Group to advise the Bank on its structure and management information systems requirements. The desire expressed by the Managing Director was for a revised structure to be in place by July 1989, and for a review of management information. The Board authorised "State Bank Management" to examine the possibility of appointing management consultants to assist with the carriage of this review.
I note that in an offer of services addressed to Mr Clark, and dated 23 January 1989, Mr J Colvin, Chief Executive Officer, PA Consulting Group, referred to the fact that:
"... the Chief Executive [Mr Clark] is ... clear in his mind as to the final solution. However, this needs verification to minimise the risk of making structural mistakes. There are a number of examples of organisational trauma caused by faulty organisational restructuring currently in Australia." () [Emphasis added]
In February 1989, as a result of a strategic planning conference held by the Corporate Banking division of the Bank, and an ensuing recommendation that the structure of the division be reviewed in order to "... determine the most effective structure to operate Corporate Banking" (), the firm of Fish & Nankivell was commissioned to carry out a review of Corporate Banking. The consultant involved, Mr G Fish, handed in his draft report on 30 March 1989. The report recommended the establishment of four subsidiary areas (Relationship Banking, Corporate and Project Finance, Credit and Risk Management and Corporate Banking Administration); the re-allocation of functions between two of the above-mentioned areas; the re-allocation of the analyst pool; and the disbanding of the "intensive care and work-out group", with staff being re-allocated to the Corporate and Project Finance Group.
Some of the practical implications of the proposed restructure were outlined in the closing Section of the report, which identified the need for:
(a) the revision of job descriptions, to ensure that all persons involved understand their objectives;
(b) the assessment of the level of skills held by existing staff, so as test their suitability for the revised positions; and
(c) the possible later need for the establishment of positions to accommodate increased workloads and growth.
On 22 June 1989, in a memorandum, addressed to Mr Paddison, Chief General Manager, Australian Banking (Elect), Mr Masters, General Manager, Corporate Banking, highlighted the key strategic issues facing the Corporate Banking department at the close of the 1989 financial year. Under the heading of "Divisional Structure", he noted, regarding the earlier Fish & Nankivell consultancy, that:
"... recommendations in the Report have not been proceeded with ...".()
except for two, pending the re-allocation of one staff member, and "the need for a further review of the structure, as proposed by Greg Fish". Mr Masters then put forward his own thoughts on a new structure. He concluded that, in his opinion, the most pressing of all the issues raised in the memorandum related to the agreement and release of "appropriate organisational structure".
The proposed restructure was the object of further discussions between Mr I J Kowalick (Chief Manager, Planning, since October 1989), Mr Abbott (Chief Manager, Human Resources, since August 1988) and Mr Masters.()
In May 1989, the Board approved the substantial organisation restructure:
"... recommended by the Managing Director, the Chief General Manager and General Manager, Personal and Business Banking and Mr John Colvin of PA Consulting Group."
The restructure altered the allocation of responsibilities among the senior executive echelon through the redistribution of business responsibilities among various divisions and departments. It also resulted in significant changes in the membership of the Executive Committee, which was reduced from fourteen to eight.() In addition, Mr Hamilton, formerly of Elders IXL Limited, was appointed Chief General Manager, Group Planning and Subsidiaries.()
For ease of comprehension, the reader is directed to Appendix C.6, "State Bank Organisation Structure 1989". As a result of the conflicts which had arisen in December 1988 (to which I have referred) and of the review conducted by PA Consulting in February to March 1989, another redistribution of responsibilities was well-nigh inevitable, with the result that in 1989 the Bank underwent the third of four sweeping re-organisations. Under the revised arrangements, the principal divisions in the Bank were reduced in number to seven, the heads of which reported directly to Mr Clark.
Those divisions were:
(a) Australian Banking (Chief General Manager, Mr S G Paddison)
Formerly head of Personal and Business Banking, Mr Paddison assumed wider responsibilities. Under his control now came the following functions:
(i) Personal and Business Banking (General Manager, Mr G S Ottaway);
(ii) Corporate Banking (General Manager, Mr D C Masters);
(iii) Domestic Treasury (Chief Manager, Mr S C Targett); and
(iv) Trade Finance.
(b) International Banking (Chief General Manager, Mr T L Mallett)
The re-organised portfolio of functions under Mr Mallett's supervision now comprised:
(i) Institutional Banking (Chief Manager, Mr R L Wright);
(ii) International Treasury and Capital Markets (Chief Manager, Ms J L Meeking);
(iii) United Kingdom (Chief Manager, Mr M Wilcox);
(iv) United States of America (Executive Vice-President and Chief Manager, Mr R Sewell)
(v) New Zealand (Chief Manager, Mr D Hammond); and
(vi) Hong Kong (Director, Asian Operations, Mr I R Johnston).
(c) Group Risk Management (Chief General Manager, Mr K S Matthews)
The portfolio entrusted to Mr Matthews had been substantially restructured, with the result that he now supervised the following activities:
(i) Global Risk Management (General Manager Mr C W Guille, who also remained Managing Director of Executor Trustee for a period);
(ii) Economic Services (Chief Manager, Mr D J Gobbett);
(iii) Internal Audit (Chief Manager, Ms M Chin);
(iv) Government Relations; and
(v) Reserve Bank Relations.
(d) Group Management Services (Chief General Manager, Mr J B Macky)
Under Mr Macky's supervision were now located the following functions:
(i) Group Marketing (General Manager, Mr R S Dent);
(ii) Group Human Resources (General Manager, Mr G D Abbott);
(iii) Information Systems Development (Chief Manager, Mr H Andersen);
(iv) Information Systems Services and Support (Chief Manager, Mr B McCulloch); and
(v) Service Quality.
(e) Group Finance (General Manager, Mr K L Copley)
The responsibilities of Group Finance had now been expanded. They encompassed:
(i) Property (Chief Manager, Mr K P Rumbelow);
(ii) Finance;
(iii) Stationery;
(iv) Legal; and
(v) Operational Planning.
(f) Group Planning and Subsidiaries (Chief General Manager, Mr M G Hamilton)
Under the revised arrangement, the Bank was returning to an earlier situation which saw the responsibility for the subsidiaries grouped under a single reporting head. To Mr Hamilton now reported:
(i) Ayers Finniss Limited (Managing Director, Mr J T Hazel);
(ii) Executor Trustee and Agency Company of South Australia Limited (Managing Director, Mr C W Guille);
(iii) Oceanic Capital Corporation Limited (Managing Director, Mr J Purvis);
(iv) Day Cutten Limited (Managing Director, Mr F T Wilsen);
(v) Myles Pearce & Co Pty Ltd (Managing Director, Mr M Pearce); and
(vi) Group & Capital Planning (which included Group strategic planning) (Chief Manager, Mr I J Kowalick).
(g) Beneficial Finance Corporation Limited (Managing Director, Mr J A Baker)
The portfolio of Mr Baker remained unchanged.
1990
In June 1990, the Board approved the formation of the Audit Committee, after a protracted debate, begun in October 1989, between the Managing Director and the Board as to the need for such a committee in the Bank.() In June 1990, the Board also approved a major restructure endorsed earlier by the Executive Committee. The restructure, which established the Financial Services Group within the Bank Group of companies, was a complex and far-reaching one. It involved the re-organisation of the management reporting structure of numerous companies, among which were Beneficial Finance Group, Ayers Finniss, Day Cutten Pring Dean, Executor Trustee of Australia, Oceanic Capital Corporation and Myles Pearce.() It required the establishment of a holding company - SBSA Financial Services Group Limited - to look after the investment of the Bank Group in the entities which made up the new Financial Services Group. Furthermore, it also entailed the constitution of a new Board of Directors, and the revision of delegations of authorities to manage the new structure.
The introduction of the new structure represented a reaction to the increasing concerns held by the Board, by the Managing Director, by the recently appointed Chief General Manager, Group Planning and Subsidiaries, Mr Hamilton(), and by other senior executives, regarding the performance of Beneficial Finance Corporation and other entities such as Oceanic Capital Corporation.() The revised structure reflected the Bank's desire better to contain and control a situation which was growing more worrisome by the month.
In September 1990, the Board redefined the role and responsibilities of Mr Clark. The Board Minute which records the meeting at which this resolution was passed stated that the Board had resolved to have the Managing Director:
"... operate more as an Executive Chairman free to roam with a high public profile, [while] Messrs Hamilton and Paddison [would] act as "Deputy Managing Directors" and `be blooded' having regard to the fact that T.M. Clark [sic] will not continue as Managing Director past June 1992." ()
That decision is reported on more fully in Chapter 21 - "The Relationship between the Board and the Chief Executive".() The changes in responsibilities and reporting relationships, which were set in train by the decision of the Board regarding the role of Mr Clark on 3 September 1990, is referred to briefly in the minutes of the regular monthly Board meeting of 27 September 1990, in the following terms:
"It was felt that to allow the Group Managing Director to focus on critical issues relating to the performance of the Group, the reporting lines to the Managing Director would be reduced to three, with a greater number of senior executives being represented on the Bank's Executive Committee." ()
This statement reflects nothing of the reasons which led the Board effectively to remove Mr Clark from the exercise of operational responsibilities as Chief Executive, and to assign to him, instead, marketing and business development duties. It does, in fact, reflect a further alteration to the distribution of responsibilities among the senior executive team, and another change to the top tier of the organisation structure. The relevant segment of the Minutes records that:
"... Management's current thoughts on an organisational [sic] restructure were briefly outlined by the Managing Director. He advised that discussions had taken place between the Chairman, Deputy Chairman and Group Managing Director in relation to the strategic reorganization of senior positions." ()
In addition to the changes already referred to above, it introduced a further one, in that the Board also concurrently approved the establishment of the position of Chief General Manager, Financial Strategy, reporting to the Group Managing Director. On the recommendation of Mr Clark, the position was designed to merge two desired positions, that of Group Company Secretary and Group Finance Director. The need for a Finance Director was raised by the Chairman, Mr Simmons, with Mr Clark in mid-July 1990.() The position, as it happened, was never filled. The Bank was unable to agree on a suitable candidate.()
In November 1990, as a result of the September redistribution of responsibilities at the most senior level of the organisation, the Board was advised that:
"... detailed work on the organisational restructure had now been completed. Management was preparing to make formal announcements to senior management and the press ... The Chief General Manager, Australian Banking, advised that, with the resources of a limited group of people to maintain confidentiality, the reorganization of Australian Banking Division was complete. The industrial aspects eventuating from redundancies and retirements had been addressed." ()
The statement evidenced, once again, the far-reaching repercussions of changes to roles and responsibilities within an entity such as the Bank.() In addition to the redistribution of responsibilities which flowed from the Board's decision regarding the role of Mr Clark, there had also been added, at the same time and in response to the worsening performance of the Bank, a drive to reduce costs and to `rationalise' staff numbers. Such a drive, when combined with the re-arrangement of the first executive tier, led to another substantive re-arrangement of the structure. A Board Paper presented by Mr Clark described both the workload associated with a restructure of the breadth undertaken, and its unsettling impact:
"... senior management of the Bank have been fully occupied with this major project ... Morale is poor, many people are uncertain of their future, and rumours are rife. Attached is the final organisation chart." ()
The major features of the extensive restructure were communicated to staff through an in-house publication, "The Exchange", and through a general memorandum released under the signature of the Group Managing Director, Mr Clark, and of the Director, Banking, Mr Paddison, on 10 December 1990. The memorandum explained some aspects of the impact of the restructure on retail banking operations, support services, commercial lending, and rural banking.
Again, in November 1990, in addition to the changes referred to above, the Board approved a re-organisation of the Financial Services Group proposed by Mr Hamilton as a result of his review of the activities of its constituent entities. The Board's approval was granted "subject to further discussion and consideration of the appropriateness of the current structure". The Board, through Mr Bakewell, had voiced its concern:
"... as to whether the structure was the most effective. The structure did not facilitate Directors' awareness of the individual operations of the subsidiaries".()
Mr Hartley, for his part, is recorded in the minutes as having:
"... questioned the suitability of the structure and whether the Board was, in fact, satisfied that the appropriate people were heading the companies. Management took on notice the issues and concerns raised by the Directors." ()
For ease of comprehension, the reader is directed to Appendix C.7, "State Bank Organisation Structure 1990". In 1990, in the face of increasing problems arising from its non-performing loans, from the performance of acquisitions such as Oceanic Capital Corporation and the United Building Society of New Zealand, and from subsidiaries such as Beneficial Finance Corporation Limited, the Bank, under the Managing Directorship of Mr Clark, sought to regain control of its affairs through a third extensive restructuring. It is to this restructuring that Mr Clark referred during his meeting with the Premier and Treasurer, Mr J C Bannon, on 14 December 1990, when he stated that:
"... the Bank had considered its situation, and reviewed its management and set in train a major restructure ...".()
As a result of the 1990 restructure, the number of reporting lines to the Managing Director was reduced to five, with all key business-generating divisions concentrated in three of those reporting lines. It will be remembered, moreover, that as a result of an extraordinary meeting of the Board held on 3 September 1990, the role of Mr Clark was redefined by the Board. That redefinition triggered many of the changes reflected in the structure below, which was settled in December 1990. At that time, the portfolio of activities had been re-arranged thus:
(a) Australian Banking under the responsibility of Mr Paddison now comprised National Corporate Accounts, South Australian Commercial and Corporate Lending, Retail Banking, Australian Banking Treasury, Group Risk Management, Australian Banking Development, and Economic Services, as well as a range of subsidiary functions.
(b) International Banking under the responsibility of Mr Mallett now encompassed the United Banking Group (New Zealand), United States of America - New York Office, United Kingdom and Europe, New Zealand, Asian Operations, International Treasury, and Capital Markets, as well as the Wholesale Credit Inspection Review Project.
(c) Beneficial Finance Corporation Limited - Mr Hamilton was appointed to act as Managing Director following the departure of Mr Baker.
(d) Financial Services Group and Group Planning remained under the supervision of Mr Hamilton, assisted by Mr Hazel who, as Chief General Manager, had immediate supervisory responsibility for Ayers Finniss, Day Cutten, Executor Trustee and Agency Company, Oceanic Capital Corporation, and Personal Financial Services.
(e) Group Management Services remained under the responsibility of Mr Macky, Chief General Manager and included Group Human Resources, Group Information Systems, Group Marketing, Group Marketing Communications, Property, Information Systems Development and Group Quality Management.
(f) Group Finance and Administration was overseen by Mr Copley, whose responsibilities covered the functions of Finance, Internal Audit and General Counsel, Legal.
1991
In January 1991, following a December 1990 decision by the Board which authorised Management to approach JP Morgan regarding the conduct of a "strategic review of the Bank"(), the Board approved the engagement of JP Morgan.
The brief given to JP Morgan was a three-fold one. Their first task was a:
"... review of the structure and direction of State Bank Group, how we conduct our business and our procedures, processes and business systems." () [Emphasis added]
In February 1991, the Board accepted the resignation of the Managing Director, Mr Clark.() The acting Chief Executive Officer of the Bank(), Mr Paddison, submitted a paper() on the proposed restructure of the Bank Group. This restructure was based on a re-assessment of all the activities of the Bank. That reassessment came in the wake of the release of the half-yearly results and the statements disclosing the parlous position of the Bank. The paper put forward a completely reshaped Group structure as a result of an analysis of the activities of Group entities. The proposed restructure was a sweeping one, in that it affected the following key areas: Personal and Business Banking, Corporate and International Banking, Treasury and Capital Markets, Beneficial Finance, Management Services, Finance and Subsidiaries. Areas of responsibility within each of those areas were confirmed. A number of changes (redundancies, replacements, retirements, promotions) were effected in key positions.
After review and acceptance by the Advisory Group, the proposal in that paper became the object of a firm recommendation to the Board on 8 March 1991.()
On 25 March 1991, JP Morgan presented their report. It took in and supported the propositions made in the paper to the Advisory Group and the subsequent paper to the Board.()
An evaluation of this last restructure falls outside the scope of my Terms of Appointment. No comment on the last restructure is called for on my part.
20.5.2 OBSERVATIONS AND CONCLUSIONS REGARDING THE EVOLUTION OF THE ORGANISATION STRUCTURE OF THE STATE BANK AND OF THE STATE BANK GROUP FROM 1984 TO 1991
The preceding pages set out the more important changes made to the structure of the Bank and, where appropriate, of the Bank Group. The summary of changes described is not intended to be an exhaustive list of the restructurings undertaken between 1984 and 1991. The Bank was subjected to wave upon wave of restructuring and of redistribution of functions among its senior executive team. The Bank modified the reporting structure of its subsidiaries in 1988, 1989 and 1990. At a business function level, near-total re-allocation of functions occurred in 1986, 1988, 1989 and 1990. At an operational level, changes occurred in key departments such as Corporate Banking, International Banking and Treasury at the same time as changes were being contemplated or effected at the business function level in the course of any one year.
At an individual level, responsibility for the management of a particular function or set of functions was often transferred in the wake of other structural alterations (eg Planning, Finance, Personnel, Treasury), with the inevitable change in management approach that accompanies such a move.
Organisational change is an inevitable, and often desirable and necessary, feature of the course of a business, and an essential management tool. I accept, furthermore that, in the banking climate of the 1980's, the development of new products, services and approaches to the business of banking would have required a degree of organisational flexibility in order to adjust the business structure to the range of services offered by the Bank.
In the light of the evidence placed before me, however, I am of the opinion that the pace and extent of structural change within the Bank brought about by the Managing Director, and by his team of senior executives, with the explicit or implicit approval of the Board, was incompatible with two key features of the organisation. It was incompatible with the acknowledged need for the development of the infrastructure required for the conduct, monitoring, and control, of the business carried out in the Bank and in its subsidiaries. This was particularly so with regard to the development of processes (such as the improvement of the credit assessment function in Corporate Lending, and its separation from the business development function)(); with regard to the development of information systems required to generate the management information needed for monitoring and control of the Bank's business(); and with regard to the development of risk management and prudential control mechanisms and systems.()
It was also incompatible with the acknowledged need, as indicated earlier, to develop a better experience and expertise base in critical areas of the Bank, such as in Corporate Banking, Finance, Planning, and Human Resources Management.()
The changes effected before 1990 generally lacked objective justification. They were not adequately explained by contemporaneous documents. Whether they resulted in improvements within the Bank is now open to question. Objective and contemporaneous justification is also lacking in certain instances for the transfer or promotion of persons placed in charge of particular functions. I refer here in particular appointments made in Australian Banking, Retail Banking, Finance and Financial Planning and Human Resources. I have no doubt that the repeated upheavals in the structure and the continuing redistribution of functions within the Bank had a substantial and generally adverse impact on the capacity of the organisation effectively to address the conduct of its business. The frequency and extent of the changes involved were, in practice, far-reaching. They may have distracted senior management from attending to, and carrying out, tasks which, in an objective sense, were far more pressing: the adoption of appropriate and effective credit processes; identification and adoption of necessary management information systems; the creation of processes and procedures for the timely identification and reporting of non-performing loans and for the monitoring of the quality of the Bank's lending; the establishment of mechanisms whereby the Bank could be satisfied that it was earning an appropriate rate of return on assets under management and that it was in fact lending profitably, to name but a few. The Investigation has established, with reference to credit processes and procedures, for example, that senior management of the Bank did not put into place a comprehensive and effective set of processes and procedures until 1990-1991, at the time of the release of its Group Credit Manual.() As a further instance of a significant process deficiency, the Investigation has established the failure of the Bank and of senior management to separate, in its Corporate Lending area, the credit initiation function from the credit assessment and credit approval functions.()
A memorandum such as the one from Mr Masters to the Chief General Manager, Australian Banking, Mr Paddison, draws a stark picture of the dilemma in which that division found itself, torn as it was between the transaction of business (ie the development of its loan portfolio), on the one hand, and the management of credit assessment and credit exposures on the other:
"The Division is grossly undermanned in the Credit Policy, Process and Review area ... In addition to our established base, the Division is continuing to expand ... The present delegations and LCC process is outdated and as a result I believe credit approval is not getting proper due diligence ... Pressure is further placed upon executive management at all levels within the Bank, as there is no external body within the Bank capable of examining and reporting upon Corporate exposures which provides confidence to all ...".()
In the wake of the many restructures, duties and responsibilities, for example, needed to be redefined repeatedly, in order to provide managers with a workable definition of their scope of control, and thus to avoid overlap and confusion in areas of responsibility. That redefinition was also needed for objective-setting, performance monitoring, and remuneration-setting purposes.
The Investigation has established that senior management of the Bank was often not provided with a clear charter. Duty Statements for senior management (with the exception of the better established retail banking operations) were the exception rather than the rule until 1988, when a more consistent approach was imposed on Human Resources Management. The track record of Mr Clark with regard to objective-setting, performance monitoring, and remuneration review is discussed in the next Section of this Chapter.
Processes and procedures needed to be reviewed and redefined as a consequence of the reorganisation, as did management information requirements. This, too, must have involved a time-consuming and costly distraction of senior management from the practical business of banking.
A cultural and organisational leap was required of the amalgamating banks and their staff. The virtual dearth of corporate lending skill in the merged Bank placed limitations on the business areas that could be entered into. It led to extensive external recruitment to bridge the gap. But a great deal of caution was called for on the part of those directing and managing the Bank, given the inexperience of staff in relation to sectors of lending to which the participating banks had virtually no exposure.
I have, in the preceding pages, described a situation where, above and beyond the implications and demands of the merger, the organisational and functional structure of the new Bank was the object of extensive and repeated re-arrangements and re-distributions of portfolios.
20.5.3 REGARDING THE ROLE OF THE MANAGING DIRECTOR IN THE STRUCTURING AND RESTRUCTURING OF THE ORGANISATION
Of all parties involved in the structuring or restructuring of the organisation, none had as dominant a role as the Managing Director, Mr Clark, by virtue of the objectives of his brief, of the powers reposed in him by the Act and those additional powers delegated to him by the Board, and of his initiatives over the period considered by this Investigation.
Commenting on the changes to the structure and their frequency, the Managing Director, Mr Clark has indicated that:
"... the climate of `change' and `growth' ... explains why organisational restructuring to accommodate the Bank's growth and diversification has necessarily been a continual process since 1984".()
The frequent organisation restructures to which I have referred were thus predicated on, and driven by, the `growth' and `change' proposed for the Bank. I have formed the opinion that the pace of growth was inappropriate to, and incompatible with, the level of skills, experience, and expertise, available in the proposed new business-generating areas of the organisation. In this Chapter, I have shown that, in a series of attempts, possibly designed to match the available resources and skills of the organisation to the growth targets foreshadowed in Strategic and Profit Plans, the Managing Director, with the tacit or explicit approval of the Board, embarked on a series of organisational restructures, the infrastructural implications of which were never fully comprehended or followed through.
The rate of the growth in business activity, while approved by the Board, was substantially influenced by the Managing Director. The pace could and should have been moderated, in recognition of the need to ensure that staff were adequate, numerically and otherwise, to the tasks committed to them, and that adequate and effective processes existed for the monitoring of staff performance.
I have formed the opinion that the frequent organisational restructures imposed upon the organisation as a consequence of the rate of growth sought by the Managing Director (and in which he played a critical role in setting and controlling) effectively:
(a) Prevented the development of the operational processes and procedures necessary for the prudent and orderly conduct of the Bank's affairs in a range of areas.
(b) Prevented the development within the Bank of the required degree of professional skills, expertise, and experience, necessary for the prudent and orderly conduct of the Bank's affairs, by depriving the organisation of structural and functional stability.
I have stated in earlier Chapters() my opinion that the absence of suitable processes and procedures was a material factor in the Bank engaging in operations which resulted in substantial losses and in the Bank holding significant assets that are non-performing. I have also stated earlier in this Chapter my opinion that the rate of growth and business generation adopted by the Bank, under the guidance of Mr Clark as Managing Director, was inappropriate to, and incompatible with, the level of skills, experience and expertise, available in new business areas such as Corporate Lending, in which many of the Bank's non-performing loans originated. The combined effect of the rate of growth and the lack of the necessary skills, experience, and expertise, led the Bank to engage in operations which resulted in material losses, and in the Bank's holding significant assets which are non-performing in the Corporate Banking area and elsewhere.
The continual and far-reaching upheavals of the structure, assumedly effected in order to enable it to meet the demands of a swiftly-expanding business effectively prevented the development of both the infrastructure and the skills that would have assisted the Bank better to control the quality of its lending, and thus to limit the extent of unsafe and imprudent lending decisions.
The Managing Director displayed a level of managerial competency well below what was to be expected of one holding his office and responsibility and earning his remuneration. It is incomprehensible that Mr Clark would choose to shape and reshape the organisation without any apparent regard to, or awareness of, the consequences of such decisions, and in spite of repeated warning signs regarding persistent infrastructural weaknesses, be those related to persons or systems.
I can only conclude that his actions were the result of an obsession with growth, and with profit-reporting, as ends in themselves.
20.5.4 REGARDING THE ROLE OF THE BOARD IN THE STRUCTURING AND RESTRUCTURING OF THE ORGANISATION
Under the Act, the Chief Executive Officer is responsible for the management of the affairs of the Bank, subject to the control of the Board.() The Board, moreover, has the power to appoint "such officers of the Bank as it thinks necessary for the effective operation of the Bank".() In the delegation of powers and functions granted to the Chief Executive by the Board at its inaugural meeting, it was resolved that the Board:
"... would appoint all prescribed officers on the recommendations of the Chief Executive and [would] approve all items of their remuneration. Below prescribed officers the Board [would] approve policy, but Management [would] have the right to recruit, terminate, transfer and remunerate staff".()
The Board had, therefore, reserved to itself the theoretical power, had it chosen to exercise it,() to intervene and impose its veto, or to participate in a more positive manner in the structuring of the organisation through the appointment of prescribed officers.
Had it desired to be involved to an even greater extent, it could furthermore have modified or qualified its delegations to the Chief Executive regarding the appointment, transfer or dismissal of executives below the level of prescribed officer. While it may have engaged in discussion and debate over proposed restructurings, the Board intervened only once with any force in matters of organisation structuring. As indicated earlier in this Section, this intervention occurred in 1990, in relation to the proposed restructuring of the Financial Services Group, as proposed by Mr Hamilton, to which Mr Bakewell and Mr Hartley voiced objections, albeit from different perspectives. The Board was aware of proposed or agreed restructurings undertaken by the Executive Committee or by Mr Clark. It was presented with, and noted, the minutes of the meetings of the Executive Committee which recorded such events and matters. The Board was made aware of some major restructurings proposed by the Executive Committee and/or by Mr Clark which were discussed and approved by the Board, on the recommendations of the Managing Director. The Board was as well informed as the Managing Director and Senior Executives of what restructures were proposed. In the alternative, the Board had the necessary powers and means in order for it to become so, had it chosen to exercise a higher level of scrutiny, control or participation. Other than in the specific instance and general manner quoted above, it failed to do so.
I am of the opinion that, in delegating in the manner in which it did, and in its failure thereafter to take a more active and penetrating role, the Board failed adequately and properly to direct, supervise, and control the affairs of the Bank.
20.6 FINDINGS AND CONCLUSIONS
In this Chapter I have investigated the manner in which the Board, through the activities of the Managing Director, managed the senior executive echelon of the Bank. That is to say:
(a) The manner in which the Board and the Managing Director established and developed the senior executive tier.
(b) The manner in which the Board and the Managing Director reviewed the performance of the senior executives, rewarded their performance, and dealt with demonstrated poor performance.
(c) The manner in which the skills, experience and expertise, of senior management were deployed through the organisation of the Bank, and the impact of the Bank's structure on the management of the affairs of the Bank.
Having regard to all the evidence to which I have referred in this Chapter, and for the reasons set out in this Chapter, I am of the opinion:
(a) That the Board (for the reasons set out in Sub-Section (b) below) and the Chief Executive Officer did not properly and adequately supervise, direct, and control, the recruitment, performance monitoring, remuneration setting, and deployment, of senior executives in the Bank.
(b) That the Board:
(i) By delegating to the Chief Executive Officer the power to recruit, remunerate and otherwise control classified (as opposed to "prescribed") officers in the manner in which it did and without supervision of the exercise of that power, failed adequately and properly to direct, supervise, and control, the affairs of the Bank.
(ii) By delegating to the Managing Director extensive powers to staff the senior executive tier (by the appointment of prescribed officers) without adequate review by the Board, the latter was left with little or no direct regulatory control over management of senior staff, and by so delegating it permitted the Bank to operate with inadequate organisational controls for the recruitment of those senior executives. To that extent, the Board did not adequately involve itself in the recruitment of senior executives necessary for the successful penetration by the Bank into new business areas and necessary to sustain the growth projected in the Strategic Plans and Profit Plans approved by the Board from time to time.
(c) That the Managing Director:
(i) By delegating to his subordinates extensive powers to recruit classified staff, without having either prescribed, or caused the adoption of policy, standards, or procedures, appropriate to the task, failed adequately and properly to supervise, direct, and control, the affairs and operations of the Bank.
(ii) Displayed a lack of understanding of the role and functions of human resources management, and of the need for common procedures and standards across the organisation, being procedures calculated to:
. Protect the integrity of the recruitment function at senior level.
. Provide the required basis, through those procedures and standards, for the definition of responsibilities for the allocation of duties and the design of organisation structures, and for the review, monitoring, and control, of staff performance.
(iii) Failed adequately and properly to supervise, direct, and control, the affairs of the Bank in that:
. The performance assessment process applied by Mr Clark to the senior echelon of the organisation was an informal one. Its informality rendered it ineffectual.
. The performance review process adopted by Mr Clark was inappropriately subjective and lacked the benefit of any checks and balances. Performance assessments were, therefore, personal and potentially idiosyncratic.
. The informality, secretiveness and subjectivity inherent in the performance review process, as applied to senior executives by the Managing Director, vitiated and undermined the integrity of the process of the promotion and placement of senior executives in the organisation, and of their remuneration setting.
. The concentration of power arising from the informality, secretiveness, and subjectivity, of the performance assessment process - particularly when considered in the light of its ancillary processes of promotion and remuneration review - had the potential to create - and did I am satisfied create - an unusually strong and far-reaching dependency on the part of the senior executive echelon upon the Managing Director and upon the satisfaction of his expectations.
. The all-encompassing, isolated, and subjective nature of Mr Clark's dealings with senior management had the potential to create and did, I am satisfied, create an autocratic environment.
. The dependency thus generated between senior executives and the Managing Director was inappropriate.
. The approach taken by Mr Clark to the review of executive performance created an environment where there was risk of senior executives compromising the independence of their judgement and was wholly inappropriate, given its potential impact on the quality of decision-making within the Bank.
. That the informal and subjective character of the performance management approach adopted by Mr Clark was inappropriate and imprudent for the Bank, in that it left the Managing Director, for all practical purposes, as the only repository of information to which the Board could readily refer in order to elicit facts and opinions in matters of senior executive performance.
(d) In specific reference to the scheme of bonus payments applicable within the Bank during the period under review, and in relation to increments paid to senior executives in that period, I report:
(i) The Board had the power, the opportunity, and the responsibility, to adopt a policy regarding performance review, remuneration adjustment, and the determination of bonuses, and to call for the development, by management, of the appropriate structures and tools to support such policy. By failing to require that the Managing Director reduce to writing ie for discussion and scrutiny, the set of criteria (if any) that he used in fixing the discretionary component of bonuses it failed to adopt such a policy, and thus, failed in this respect properly and adequately to direct, supervise, and control, the affairs of the Bank.
(ii) That the Board relied, until 1990 (ie until the establishment of the Remuneration Sub-Committee) in large part on the informal and subjective advice of the Managing Director in conducting its deliberations. This reliance led ultimately to the Board failing adequately to monitor the performance of the Bank's senior executives.
(iii) In placing the level of reliance which it did on the advice of the Managing Director, the Board failed to adequately supervise his assessment of senior executive performance and of the level of appropriate reward for that performance.
(iv) The Board failed adequately and properly to supervise, direct, and control the processes of remuneration setting and adjustment and of bonus determination in that by delegating, as it did to Mr Clark, it permitted the existence of a process of approval of remuneration increases and of bonuses which lacked adequate justification.
(v) In spite of the Bank and the Bank Group's substantially reduced profits and the alarming growth in non-performing assets in 1989 and 1990, significant increases in salary and remuneration and substantial bonuses were granted to senior executives in those years. I am satisfied that bonuses were primarily - if not entirely - based upon the discretionary and subjective assessment of Mr Clark.()
(vi) That the Managing Director, until 1990, acted contrary to accepted management practices in that he devised, established, and operated, a remuneration adjustment and bonus determination process in an informal, obscure, arbitrary, and subjective, manner.
(vii) That the remuneration adjustment and bonus determination processes devised, established, and operated by the Managing Director until 1990, did not provide the Board with a rational, objective basis upon which to approve all items of the remuneration of senior executives or to assess their performance relevant thereto.
(viii) That the remuneration adjustment and bonus determination processes devised, established and operated by the Managing Director until 1990, when considered in association with the performance appraisal process, created an inappropriate dependency between the senior executives and the Managing Director; created an inappropriate concentration of power in the hands of the latter; and created, furthermore, an internal environment where the risk of senior executives compromising the independence of their judgement was inappropriately high, with a consequent potential impact on the quality of the decisions and business entered into by the Bank.
(xi) That the Managing Director, in granting remuneration increases and bonuses without due accountability, failed adequately and properly to supervise those affairs of the Bank committed to his charge.
(e) Regarding the continual re-organisation of the Bank:
(i) The Bank was subjected to wave upon wave of restructuring, and of redistribution of functions among its senior executive team.
(ii) The pace, and extent, of structural change within the Bank brought about by the Managing Director, and by his team of senior executives, with the explicit or implicit approval of the Board (which on a number of occasions was given after receipt of expert management consultants' reports which were enthusiastically endorsed by the Managing Director), was incompatible with two key features of the organisation, namely:
. The need for the development of the infrastructure required for the conduct, monitoring, and control, of the business carried on by the Bank and its subsidiaries, and the development of processes (such as the improvement of the credit assessment function in Corporate Lending); the need to develop systems required to generate the management information needed for monitoring and control of the Bank's business; and the need to develop risk management and prudential control mechanisms and systems.
. The need to develop a better expertise base in critical areas of the Bank, such as in Corporate Banking, Finance, Planning, and Human Resources Management.()
(iii) The pace of growth of the Bank was inappropriate to, and incompatible with, the level of skills, experience, and expertise, available in the proposed new business-generating areas of the organisation.
(iv) The rate of the growth in business activity, while approved by the Board, was substantially influenced by the Managing Director. The pace could and should have been moderated, and there should have been recognition of staffing inadequacies.
(v) The frequent organisational restructures imposed upon the organisation as a consequence of the rate of growth sought by the Managing Director (and in which he played a critical role in setting and controlling) effectively:
. prevented the development of the operational processes and procedures necessary for the prudent and orderly conduct of the Bank's affairs in a range of areas; and
. prevented the development within the Bank of the required degree of professional skills, expertise and experience necessary for the prudent and orderly conduct of the Bank's affairs, by depriving the organisation of structural and functional stability.
(vi) The continual and far-reaching upheavals of the structure, assumedly effected in order to enable it to meet the demands of a swiftly-expanding business, effectively prevented the development of both the infrastructure and the skills that would have assisted the Bank better to control the quality of its lending, and thus to limit the extent of unsafe and imprudent lending decisions.
(vii) The Managing Director displayed a level of managerial competence well below what was to be expected of one holding his office and responsibility, and earning his remuneration. It is incomprehensible that Mr Clark would choose to shape and reshape the organisation without any apparent regard to, or awareness of, the consequences of such decisions, and in spite of repeated warning signs regarding persistent infrastructural weaknesses. His actions were the result of an obsession with growth, and with profit-reporting, as ends in themselves.
20.7 REPORT IN ACCORDANCE WITH TERMS OF APPOINTMENT
I have investigated and inquired into matters relating to the manner in which the Board, through the activities of the Managing Director, managed the senior executive echelon of the Bank, as directed by Terms of Appointment A and C. Having regard to the evidence to which I have referred in this Chapter, and for the reasons set out in this Chapter, I hereby report that in my opinion:
20.7.1 TERMS OF APPOINTMENT A
(a) That the matters and events which caused the financial position of the Bank as reported by the Bank and the Treasurer in Public Statements on 10 February 1991 and in a Ministerial Statement by the Treasurer on 12 February 1991 included the inadequacy of the skill and expertise in banking matters of the staff and senior management of the Bank. More specifically:
(i) that the skills, experience and expertise necessary to manage the business of the Bank were lacking from critical areas such as Corporate and International Banking, and from those organisation of units within the Bank charged with financial planning and control;
(ii) that the skills of the staff of the Bank were inadequate for the efficient and successful conduct of the business of the Bank: for the conduct of that business having regard to the volume and the rate of growth demanded by the Managing Director and approved by the Board; and projected in the Strategic and annual Profit Plans of the Bank from time to time;
(iii) that widespread lack of banking skills, experience, and expertise led the Bank to enter into transactions which lacked intrinsic merit, and which were not appropriately reviewed for soundness and quality; and
(iv) that widespread lack of skill and expertise thus contributed to the Bank's position as declared in February 1991, and to the Bank's holding substantial assets which are non performing.
(b) That the processes which led 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, included the monitoring and review of the performance of senior executives (and consequently to the setting of their remuneration), and to their deployment in the organisation. These processes were neither appropriate nor adequate to ensure the effective guidance and control of these executives in the exercise of their duties.
20.7.2 TERM OF APPOINTMENT C
That the operations and affairs of the Bank were in the respects identified in this Chapter not adequately or appropriately supervised, directed and controlled by:
(a) the Board of Directors of the Bank; and
(b) the Chief Executive Officer of the Bank.
20.8 APPENDICES
METHOD OF RECRUITMENT
APPENDIX A
GROUP MANAGING DIRECTOR AND SELECTED SENIOR EXECUTIVES
| NAME | TITLE
(CURRENT OR MOST RECENT) |
START DATE | DIRECT APPROACH | ADVERTISED SELECTION | SEARCH | MORE THAN 10 YEARS SERVICE | ADDITIONAL COMMENTS | ||
| BY BANK | BY EMPLOYEE | BY BANK | BY CONSULT | ||||||
| Chin CM | CM Group Audit | 09/88 | Yes | John Clements Consultants | |||||
| Clark T M | Group MD | 02/84 | Yes | Spencer Stuart Consultants. | |||||
| Guille CW | Head of Group Risk Management | 08/86 | Yes | Following a secondment from RBA, was approached by Cordiner, King & Warburton to join. | |||||
| Hamilton MG | MD Financial Services Group | 07/89 | Yes | Mr Hamilton was interviewed by PA Consulting for "vetting" purposes. | |||||
| Hammond DR | Head of Group Asset Management | 12/88 | Yes | Employed by Security Pacific prior to takeover by the Bank. | |||||
| Hazel JT | CGM Financial Services | 10/84 | Recruitment method not on record | ||||||
| Kowalick IJ | GM Prudential Management | 08/89 | Yes | Following the liquidation of SAMIC, in which both Mr Kowalick and Mr Clark held directorships, Mr Clark offered Mr Kowalick a contract position within the Bank. | |||||
| Macky JB | CGM Group Management Services | 02/81 | Joined Savings Bank of South Australia from the ANZ. | ||||||
| Mallett TL | CGM Corporate and International | 11/84 | Yes | Mr Masters approached Mr Mallet to join the Bank. Both had been employed by ANZ. | |||||
| Masters DC | GM SA Corporate & International | 02/83 | Yes | Replied to an advertisement placed by the Savings Bank of South Australia. | |||||
| Matthews K | CGM Group Risk Management | 02/49 | Yes | Joined the bank in 1949. | |||||
| Matthews NL | CM Group Credit Secretariat | 05/89 | Yes | Selected by Cordiner King & Warburton. | |||||
| Meeking JA | CM International Treasury & Capital Markets | 06/87 | Yes | ||||||
| Morgan TC | CM Corporate & International Support | 08/88 | Yes | Replied to an advertisement placed by the Bank | |||||
| Mullins PF | GM National Corporate | 03/88 | Yes | Approached by Speakman Stillwell Consultants. | |||||
| Murnane J | Head of Bank Credit | 04/89 | Yes | Approached Mr Sewell about joining the Bank in New York. Both had been employed by ANZ previously. | |||||
| Ottaway GS | GM Retail Banking | 03/55 | Yes | Joined the bank in 1955. | |||||
| Paddison SG | Chief Operating Officer | 09/84 | Yes | Was known to the Bank through his consulting assignments while employed by Arthur Andersen. Mr Clark offerred Mr Paddison a contract position which subsequently became a permanent role. | |||||
| Rumbelow KP | CM Property | 01/53 | Yes | Joined the Bank in 1953. | |||||
| Stone SJ | CGM Retail Banking | 07/90 | Yes | Was known to the Bank through his employment with IBM. Dr Stone was approached by Mr Macky to join the Bank. | |||||
| Targett SC | Group Treasurer | 03/88 | Yes | Mr Targett was known to Mr Mallet. Mr Targett was identified by an unnamed search firm in London. | |||||
| Wright RL | CM Credit Inspection | 01/57 | Yes | Joined bank in 1957. | |||||
| TOTAL | 7 | 1 | 2 | 1 | 5 | 4 | |||
Appendix B
Recruitment Documentation Information
Group Managing Director and Selected Senior Staff
| Name | Letter of Offer/Terms and Conditions in Personnel File? | Psychological Assessment Report in Personnel File? | Curriculum
Vitae in Personnel File? |
Reference
Check in Personnel File? |
Board Minutes | More than 10 Years Service? | |
| Recruitment Noted | Recruitment Approved | ||||||
| Chin CM | Yes | ||||||
| Clark T M | Yes
(2 formal contracts exist, with Bank solicitors, although not held at the Bank in any files) |
Yes | |||||
| Guille CW | Yes | Yes | |||||
| Hamilton MG | Yes | ||||||
| Hammond DR | Yes | ||||||
| Hazel JT | Yes
04/88 |
Yes | Yes | ||||
| Kowalick IJ | Yes | Yes | Yes | ||||
| Macky JB | |||||||
| Mallett TL | Yes | Yes | |||||
| Masters DC | Yes | Yes | |||||
| Matthews KS | Yes | ||||||
| Matthews NL | Yes | Yes | |||||
| Meeking JA | Yes | Yes | |||||
| Morgan TC | Yes | Yes | |||||
| Mullins PF | Yes | Yes | Yes | ||||
| Murnane J | Yes | Yes | |||||
| Ottaway GS | Yes | ||||||
| Paddison SG | Yes | Yes | |||||
| Rumbelow PP | Yes | ||||||
| Stone SJ | Yes | Yes | Yes | ||||
| Targett SC | Yes | ||||||
| Wright RL | Yes | ||||||
| TOTAL | 10 | 2 | 15 | 0 | 1 | 6 | 4 |
APPENDIX C.1 INSERT FROM HARVARD GRAPHICS
APPENDIX C.2 INSERT FROM HARVARD GRAPHICS
APPENDIX C.3 INSERT FROM HARVARD GRAPHICS
APPENDIX C.4 INSERT FROM HARVARD GRAPHICS
APPENDIX C.5 INSERT FROM HARVARD GRAPHICS
APPENDIX C.6 INSERT FROM HARVARD GRAPHICS
APPENDIX C.7 INSERT FROM HARVARD GRAPHICS
Appendix D
Selected Senior Executives and Line Managers
Position History 1985-1991
(Effective June 30)
| NAME | 1985 | 1986 | 1987 | 1988 | 1989 | 1990 | 1991 | TOTAL STATE BANK
YEARS TO 30/06/91 |
| Abbott GD | Chief Manager
Group Human Resources (joined 01/08/88) |
General Manager
Group Human Resources (appointed 01/07/89) |
General Manager
Group Human Resources |
Executive Director Group Management Services Division | 3.0 | |||
| Byrnes PE | General Manager Corporate & International Banking | |||||||
| Chin CM | Senior Manager
Internal Audit |
Senior Manager
Internal Audit |
Chief Manager
Group Audit |
3.0 | ||||
| Copley KL | Chief Manager Finance and Planning (appointed 06/07/87) | Chief Manager Group Finance (title change 22/07/88) | General Manager Group Finance (appointed 01/07/89) | General Manager Group Finance & Administration (appointed 01/07/90) | General Manager Group Accounting | 4.0 | ||
| Dent RS | Chief Manager Marketing | Chief Manager Marketing | Chief Manager Marketing | Chief Manager Group Marketing | Chief Manager Group Marketing | General Manager Group Marketing | General Manager External Relations & Communications | 27.0 |
| Guille CW | Chief Manager
Personnel (appointed 28/08/86) |
Chief Manager
Personnel |
General Manager,
Managing Director Executor Trustee & Agency |
General Manager
Global Risk Management (actually appointed 01/07/90) |
General Manager
Group Risk Management (appointed 01/07/90) |
General Manager,
Group Risk Management |
5.0 | |
| Hamilton MG | Chief General Manager
Group Planning & Subsidiaries |
Managing Director
Financial Services Group |
1.5 | |||||
| Hammond DR | Chief Manager
New Zealand |
Chief Manager
New Zealand |
General Manager
Head of Group Asset Management |
2.5 | ||||
| Hazel JT | General Manager
Treasury & Capital Markets |
General Manager
Treasury & Capital Markets |
General Manager,
Managing Director Ayers Finniss Ltd |
General Manager,
Managing Director Ayers Finniss Ltd |
Chief General Manager
Financial Services (appointed 01/07/90) |
7.0 | ||
| Kowalick IJ | Chief Manager
Group Planning (appointed to Prudential Managment 02/05/90) |
Chief Manager
Prudential Management |
2.0 | |||||
| Macky JB | Chief Manager
Planning |
General Manager
Information Systems and Subsidiary Companies |
General Manager
Information Systems and Subsidiary Companies |
General Manager
Group Information Systems |
Chief General Manager
Group Management Services (appointed 01/07/89) |
Chief General Manager
Group Management Services |
10.0 | |
| Mallett TL | Senior Manager Corporate Finance | Chief Manager
International Banking |
Chief Manager
International Banking |
General Manager
Treasury & International Banking |
Chief General Manager
International Banking (appointed 01/07/89) |
Chief General Manager
International Banking |
Chief General Manager
Corporate & International Banking |
6.5 |
| Masters DC | Chief Manager
Corporate Banking |
Chief Manager
Corporate Banking |
Chief Manager
Corporate Banking |
General Manager
Corporate Banking |
General Manager
Corporate Banking |
General Manager
SA Corporate and Commercial Banking (appointed 01/07/90) |
8.0 | |
| Matthews KS | General Manager
Retail Banking |
Chief General Manager | Chief General Manager | Chief General Manager | Chief General Manager
Group Risk Management |
Chief General Manager
Group Risk Management |
41.0 | |
| Matthews NL | Controller
Credit Policy and Quality |
Chief Manager
Group Credit Secretariat (appointed 01/07/90) |
Chief Manager
Group Credit Secretariat |
2.0 | ||||
| Meeking JA | Senior Manager
Treasury and International |
Chief Manager
Treasury |
Chief Manager
Australian Treasury |
Chief Manager
International Treasury and Capital Markets |
3.0 | |||
| Morgan TC | Financial Controller | Financial Controller | Chief Manager
Corporate & International Support |
3.0 | ||||
| Mullins PF | Chief Manager
Corporate Banking |
Chief Manager
Corporate Banking |
Chief Manager
Corporate Banking |
General Manager
National Corporate Accounts |
3.0 | |||
| Murnane JE | Vice President
Corporate Finance, New York |
Vice President
Corporate Finance, New York |
Chief Manager
Head of Bank Credit |
2.0 | ||||
| Ottaway GS | Chief Manager
Finance |
General Manager
Corporate & International Banking |
General Manager
Corporate & International Banking |
General Manager
Group Service |
General Manager
Personal & Business Banking (appointed 01/07/89) |
General Manager
Retail Banking (appointed 01/07/90) |
35.0 | |
| Paddison SG | Chief Manager
Personnel |
General Manager
Retail Banking (appointed 01/07/86) |
General Manager
Retail Banking |
General Manager
Personal & Business Banking |
Chief General Manager
Australian Banking (appointed 01/07/89) |
Chief General Manager
Australian Banking (Director - Banking) |
Chief Operating Officer | 7.0 |
| Pfeiffer VR | Chief Manager Retail Lending | Chief Manager Retail Lending | Chief Manager Retail Lending | Chief Manager Retail Lending | Chief Manager Personal & Business Lending | Chief Manager Personal & Business Lending | 41.0 | |
| Rumbelow KP | Chief Manager
Administrative Services |
Chief Manager
Property |
Chief Manager
Property |
Chief Manager
Property |
Chief Manager
Property |
Chief Manager
Property |
38.0 | |
| Stone SJ | Chief Manager
Australian Banking Development |
General Manager
Personal & Business Banking |
1.0 | |||||
| Sewell R | Chief Manager Executive VP USA | Chief Manager Executive VP USA | Chief Manager Executive VP USA | Executive VP USA General Manager | 3.0 | |||
| Targett SC | Treasurer
London |
Treasurer
London |
Chief Manager
Australian Treasury |
General Manager
Group Treasurer |
3.0 | |||
| White GN | Chief Manager Personnel | Chief Manager Organisational Change | Chief Manager Organisational Change | 44.5 | ||||
| Wright RL | Chief Manager
London Office (appointed 01/08/85) |
Chief Manager
London Office |
Chief Manager
London Office |
Chief Manager
Institutional Banking |
Chief Manager
Institutional Banking |
Chief Manager
Project Leader Wholesale Credit Inspection Review |
Chief Manager
Credit Inspection |
34.0 |
| Zubrinich S | Senior Manager Human Resource Systems Development | Senior Manager Human Resource Systems Development | Senior Manager Personal Financial Services | Senior Manager Personal Financial Services | Senior Manager Personal Financial Services | Chief Manager Financial Services | 5.5 |
REMUNERATION SUMMARY - ACTUAL
APPENDIX E
YEAR ENDED 30 JUNE 1988
| NAME | PACKAGE | BONUS | UNUSED() BALANCE 30/06/87 | TOTAL | SALARY | SUPER'N | 1ST
MOTOR VEHICLE |
2ND
MOTOR VEHICLE |
HOUSING/
HOME LOANS |
INVEST.
LOANS |
PRIVATE
EXPENSES |
UNUSED
BALANCE 30/06/88 |
TOTAL |
| T M Clark | 318,334 | 318,334 | 139,167 | 92,000 | 11,167 | 37,000 | 9,000 | 31,010 | (1,010) | 318,334 | |||
| K L Copley | 113,750 | 113,750 | 68,250 | 10,238 | 6,508 | 1,429 | 752 | 5,707 | 20,481 | 385 | 113,750 | ||
| C W Guille | 105,000 | 12,000 | 1,134 | 118,134 | 63,000 | 24,600 | 5,530 | 8,775 | 6,115 | 8,301 | 1,813 | 118,134 | |
| J T Hazel | 175,000 | 5,000 | (1,495) | 178,505 | 105,000 | 21,518 | 5,530 | 2,328 | 783 | 39,294 | 4,052 | 178,505 | |
| J B Macky | 140,000 | 16,000 | 156,000 | 84,000 | 16,784 | 7,280 | 10,749 | 33,338 | 3,849 | 156,000 | |||
| T L Mallett | 125,000 | 6,000 | 131,000 | 75,000 | 14,478 | 5,000 | 11,460 | 7,405 | 16,046 | 1,611 | 131,000 | ||
| D C Masters | 125,000 | 37,000 | 162,000 | 75,000 | 21,200 | 5,550 | 3,184 | 6,907 | 3,999 | 30,199 | 15,961 | 162,000 | |
| K S Matthews | 150,000 | 12,000 | 228 | 162,228 | 95,000 | 26,750 | 8,000 | 8,998 | 4,586 | 12,219 | 6,675 | 162,228 | |
| G S Ottaway | 140,000 | 10,000 | 938 | 150,938 | 84,000 | 17,202 | 10,320 | 9,419 | 9,653 | 15,565 | 4,779 | 150,938 | |
| S G Paddison | 175,000 | 12,000 | 686 | 187,686 | 105,000 | 15,750 | 10,000 | 16,346 | 19,343 | 21,247 | 187,686 |
REMUNERATION SUMMARY - ACTUAL
APPENDIX E
YEAR ENDED 30 JUNE 1989
| NAME | PACKAGE | BONUS | UNUSED() BALANCE 30/06/88 | TOTAL | SALARY | SUPER'N | 1ST
MOTOR VEHICLE |
2ND
MOTOR VEHICLE |
HOUSING/
HOME LOANS |
INVEST.
LOANS |
PRIVATE
EXPENSES |
UNUSED
BALANCE 30/06/89 |
TOTAL |
| T M Clark | 420,833 | 48,750 | (1,010) | 468,573 | 195,101 | 131,269 | 12,000 | 37,000 | 9,000 | 103,757 | (19,554) | 468,573 | |
| K L Copley | 150,000 | 31,500 | 385 | 181,885 | 90,000 | 13,500 | 8,327 | 6,832 | 5,809 | 6,256 | 51,156 | 5 | 181,885 |
| C W Guille | 140,000 | 32,000 | 1,813 | 173,813 | 84,000 | 16,800 | 5,530 | 10,874 | 7,305 | 37,113 | 12,191 | 173,813 | |
| J T Hazel | 225,000 | 50,000 | 4,052 | 279,052 | 135,000 | 21,630 | 14,360 | 6,144 | 4,709 | 219 | 95,770 | 1,220 | 279,052 |
| J B Macky | 175,000 | 35,000 | 3,849 | 213,849 | 105,000 | 17,304 | 10,271 | 6,966 | 72,421 | 1,887 | 213,849 | ||
| T L Mallett | 180,000 | 33,500 | 823 | 214,323 | 108,000 | 15,450 | 6,050 | 13,898 | 6,321 | 29,595 | 35,009 | 214,323 | |
| D C Masters | 185,000 | 36,000 | 15,961 | 236,961 | 115,000 | 24,650 | 18,932 | 11,449 | 4,719 | 1,383 | 52,617 | 8,211 | 236,961 |
| K S Matthews | 175,000 | 38,000 | 6,675 | 219,675 | 110,000 | 23,715 | 10,668 | 5,516 | 44,829 | 24,947 | 219,675 | ||
| G S Ottaway | 180,000 | 39,000 | 4,779 | 223,779 | 108,000 | 17,304 | 10,320 | 11,076 | 3,778 | 72,584 | 717 | 223,779 | |
| S G Paddison | 225,000 | 50,000 | 21,247 | 296,247 | 135,000 | 20,250 | 10,000 | 14,332 | 8,988 | 70,855 | 36,822 | 296,247 |
REMUNERATION SUMMARY - ACTUAL
APPENDIX E
YEAR ENDED 30 JUNE 1990
| NAME | PACKAGE | BONUS | UNUSED() BALANCE 30/06/89 | TOTAL | SALARY | SUPER'N | 1ST
MOTOR VEHICLE |
2ND
MOTOR VEHICLE |
HOUSING/
HOME LOANS |
INVEST.
LOANS |
PRIVATE
EXPENSES |
UNUSED
BALANCE 30/06/90 |
TOTAL |
| T M Clark | 470,833 | 50,000 | (19,554) | 501,279 | 211,333 | 181,455 | 12,000 | 37,000 | 9,000 | 50,491 | 501,279 | ||
| K L Copley | 180,000 | 15,000 | 4 | 195,004 | 108,000 | 16,200 | 10,761 | 7,347 | 6,628 | 6,256 | 39,812 | 195,004 | |
| C W Guille | 180,000 | 20,000 | 12,191 | 212,191 | 108,000 | 21,600 | 5,530 | 12,280 | 7,617 | 57,164 | 212,191 | ||
| J T Hazel | 250,000 | 75,000 | 1,220 | 326,220 | 150,000 | 27,810 | 20,674 | 6,396 | 10,954 | 241 | 110,145 | 326,220 | |
| M G Hamilton | 275,000 | 275,000 | 165,000 | 110,000 | 275,000 | ||||||||
| J B Macky | 250,000 | 26,000 | 1,887 | 277,887 | 150,000 | 21,630 | 12,000 | 9,158 | 85,099 | 277,887 | |||
| T L Mallett | 250,000 | 18,000 | 35,009 | 303,009 | 150,000 | 22,866 | 14,145 | 21,288 | 7,707 | 87,003 | 303,009 | ||
| D C Masters | 200,000 | 8,211 | 208,211 | 120,000 | 25,528 | 21,836 | 11,985 | 28,862 | 208,211 | ||||
| K S Matthews | 200,000 | 15,000 | 24,947 | 239,947 | 160,000 | 13,280 | 10,420 | 4,500 | 51,747 | 239,947 | |||
| G S Ottaway | 200,000 | 16,000 | 717 | 216,717 | 120,000 | 22,248 | 9,614 | 12,349 | 5,097 | 47,409 | 216,717 | ||
| S G Paddison | 325,000 | 40,000 | 36,822 | 401,822 | 195,000 | 29,250 | 15,000 | 7,770 | 12,241 | 142,561 | 401,822 |