VOLUME THREE DIRECTION-SETTING AND DIVERSIFIABLE CREDIT RISK MANAGEMENT

CHAPTER 4
DIRECTION-SETTING AND PLANNING

TABLE OF CONTENTS

4.1 INTRODUCTION
4.1.1 THE PURPOSE OF THIS CHAPTER
4.1.2 RELEVANCE TO THE INVESTIGATION
4.1.3 THE PLAN OF THIS CHAPTER
4.1.4 INFORMATION SOURCES

4.2 THE STATE BANK'S PLANNING PROCEDURE
4.2.1 THE PROCEDURE ESTABLISHED BY THE BOARD OF DIRECTORS
4.2.2 THE STRATEGIC PLANNING AND BUDGETING PROCEDURE
4.2.3 THE BANK'S RELATIONSHIP WITH ITS SUBSIDIARIES
4.2.4 SUMMARY

4.3 THE CONTENT OF THE STRATEGIC AND PROFIT PLANS
4.3.1 THE BANK'S INTERPRETATION OF ITS CHARTER
4.3.2 THE BANK'S STRATEGIC OBJECTIVES
4.3.2.1 The Vision of the Bank's Future Position
4.3.2.2 The Bank's Business Development Objectives and Strategies
4.3.3 PLANNING FOR MANAGEMENT SYSTEMS, HUMAN RESOURCES AND CAPITAL ADEQUACY
4.3.4 SUMMARY

4.4 IMPLEMENTATION OF THE STRATEGIC PLANS
4.4.1 THE PROFIT PLANS
4.4.2 STRATEGIC MONITORING AND REPORTING
4.4.3 PLANNED GROWTH AND ACTUAL GROWTH
4.4.4 SUMMARY

4.5 FINDINGS AND CONCLUSIONS

4.6 REPORT IN ACCORDANCE WITH TERMS OF APPOINTMENT
4.6.1 TERMS OF APPOINTMENT A
4.6.2 TERM OF APPOINTMENT C

4.7 APPENDICES

A Divisional Responsibility for the Banks Strategic Planning Department
B Projected and Actual Total Assets of the Bank
C Projected and Actual Total Assets of the Bank Group

4.1 INTRODUCTION

As described in Chapter 3 - "Overview of the State Bank and of the State Bank Group", a striking feature of the Bank after its establishment in 1984 was its very rapid growth and diversification. The most significant aspects of that growth and diversification - having regard to the non-performing assets of the Bank - were the acquisition of subsidiary companies, and the growth of the loan portfolio, both in Australia and overseas.

Between 1 July 1984 and 30 June 1990, the total assets of the Bank increased by 543 per cent, from $2,690.6M to $17,299.8M (total assets of the Bank Group increased over the same period by 572.7 per cent, from $3,142.8M to $21,142.1M). The real increase in the Bank's total assets was in fact even greater, because in 1989 the Bank's portfolio of concessional housing loans was transferred to South Australian Financing Agency. Excluding that portfolio, the increase in assets of the Bank was 700.1 per cent - from $2,162.3M to $17,299.8M.

Of this increase in the Bank's assets, only $202.5M - 1.3 per cent - related to the acquisition of (and capital contributions to) subsidiary companies, although, as reported in Chapter 3 - "Overview of the State Bank and of the State Bank Group", 14 per cent of the Government's indemnity was used to offset losses in respect of the Bank's investments in subsidiary companies.

The growth in the Bank's assets was overwhelmingly related to the growth of the loan portfolio - from $1,202.9M to $11,123.6M, an increase of 824.7 per cent.

As important as the growth in the size of the loan portfolio was the change in its character. At the time of the establishment of the Bank on 1 July 1984, housing loans (including concessional housing loans) represented 62.5 per cent() of the Bank's loan portfolio. Excluding concessional housing loans, the housing loan portfolio was 46.1 per cent of the total loan portfolio. The loan portfolio of the Bank was almost entirely limited to exposures within South Australia. The Bank Group's loan exposures outside South Australia were substantially limited to those of Beneficial Finance, whose net receivables (totalling $464.5M) were spread across Australia, with 89 per cent being outside South Australia.()

By the end of 1990, the nature of the Bank's loan portfolio had radically changed.

The nature of the portfolio can be most clearly shown from an analysis of the Bank's interest earning assets as at 31 December 1990 prepared by JP Morgan in April 1991. By excluding those interest earning assets having a risk weighting of 20 per cent or less, the profile of the Bank's loan portfolio at 31 December 1990 (those assets involving substantive credit risk) was as follows:

Region/Exposure	Proportion of Loan Portfolio Per Cent	Proportion of Non-Performing Loans Per Cent
Australia:
Housing	14.7	2.0
Retail Personal and Business	13.0	13.0
Corporate	37.6	60.4

New Zealand:
Housing (United Banking)	7.6	1.2
Corporate	9.9	11.6

Other International:
Housing	0.5	-
Corporate	16.8	11.9
	100.0	100.0

As can be seen, the Bank's housing loans within Australia represented only 14.7 per cent of the loan portfolio by the end of 1990, and accounted for only 2.0 per cent of the Bank's non-performing loans. Foreign loans represented 34.8 per cent of the Bank's loan portfolio, and accounted for 24.7 per cent of non-performing loans. By far the worst performed sector of the portfolio was corporate loans within Australia, which represented 37.6 per cent of the portfolio, but accounted for 60.4 per cent of the Bank's non-performing loans.

The growth in the Bank's total assets, and the growth and changed profile of its loan portfolio, in particular, was associated with changes to the Bank's funding. Wholesale funds increased as a proportion of the Bank's total funds from 15 per cent in 1984, to 82 per cent in 1990(), and by 1990 the Bank had interest bearing deposits overseas totalling $2,214.7M.()

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

4.1.1 THE PURPOSE OF THIS CHAPTER

This Chapter examines the Bank's strategic and business planning procedures at the level of the formation of the strategic plans and profit plans that were submitted to the Board of Directors for its review, approval and monitoring. The implementation of the strategic and profit plans is the subject of review and comment in other Chapters of this Report that examines specific transactions that were entered into and procedures and processes that were adopted in the administration of the Bank's affairs.

In its broadest sense, strategic and business planning involves more than these planning procedures and documents, and extends to all activities of the Board and of Management which are instrumental to the planning, implementation and monitoring of the Bank's business activities. In particular, proposals and position papers prepared by Management were submitted to the Bank's Board of Directors from time to time regarding such matters as the development of business activities in the Bank's London office, the establishment of new offices interstate and overseas, and diversification through the acquisition of new subsidiary companies. The Board approved or confirmed all major loans made by the Bank. At the management level, divisional budgets were prepared, information systems evaluated and installed and human resource requirements evaluated and addressed - including the use of external consultants - in ways that were not necessarily fully described or documented in the formal planning papers submitted to the Board.

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

To put the matter another way, the functions of a board of directors of a bank, in my opinion, may be stated to be to:

(a) set goals for the corporation;

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

(d) monitor operations, ensuring adequate internal controls and compliance with applicable laws and regulations;

(e) oversee the plans of managers for the acquisition and organisation of financial and human resources towards attainment of the corporation's goals;

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

(g) to report to external stakeholders for the operations of the corporation by way of published accounts and reports.

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

Paying due regard to these considerations, it is nevertheless the case that the State Bank devoted considerable resources to a formalised procedure of strategic planning and budgeting, including the establishment of a specialised Finance and Planning division and Strategic Planning department. Further, the procedure for the Bank's planning and budgeting was established by the Board in June 1984 as the principal means by which the Board would set policy for the Bank, oversee the plans of management to attain the Bank's goals, and review the Bank's progress towards attaining its goals. The procedure established by the Board in 1984 was followed until the end of 1990. It was, therefore, an important aspect of the Bank's arrangements for planning the development of its business.

This Chapter describes the role of that procedure - a procedure established by the Board of Directors - in the planning, implementation, and control of the Bank's growth and diversification. As mentioned above other aspects of the business planning of the Bank - the details of the conduct of the Bank's activities - are described and evaluated in later Chapters of this Report.

4.1.2 RELEVANCE TO THE INVESTIGATION

The business planning of the Bank is clearly relevant to my Terms of Appointment. In particular, Term of Appointment A(b) requires me to investigate and report on:

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

Further, Term of Appointment C directs me to investigate and report:

"... 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 of the Bank;

(c) other officers and employees of the Bank;

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

As described in Section 4.1.1, this Chapter describes one particular aspect of the direction, supervision, and control, of the Bank, being the procedure established for the approval and supervision by the Board of Directors of the Bank's business planning. Accordingly, this Chapter does not, by itself, allow me to make conclusive findings regarding any of my Terms of Appointment, since any deficiencies in respect of the strategic planning procedure might conceivably have been compensated for by other aspects of the Board's and of Management's activities.

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

4.1.3 THE PLAN OF THIS CHAPTER

This Chapter addresses the following matters:

(a) Section 4.2: Describes the business planning, budgeting, and monitoring procedure, established by the Board of Directors in June 1984, and the principal features of the procedure as it operated from then until the end of 1990.

(b) Section 4.3: Describes the content of the Bank's strategic and profit plans. The Section describes the Bank's - the Board of Directors' and Management's - interpretation of the objectives of the Bank as set down in the State Bank Act. The Section then describes the key features of the Bank's strategic and profit plans, including the relationship with the Bank's subsidiaries.

(c) Section 4.4: Examines the implementation of the business plans, to the extent relevant to the strategic planning and budgeting procedure.

(d) Section 4.5: Conclusions and Findings.

4.1.4 INFORMATION SOURCES

Information presented in this Chapter was gathered from four sources:

(a) interviews with and submissions from management responsible for strategic and profit planning;

(b) interviews with and submissions from directors of the Bank and of Beneficial Finance as appropriate;

(d) strategic plans of Beneficial Finance.

The managers who were interviewed in relation to planning matters were:

(a) Dr M Wrzesinski - Manager, Strategic Planning;

(b) Mr I Kowalick - Former Chief Manager, Group Planning;

(d) Mr G Smith - Senior Manager, Operational Planning; and

(e) Mr C Guille - Former Acting Chief Manager - Planning.

The Managing Director and all surviving Non-Executive Directors (with the exception of Mr K Smith and Mr A G Summers) of the State Bank were interviewed in the context of the examinations conducted under my authority.

Listed below are the documentary sources scrutinised in relation to planning:

(a) The strategic plans, profit plans and annual reports of the Bank for each of the years in the period 1985-1990.

(b) Selected notes, meeting minutes and memoranda from the State Bank of South Australia -Savings Bank of South Australia merger advisory group.

(c) House of Assembly proceedings from the second reading of the State Bank of South Australia Act 1983 and debate thereon.

(d) Material given to participants for the 1987, 1988, and 1989, strategic planning conferences.

(e) Beneficial Finance strategic plans.

(f) Selected minutes of executive committee and Bank Board meetings.

(g) Minutes of meetings held with the Reserve Bank of Australia in 1989 and 1990 to identify any comments made by the Reserve Bank regarding the Bank's strategic directions.

(h) Monthly and quarterly operating reviews.

(i) Strategic implementation reviews prepared in 1987 and 1988 for presentation to the Bank Board.()

4.2 THE STATE BANK'S PLANNING PROCEDURE

4.2.1 THE PROCEDURE ESTABLISHED BY THE BOARD OF DIRECTORS

At its inaugural meeting on 28 June 1984, the Board of Directors of the new Bank considered the role of the Board in the governance of the Bank in general, and in the planning and budgeting process in particular. The Board approved the following description of the "Proceedings of the Board" as drafted by the Chairman, Mr L Barrett:

"... the role of the Board is as its name implies, viz a Board of Directors, and, in considering the proceedings of the Board, emphasis is to be placed on determining and directing matters of policy. The execution of this policy is the role of the Chief Executive Officer and the staff of the Bank.

The Board is not to be seen as a "rubber stamp" to endorse all actions and recommendations of Management without question. A procedure is to be developed by which the Board will be able to assess the efficacy of Management and control any delegation of its powers or functions." ()

At the same meeting, the Board approved procedures for the Bank's planning and budgeting, and for reporting to the Board in respect of the Bank's performance. The procedure prescribed by the Board, which was outlined in a document titled "Functioning of the Board of the New State Bank and Delegation of Powers to the Chief Executive Officer", was:

"Annually, about March, the Directors will be asked to approve a 5-year strategy plan. This would probably require the afternoon of a Board day and would focus on where the Bank wants to be 5 years from then. When the Board has discussed, amended and approved the 5-year strategy plan, Management would then start preparation of the annual profit plan for approval by the Board at the July Board Meeting (again a special afternoon should be set aside).

Each month the Board will receive an Operating Review detailing performance against budget with commentary as appropriate to indicate action that is being taken to correct areas behind budget. This Review will contain all key operating information necessary for the Board to supervise the Bank's operation.

Each quarter the Operating Review would be more expansive and would include a revised estimate of the annual profit result. However, the budget does not get altered. The budget agreed at the beginning of the year stays budget throughout the year, but the quarterly up-date estimates will indicate the latest thinking on year-end profit result." ()

The strategic planning and budgeting of the Bank in the years 1984 to 1990 followed this procedure. It involved the annual production of two documents for approval by the Board - a five-year strategic plan, and a profit plan or budget for the coming year.

4.2.2 THE STRATEGIC PLANNING AND BUDGETING PROCEDURE

Preparation of the five-year strategic plan was the responsibility of the Strategic Planning department, which was, from August 1985, headed by Dr Michael Wrzesinski (the department generally formed part of the Bank's Finance and Planning division - refer Appendix A).

The formal strategic planning process commenced in January, when the Manager of the Strategic Planning department consulted with members of the senior management team in order to draft initial planning documents. The Strategic Planning department also ensured that senior management of the Bank and of its subsidiary companies were provided with information papers which contained background information on the key external issues facing the Bank. These papers discussed issues such as the economic environment, possible strategies for the Bank, the strategies of competitors, and the outlook for key industries.

In March of each year, a two-day strategic planning conference was held, attended by the senior management from the Bank and from each of the subsidiaries. A draft of the strategic plan prepared by the Strategic Planning department was distributed to participants, together with background papers, to give the conference its focus. The conference was structured to allow discussion, within working groups, of the strategies to be adopted by each division of the Bank over the next five years. After the conference, the Strategic Planning department prepared a draft of the strategic plan, and submitted it to the Executive Committee for review and approval, before it was submitted in final form to the Board of Directors for its review, amendment, and approval.

Typically, the strategic plans were presented to the Board at its March meeting by the Manager of the Strategic Planning department and the Chief Manager of the Finance and Planning division. In 1986 and 1987, all General Managers of the Bank attended the Board meeting at which the five-year strategic plan was discussed and approved.

The formulation of the strategic plan, its purpose, and its place in the planning process, was summarised by Mr T M Clark in a memorandum, dated 27 March 1986, to the Board of Directors in respect of the 1986 strategic plan (for the 1987-1991 financial years):

"Recommendation

The attached 1986 Strategic Plan, showing where State Bank Group will be in 1991 is recommended to the Directors for approval.

Discussion

The purpose of the Strategic Plan is to take a look into the future (in our case, 5 years) and decide if we like the results that our current policies and procedures are likely to produce.

The plan has been compiled by Manager - Strategic Planning, Michael Wrzesinski, and his team, and has considerable input from all department heads. A summary of the planning document is attached.

The plan was discussed in detail with the Managing Director, and then was the subject of a two day seminar attended by all Chief and General Managers of the Bank, and representatives of Beneficial Finance, Executor Trustee and Day, Porter.

After discussion by the Board, and amendments as agreed, we would like the approval of the Board to the Plan.

Strategic Planning will then prepare guidelines which will be handed out to each division of the Bank, from which they will be asked to frame their profit plan for the next year. Thus, we would hope to bring to the Board at the July meeting, a Profit Plan within the context of the Strategic Plan."

Once the strategic plan had been endorsed by the Board, it was communicated to the Bank's various divisions to enable them to prepare their plans for the coming year. As recorded in the Minutes of the Board of Directors' meeting, held on 27 March 1986, at which the 1986 strategic plan was endorsed:

"Planning guidelines will emanate from the approved Strategic Plan advising each division of the Bank the expectations to be placed on it in achieving the Bank's overall profit and strategic objectives." ()

Copies of the strategic plans approved by the Board were also sent to the South Australian Treasury, and to the Reserve Bank.()

The most important planning guidelines issued to the divisions and subsidiaries were the so-called "strategic programs". Strategic programs were specific actions or tasks to be undertaken by particular divisions and subsidiaries toward meeting the strategic objectives of the Bank as stated in the strategic plan. A "strategic programs supplement", dated April 1986, prepared by the Finance and Planning division, stated:

"This document heralds the first phase of the implementation of the 1986-1991 strategic plan. The implementation phase is the most important and most difficult aspect of the strategic planning process.

The overall strategic plan was approved by the Board of Directors. Major initiatives outlined in the document have been translated here into specific action programs to be implemented over the next five years.

At an earlier stage the document was discussed at the Strategic Planning Seminar and in ensuing individual discussions and was modified accordingly. The senior management team have therefore expressed their commitment to the strategy and to carry out the strategic programs.

This plan is intended to be flexible. Its progress will be monitored by the Finance and Planning department in order to ensure successful implementation."

The 1988 Strategic Plan stated, in respect of "strategy implementation", that:

"Strategic Planning has been recognised to be more than an annual Strategic Planning Conference. Consequently, strategic issues will be dealt with and acted upon at the Executive level throughout the year on a regular basis.

The translation of this Strategic Plan into action is being pursued by Strategic Programs. Currently, 47 major Strategic Programs are in place. Each Bank Division, subsidiary and affiliated company has developed a set of appropriate programs. These programs outline the responsibility, cost and deadlines for a course of action to implement the strategy." ()

The principal planning document for the implementation of the strategic plan over the coming year was the profit plan. The profit plans were the annual business plans of the Bank, and detailed the budgeted levels of income and expenditure, and other essential budgetary items, for the coming financial year.

The profit plans were compiled by aggregating the annual budgets prepared by the Bank's various divisions and subsidiaries. As described by Mr Clark, in his memorandum, dated 18 July 1986, submitting the profit plan for the 1987 financial year to the Board of Directors:

"The Profit Plan has been prepared by the Planning Department after extensive consultation with all areas of the Bank:

- Branch Plans for Deposits, Assets, Income & Expenses have been collated and considered. In most cases balances used are in line with Branch Plans.

- All Departments have submitted detailed expenditure and, where appropriate, revenue budgets for the year.

- All Departments have had ample opportunity to review the Plan."

The most important aspect of the profit plans, at least for present purposes, is that - as described by Mr Clark in his 18 July 1986 memorandum - they were based on the detailed expenditure and revenue budgets of all divisions and subsidiaries. The plans were, therefore, a critical manifestation of each division's implementation of the strategic programs, especially as they related to the establishment of the vital internal management systems and human resources of the Bank. Implementing the strategic programs clearly had budgetary implications in terms of the commitment of management and staff resources, and of recurrent and capital expenditure. The profit plans, therefore, constituted an essential and integral step in the implementation of the Bank's strategic plans.

Responsibility for compiling the profit plans lay with the Finance and Planning division, but not specifically with the Strategic Planning department. In 1988, a separate department called "Operational Planning" was given responsibility for managing the preparation and monitoring of the profit plans.

Like the five-year strategic plans, the profit plans were submitted first to the Executive Committee for approval. Finalising the profit plan sometimes entailed a number of revisions of divisional and subsidiary budgets. Mr Clark informed the Board in 1986, in his memorandum recommending approval of the profit plan for the year ended 30 June 1987, that:

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

Although the plan was described by Mr Clark as "stretching and challenging", Mr Clark assured the Board that "management believes it is achievable ... top management and I are committed to its achievement, and it is recommended to the Board for approval".

Similarly, Mr Clark's memorandum to the Board of Directors in July 1988, recommending approval of the profit plan for 1989, informed the Board that:

"The 1988/89 Strategic Planning Conference, held in March this year, set a Group profit objective of $85.5M for 1988/89 ... Establishment of the 1988/89 profit target has not been easy. Management has been very guarded about committing to a profit which they would consider unachievable. The first cut of the Profit Plan produced a profit of $24M ... and a Group profit of $54M. All members of the Group were requested to rebuild their budgets with a profit objective in mind. The second cut result was $73M Group, $42M Bank. Again this unacceptable result was returned to divisions and departments. A profit objective for 1988/89 has been set at $97.3M Group, $65.8M Bank ... The Management team is fully committed to the achievement of $97.3M as a minimum Group profit target for 1988/89 and it is with this reassurance that I recommend this Plan to the Board for acceptance and approval."

The profit plans were presented to the Board of Directors in July each year, the first month of the budgeted financial year.

Regular reporting to the Board of Directors of the Bank's performance in implementing elements of the strategic plans was largely limited to the Bank's profitability as against that budgeted in the profit plans. As required by the Board of Directors at its meeting on 28 June 1984, the Board received monthly and quarterly operating reviews, which detailed operating performance against that budgeted in the profit plan. Although the quarterly operating reviews did provide a brief narrative of the current activities of the various divisions, the reviews were not intended to provide detailed reports on the implementation of particular strategic programs.

Some attempts were made to provide more extensive monitoring reports to Management and to the Board of Directors in respect of the implementation of the strategic plans. The strategic plan presented in March 1986 contained a brief summary of the "status of 1985 strategic programs"(), and the profit plan which was approved by the Board in July 1986 stated that a half yearly audit and assessment of "current strategic plan initiatives" was to be initiated. Strategic monitoring reports were to be carried out by the Strategic Planning department and submitted to the Executive Committee and the Board. The profit plans for the 1988 and 1989 financial years also provided for the strategic audit reports to be provided every six months.

A review of Board Papers indicates that only two strategic monitoring reports were given to the Board, on 26 November 1987 and 28 April 1988.() The profit plan for 1990 abandoned the half yearly reports in favour of more regular reporting to management. It stated that:

"Strategic Monitoring will be performed continuously throughout the plan year ... Position papers, environment scenarios and gap analysis papers will be presented to management on a regular basis to generate awareness of and assist in addressing critical issues." ()

4.2.3 THE BANK'S RELATIONSHIP WITH ITS SUBSIDIARIES

This Chapter examines particularly the Bank's own business planning and budgeting. The business planning of Beneficial Finance is to be described in a later report. As described in Chapter 3 - "Overview of the State Bank and of the State Bank Group" of this Report, the business activities of the Bank's other subsidiaries has not been examined in detail, since they are not material to the losses of the Bank and Bank Group. The significance of those subsidiaries lies in the processes which led the Bank to acquire them, and this issue has been examined in two specific case studies in this Report in Chapter 17 - "Case Study in Acquisition Management: The Oceanic Capital Corporation" and Chapter 18 - "Case Study in Acquisition Management: The United Building Society".

An important aspect of the Bank's strategic and profit plans was, however, the strategies and budgets of the subsidiary groups. Indeed, from 1987 the strategic plans were called the "Group Strategic Plans". The Bank's strategic plans also dealt with issues regarding the integration of the various companies comprising the State Bank Group, and established strategic programs intended to better co-ordinate the Group's activities.

The relationship between the Bank and its subsidiary companies can be described as one of co-operative independence.

The Bank exercised control over its subsidiary groups by appointing its own representatives - directors of the Bank including the Chairman and the Managing Director, and a Bank executive - to the Board of Directors of the subsidiary companies. For example, at its meeting on 28 June 1984, the Bank's Board of Directors appointed a Board of Directors for Beneficial Finance which comprised ten directors, five of whom represented the Bank - Mr Barrett, Mr Clark, Mr D W Simmons, Mr R P Searcy and an executive of the Bank, Mr K S Matthews. It expressly appointed Bank representatives to the Beneficial Board "to ensure the new Bank control of the operations of" Beneficial Finance.() It was the Bank's policy that its Chairman was also the Chairman of the Board of Directors of subsidiary companies.

Within the limits of the control exercised by the appointment of Bank representatives to the Boards of the subsidiary companies, the subsidiaries essentially operated as semi-autonomous business units, with their own management and strategic objectives. The subsidiaries set their own policies, and prepared their own strategic plans and budgets, details of which were included as discrete sections of the Bank's strategic and profit plans. The subsidiaries' budgets were, however, subject to review by the Executive Committee of the Bank.

Co-operation and communication between the Bank and its subsidiaries at an executive level was assisted by the appointment of Mr J A Baker, the Managing Director of Beneficial Finance, to the Executive Committee of the Bank, and of a Bank executive to the Executive Committee of Executor Trustee. Executives from the Bank's subsidiaries attended the strategic planning conferences of the Bank, and representatives of the Bank attended those at least of Beneficial Finance.

The co-ordination of the business activities of the Bank and its various subsidiaries was a recurrent objective of the Bank's strategic plans. The 1985 strategic plan proposed, as a "five year strategic objective", the "full integration of management planning, joint product development and subsidiary cross selling cross referral activities". That plan also proposed the establishment of limits on the size of the Bank's subsidiaries relative to the Bank itself. The recommended limits were:

". Beneficial Finance; receivables no greater than 20% of total bank assets;

. Other subsidiary operations no greater than 10% (total) of total bank assets."

The plan noted that although the Bank's subsidiaries were in a healthy financial position, and required little management support from the bank, "some product rationalisation is definitely required as competition does exist in some areas". In respect of Beneficial Finance, in particular, the plan noted that an:

"... important part of integrating Beneficial successfully with the Bank will revolve around programs to ensure that activities such as product development are performed on a complementary basis ... Careful management will be required in ensuring that Beneficial does not provide an unwelcome level of internal competition." ()

Among the strategic programs described in the 1985 strategic plan were plans for the "integration of subsidiaries and maximisation of cross-selling advantages", and for the development of a centralised group treasury function.

The 1986 strategic plan established integration of the business of the Bank Group as a key strategic objective. It was acknowledged that effective integration of business activities would have "an impact upon the Group's success in achieving long term business and profitability growth". The important requirements were identified as being the improvement of communication and information flow within the Group, and the establishment of more stringent performance evaluation criteria for the subsidiaries. Functions which were to be shared included:

(a) product cross-selling;

(b) Treasury and money market operations;

(d) strategic planning;

(e) market research;

(f) human resources training and development;

(g) corporate image promotion; and

(h) computer resources.

The plan included an extensive inventory of the services provided by each member of the Bank Group, identifying where there was potential for competition between group members. The 1986 strategic programs included actions intended to develop the business relations between the Bank and Beneficial Finance, including the development of "joint products and packages in the mortgage, leasing and commercial lending markets". A "subsidiaries task force"() was established to improve co-ordination between the members of the Bank Group in "areas such as product management (cross-selling), advertising and publicity, corporate image etc".() Up to March 1986, the task force had "concentrated mainly on organising cross selling programs." ()

The 1987 strategic plan (for the financial years 1988-1992) again identified the need for the "efficient integration and co-ordination of business operations of individual Group members", which would "initially ... involve a clear determination of Group members' roles in different market areas". The 1988 plan emphasised a form of co-operative independence, "creating a Group culture that allows each Group member to realise their full potential with a view to maximising the Group benefits".

A review of the minutes of the meetings of the Board of Directors of Beneficial Finance, and of that company's strategic plans, shows that there was a significant degree of communication and co-operation between Beneficial Finance and the Bank at a management level. Beneficial's strategic plans, in particular, cited the company's role in meeting the strategic objectives of the Bank as one of Beneficial's objectives, and the minutes of the Beneficial Finance Board of Directors held on 29 September 1988 record that:

"The possibility of future conflict between members of State Bank Group because of the similarity in business activity and the likelihood of confusion in the market was discussed. A committee of senior representatives of Beneficial, State Bank and Ayers Finniss was to be formed to consider the issues and to work out a strategy based on the good intentions of all parties for the overall benefit of the Group."

Nevertheless, the Bank's subsidiaries continued to pursue their own business objectives, within the discretion of their own management. The 1989 Strategic Plan reported in respect of "Group Efficiency - Growth with Profitability" that:

". Some overlap in markets already served by other Group members will be tolerated in the interests of overall Group-wide market penetration and Group efficiency.

. The Group will be viewed as a set of Business Units comprising both subsidiaries and separate Bank divisions.

. Each Business Unit will maintain a high degree of autonomy and authority for independent action. This autonomy will be always subject to final leadership and control by the Board of the Bank.

. All major issues, strategies, acquisitions, etc, will be governed by the overriding responsibility of the Bank for the management and control of the global Group Risk exposure.

. Without prejudice to individual autonomy, Group members should co-ordinate their activities, whenever possible, to maximise Group effectiveness and financial performance. This will be sought in particular on issues such as:

- Core values

- Commitment to service excellence

- Accounting standards

- Personnel management

- Technology

- Marketing."

4.2.4 SUMMARY

The important features of the formal procedure of strategic planning and budgeting used by the Bank have been:

(a) The procedure was established by the Board of Directors in June 1984 as an important aspect of the Board's performance of its function of setting policy, overseeing Management's plans, and reviewing the progress of the Bank towards its objectives.

(b) The procedure leading to the formulation of each year's business plan, in the form of the profit plan submitted to the Board in July, was extensive, stretching over seven months. It involved a specialised planning department; a two-day management conference attended by the senior managers of the Bank and of its subsidiaries; preparation of a five-year strategic plan that was reviewed by both the Executive Committee and the Board; the issue of planning guidelines for preparation of detailed budgets by all the Bank's divisions and subsidiaries; and compilation of those budgets into the profit plan that was reviewed by the Executive Committee, before being submitted to the Board for approval. All senior managers had ample opportunity to contribute to the Bank's business planning. Of course the Board had the prime responsibility for strategic and consequently profit plans, but the Directors were entitled to regard the strategic and profit plans produced for this approval as carrying the weight properly to be ascribed to them in the circumstances. The circumstances were such, in my opinion, to place the Board on notice that the implementation of the planning process was difficult.

(i) all senior managers had been involved in discussing and reviewing the strategic and profit plans; and

(ii) all senior managers were "firmly" or "totally" committed to the achievement of the profit plans.

The memorandum dated 18 July 1985 from Mr Clark to the Board recommending adoption of the profit plan for 1986 was typical:

"All Chief Managers of the Bank have studied the Plan and debated it at length. Considerable amendments have been made to reflect comments and discussion.

The Executive of the Bank is firmly committed to the achievement of this Profit Plan and I recommend the Plan to the Board for approval."

(d) The Board of Directors was also informed, in the 1988 Strategic Plan, that each division and subsidiary had "developed a set of appropriate programs" to implement the strategic objectives identified in the strategic plans.

(e) The Bank's strategic and profit plans included the plans of its subsidiary groups. The Bank ensured control of its subsidiaries by appointing representatives to the Boards of the subsidiary companies. The subsidiaries were, however, responsible for development of their own strategic and business plans, details of which were included in the Bank's planning documents.

4.3 THE CONTENT OF THE STRATEGIC AND PROFIT PLANS

Although the format of the strategic plans varied to some extent over the period, they generally included the following information:

(a) the Bank's mission statement;

(b) a description of the Bank as it was intended to be in five years time;

(d) an assessment of the economic and business environment in which the Bank would have to operate;

(e) an assessment of the threats and opportunities facing business units;

(f) particular strategic objectives of the Bank which would ensure that it achieved its preferred position;

(g) a description of particular strategic programs to be implemented by the various divisions and subsidiaries to ensure that the strategic objectives were met; and

(h) financial projections of assets, liabilities and profitability over the five year period.

The profit plans were, of course, focused on the ensuing year. The profit plans generally included:

(a) a summary of the outlook for the economy, and the banking industry, over the coming year;

(b) a description of the business strategies to be pursued by the Bank's divisions and subsidiaries over the year;

(c) detailed financial forecasts of income, expenditure, assets and liabilities, performance targets and interest rate sensitivity analyses; and

(d) a description of the monitoring process to be followed in respect of the Bank's performance.

4.3.1 THE BANK'S INTERPRETATION OF ITS CHARTER

An essential aspect of the strategic and profit planning of the Bank is the Bank's interpretation of its charter as set down in the State Bank of South Australia Act, 1983 ("the Act"). That Act operates, among other things, essentially as the Bank's Memorandum and Articles of Association, both in broadly specifying the arrangements for the governance of the Bank, and in stating the Bank's objectives.

Section 19 of the Act provides that the Bank "shall carry on the general business of banking", and vests the Bank with all such powers as are necessary for that purpose. Sub-section 19(2) expressly provides that the business may be carried on both within and outside South Australia.

The particular objectives of the Bank in the conduct of its banking business are stated at sub-sections 15(1) and (2) of the Act, in the form of directions to the Board of Directors regarding the exercise of its powers in the administration of the Bank's affairs. These objectives are both commercial - to administer the Bank's affairs "with a view to achieving a profit" - and non-commercial - to act with a view to promoting "the balanced development of the State's economy" and the "maximum advantage to the people of the State", paying "due regard" to the importance to each of the "availability of housing loans". Also of importance is the requirement that the Board shall administer the bank's affairs in accordance with accepted principles of financial management and with a view to achieving a profit.

A review of the minutes and correspondence of the Merger Advisory Group, which advised the Government on the formation of the new Bank and was an important influence in drafting the Act, and of the Hansard report of the Parliamentary debate accompanying the introduction of the Act, shows that it was expected that the Bank would operate first and foremost as a commercially competitive financial institution. The Merger Advisory Group stated in a paper dated 17 October 1983 titled "Draft Legislation: The Competitive Position of the New Bank" that it favoured structuring the Bank along "mostly commercial" lines because:

"- It will require the Bank to be more entrepreneurial;

- It will impose a stronger commercial discipline on the Board and Management;

- At the same time it ensures that community interests are not entirely discarded as a factor in decision making, and Government is left with an opportunity to influence the Bank's policies;

- It will give the Bank the best possible structure with which to grow and at least maintain its position in the increasingly competitive environment."

In his second reading speech in respect of the State Bank of South Australia Act, 1983, the Premier and Treasurer, the Honourable J C Bannon, stated that the Bank would have wide powers in relation to financial transactions. He expressed the view that the Government was determined to ensure that the Bank would have "the flexibility necessary to operate effectively in a rapidly changing financial environment", and envisaged that it would be "an engine of economic growth". The then Leader of the Opposition, Mr J Olsen, who supported the Act, described the many areas in which the new Bank could compete, including corporate banking, loan syndication, investment services and portfolio management. The tone of the debate was optimistic about the opportunities for an expanded range of services to be provided by the new bank. Mr J C Bannon said that the geographic operation of the Bank was to be "a matter for judgement of the Board", which while it was to be exercised within the parameters of Section 15 of the Act, was to be "done on a commercial basis".

It was entirely appropriate that the Bank's Board of Directors and Management, subject to its statutory limits, should have regard to the view of the Merger Advisory Group, and of the Parliament, in setting the objectives for the new Bank. Reference to such documents is, after all, available to the Courts in determining the meaning of legislation.

The Bank's strategic plans and profit plans, prepared by Management and approved by the Board, placed particular emphasis upon the need for the Bank to be commercially competitive and profitable - not only because sub-section 15(2) required it, but also as a means of enabling the Bank to fulfil the non-commercial objectives of sub-section 15(1).

The Board's and Management's interpretation of the Bank's charter did not ignore the Bank's social obligation to the economy and people of South Australia, but rather it regarded the competitive strength and profitability of the Bank as being essential pre-requisites to the fulfilment of those obligations. The Bank's interpretation of the charter contained in sub-sections 15(1) and (2) of the Act can be fairly summarised as follows:

(a) The principal requirement of the Bank was that it operate as a competitive, commercial financial institution with a view to earning a profit operating in compliance with accepted principles of financial management and the terms of the Act generally.

(b) The objectives of promoting "the balanced development of the State's economy" and "the maximum advantage to the people of the State" were to be achieved, in part, by maximising the financial strength and profitability of the Bank.

(c) The commercial imperative was to be balanced by a sense of social responsibility to South Australia, particularly in regard to housing loans. The Bank's social responsibilities could not be met, however, unless the Bank was commercially successful.

This interpretation of the Bank's objectives found its clearest expression in the Bank's 1989 Annual Report. In a "Message to our Owners", the Chairman and Group Managing Director stated:

"In 1983, both major political parties in South Australia supported a decision to launch State Bank with a commercial charter - a mandate to operate under accepted principles of financial management with a view to achieving a profit.

It was agreed the charter would be balanced by a sense of social responsibility to the Bank's South Australian home base, particularly in regard to housing."

The expansion and diversification of the Bank to become a "regional bank in Australasia", pursuing "profitable opportunities in global markets by developing as a niche player in key financial centres such as New York and London", was perceived as important to providing the Bank with the capacity to meet its social obligations. The 1989 Annual Report stated that the Bank's ability to provide low-cost housing loans was possible:

"... because of the great financial strength it possesses from pursuing a commercial charter. Under this constitution, the Bank has generated growth and profits from a wide range of operations in many different markets.

Activities by the Bank and its subsidiaries, such as corporate lending, merchant banking and funds management, provide the strength to make home lending decisions which, in periods of high interest rates, are often more social than commercial in nature."

The Board did give express consideration to the pursuit of the non-commercial objectives specified in sub-section 15(1). For example, the minutes of the Board of Directors' meeting held on 28 March 1985, at which the first five-year strategic plan was reviewed and "approved in principle", record that:

"Concern was expressed that the Plan did not establish guidelines relating to the role the Bank would take in the development of South Australian enterprises, particularly in regards to venture capital and investment in equities. It was also suggested that the Bank should formulate a policy to protect the ownership of viable South Australian owned companies.

It was agreed that management would consider the role of the Bank in regard to developing new enterprises and protecting viable South Australian companies. A policy paper was to be prepared and submitted to the next Board meeting." ()

Similarly, the 1988 Strategic Plan (for the financial years 1989-1993) noted that, being "a commercially-oriented organisation with social responsibility", it was important that Management and the Board "carefully evaluate and cost that responsibility", particularly in the areas of lending for housing, branch banking and the provision of high-cost customer services.() The plan affirmed that the Bank's "economic and social commitment to South Australia will continue to be paramount." ()

Nevertheless, the Bank's profitability and growth was seen as being the key to meeting the objectives of the Bank as set down in the State Bank of South Australia Act, 1983. The 1986 Strategic Plan stated that "profitability growth will be particularly crucial in the coming years", and the 1987 plan cited four reasons why profitability growth was to be a key objective:

(a) The Bank "bears a responsibility towards the State to provide the State Government, as shareholder, with a steady and growing stream of income, distributed through taxation and dividends. It is the expectation of the Government that it will be assured a satisfactory return on its capital investments."

(b) "It is necessary for the Bank to become highly profitable and to continually expand in order to remain competitive, and in order to provide the Bank's customers with increasing levels of service and product quality."

(c) "Retained profits are required to build up the capital base, and to invest in equipment, improved computer facilities, branch refurbishment etc."

(d) "The Bank's ability to provide increased benefits to its own staff (rewarding levels, career opportunities etc) also depends upon its capacity to generate growth and profits." ()

The minutes of the Board meeting held on 26 November 1987, at which the first strategic audit report was received, record that one area identified by the audit as "requiring attention" was that the Bank's:

"Staff still see the Bank's objectives more strongly in the terms of broad social responsibility rather than achieving high levels of profitability and financial performance."

4.3.2 THE BANK'S STRATEGIC OBJECTIVES

4.3.2.1 The Vision of the Bank's Future Position

The first strategic plan for the new Bank was submitted to the Board at its meeting on 24 March 1985, for the financial years 1986-1990. The minutes of that meeting record that the Board resolved that "the objectives and aims contained in the 1985 Strategy Plan be approved in principle". The Plan proposed that, by 1990, the Bank would be (among other things):

(a) "... a broadly diversified financial services organisation dominating the financial services industry in South Australia".

(b) "... meeting all retail, commercial and corporate banking needs of a customer base that is between 30-40 per cent of the total South Australian market in all major segments of that market and 50 per cent of the housing market providing that it remains acceptable banking business".

(c) "... offering a range of personal and business services such as investment advice, insurance services, business advice etc. through a range of mechanisms including direct service, agency arrangements, and subsidiary referrals".

(d) "... represented widely in South Australia and the Northern Territory and all Australian capital cities through the offices of our subsidiaries. Overseas representation will include as a minimum a major branch in London and representative offices in Asia and the United States."

(e) "... acting as a centre of a group of autonomously profitable financial subsidiary organisations who share common objectives, deliver complementary services and who are able to exchange information, staff, opportunities, resources and customers in a controlled and effective way".

(f) "... achieving profitability levels approximately 70% of the National Operating Banks in our core banking business and our subsidiaries achieving profit levels within the top 20% of the institutions in their business area".

In respect of the final objective, the Board Minutes record that:

"As segmentation of the various market shares was not possible until the following year, the objective of achieving a profitability level of 70 per cent of the NOBs could not be supported statistically and it was proposed that the profitability objective be amended to a `level appropriate to the profits achieved by the NOB's'." ()

The strategic plan projected that, by 1990, the Bank would have total assets of $7,325.0M, capital of $367.0M, and would earn a profit before tax in 1990 of $54.1M. Group assets were projected to be $8,640.0M, and Group profit before tax, $69.9M.

Subsequent strategic plans provided similar, though updated, visions of the future Bank and Bank Group. The 1986 Strategic Plan (for the years 1987-1991) proposed in March 1986 that:

"By 1991 the State Bank Group will be a broadly diversified yet largely integrated financial services organisation which dominates the South Australian finance industry. It will have a large customer base in all major market segments in South Australia and a general presence in Australia ...

Corporate/Wholesale and Overseas Assets will by far exceed Retail Banking assets by 1991. This will entail a major regrouping of the Bank's asset composition ...

The Group will have representation in selected offshore markets, in order to service the needs of larger corporate clients, and to gain access to offshore capital markets and funding sources. The Bank will also be represented directly interstate in Sydney and Melbourne, and possibly Brisbane, as well as through the networks of its subsidiaries." ()

The plan updated the projection of the Bank's total assets as at 30 June 1990 by 33.4 per cent - $2,447.6M to $9,772.6M - and projected that, by 1991, the Bank's assets would total $11,436.1M (Group assets $12,998.4M), and profit before tax would be $86.4M (Group profit $119.0M).

Similarly, the 1988 Strategic Plan projected that:

"By 1992/93 State Bank Group will be a diversified, well-performing financial services provider. It will have maintained its position as the seventh-largest financial institution in Australia while actively seeking to improve this ranking. The Group will remain SA-based, although it will have expanded significantly into selective interstate and overseas markets.

A further diversification thrust will be to develop/strengthen the broad range of financial services provided by the Group, including funds management, unit trusts, venture capital, insurance products, and possibly computer services, travel, equity positions, commodity and futures trading and property development".

The 1988 plan projected that, by 1993, the Bank's total assets would be $15,390.5M (Group assets $18,661.4M), and profit before tax in 1993 would be $120.5M (Group profit $166.6M). The 1988 plan projected the Bank's total assets as at 30 June 1990 would be $11,264.7M, and Group assets would total $13,497.7M.

4.3.2.2 The Bank's Business Development Objectives and Strategies

While the projected nature of the Bank described in the strategic plans remained consistent as a diversified financial services group, with offices and operations both interstate and overseas, and with corporate loans and overseas assets exceeding retail banking assets, the particular objectives and business strategies proposed in the strategic plans changed in emphasis over the period.

1984

The first planning document submitted to the Board of Directors was the profit plan for the year ended 30 June 1985, which was reviewed and approved by the Board at its meeting on 23 August 1984. The plan, which was described in a covering memorandum from Mr Clark as being "ambitious" and requiring "considerable effort for its achievement", stated that in preparing the plan "the general philosophy adopted has been that the Bank will lend as much money as borrowers seek, provided it is at market rates of interest. Therefore in the asset class "Loans" the Plan is based on an agreement as to what is the maximum level of lending likely to be achieved." The plan targeted a 27.8 per cent increased in commercial loans in the form of overdrafts and fully-drawn advances, an objective described as a "most challenging planned level". Total loans were budgeted to increase by 25.1 per cent (excluding concessional housing loans - the budgeted increase inclusive of concessional housing loans was 20.1 per cent), and total income earning assets were budgeted to increase by 11.9 per cent. The Bank's profit before tax in 1985 was budgeted to be $22.0M.

In fact, total assets of the Bank increased by 27.5 per cent in the year ended 30 June 1985, and loans (excluding concessional housing) increased 53.3 per cent. The Bank's profit before tax was $28.1M, 27.7 per cent better than budget.

1985

The first strategic plan submitted to the Board of Directors was the 1985 plan (for the financial years 1986-1990), which was "approved in principle" at the Board's March 1985 meeting. The "strategic five year objectives" of the Bank as set out in the first strategic plan were detailed and lengthy - they ran to seven pages - and were organised under six headings: "Markets and Products", "Information Services", "Personnel", "Strategic Business Units", "Financial" and "Subsidiaries". The plan proposed a general growth of the Bank's business across all areas, and diversification into new business areas, including:

(a) "Acquire 30% of the Corporate and International business base within the State".

(b) "Acquire all business available from interstate and overseas opportunities that:

- meet margin requirements

- are within prudential, customer and industry limits

- do not expose the Bank to risk of political controversy".

- Investment and investment related services

- Financial advisory services

- Insurance products

- Subsidiary products able to be marketed through the retail network."

The strategic plan projected that the Bank's total assets would increase in the year ended 30 June 1986 by $931.0M, or 25.8 per cent.

The profit plan for the 1986 financial year budgeted for a higher level of growth - $1,168.3M, or 34.7 per cent - stating that "the continued buoyancy of the economy suggests increased targets are feasible - especially in the personal and business sectors." () The profit plan budgeted for asset growth across the range of the Bank's income earning assets, with the most significant increase being in the assets of the London office:

"liquids	+ $179.9 Million (+26.7%)
retail loans	+ $387.0 million (+29.7%)
corporate/international loans	+ $91.5 million (+34.7%)
London book	+ $310.2 million (+866.5%)
net fixed assets	+ $36.1 million (+37.5%)"

The profit plan projected that the Bank's retail deposits would increase by $246.2M (14.9 per cent), and wholesale deposits by $373.3M (62.8 per cent). The profit plan was described in the minutes of the Board meeting held on 25 July 1985, at which it was approved by directors, as being "aggressive in its assumptions regarding asset and liability growth." ()

The strategy proposed in the strategic plan included the making of corporate loans at interest rates that effectively meant that the loans might not be profitable in the short term. The strategic plan stated, in respect of the "external and internal factors impacting five year strategic objectives", that increased competition, particularly from new foreign-owned banks, would result in:

"... substantial loss leader operations in key market segments. The Bank must be prepared to counter these to protect key segments or key customers ... Within the Corporate and International sectors we are in effect competing on exactly the same ground as the new bank entrants. With the added benefits of our local identity there is no reason that we should expect significant restraints to growth other than the continued pressure on margins that will result from the inevitable loss leader operations." ()

The Bank's 1986 Annual Report made express reference to the impact on profitability of the need to engage in corporate lending to protect market share, saying:

"Corporate lending volume was particularly impressive in view of the extremely competitive conditions which prevailed. Profits were affect [sic] by the fine margins necessary to secure business." ()

The strategic plan also identified some of the internal constraints on the expansion of the Bank's business, stating that "with the growth that the Bank is currently experiencing and with the rapid and increasing pace of change within the banking industry the Bank has a clear need to upgrade some of its human resource, management development and planning capabilities." (). The plan listed some critical issues regarding the Bank's information systems, and stated that:

"Once this development exercise has been completed the Bank will be in an excellent position to pursue major new product development exercises, to exploit electronic banking services, offer substantially improved services to corporate customers, and to acquire improved management information particularly as it relates to customer and product cost and profitability. This information should be collected in such a way that it reflects the value of a customer to the entire group not just the Bank or a subsidiary." ()

The plan included a variety of specific "strategic programs" intended to address these internal requirements, including allocation of responsibility for particular programs, and timetables for action.

1986

The 1986 strategic plan (for the financial years 1987-1991) proposed a "new approach". The plan noted that:

"The Bank's performance during this (1986) financial year has highlighted a number of weaknesses in the organisation. Continued movement in its current direction would result in a future slowdown in asset growth and profitability. This position is not acceptable. It has become apparent that a gap is emerging between where the Bank is currently heading, and where the Bank wants to be by 1991." ()

The particular problem identified was declining profitability: after a "very successful" year in 1985 (assets up 31.4 per cent, Group operating profit of $37.0M), profit for the first half of 1986 (the six months ended 31 December 1985) was only $16.66M, $3.24M below budget. (For the full 1986 financial year, the Bank's profit increased 19.6 per cent, while assets increased by 59.5 per cent.) The plan stated:

"In its formative year the Bank achieved a very high rate of growth, exceeding that of industry competitors. The high growth rate determines to a large degree the expectations of profitability and business growth for the coming years. These expectations are held by the Bank management and possibly by the State Government and the general public.

It should be remembered that these new expectations may well be above those of the industry as a whole. Their successful pursuit in terms of profitability and business growth will tend to strengthen the Bank's and the Group's corporate image, while simultaneously placing considerable stresses upon the organisation.

Profitability growth will be particularly crucial in the coming years. It will need to be further emphasized due to increasing competition and generally decreasing profit margins, the impact of which the Bank has already felt during the 1985/86 financial year. The Bank's more aggressive and more commercial attitude will also add to the emphasis upon profitability.

Due to declining interest margins, profits cannot be expected to grow in line with increased business volumes as might have been the case in past times. The Group will operate on generally fine interest margins." ()

The 1986 plan identified four "overall strategic objectives": integration (of the Bank Group), business growth, profitability growth, and higher customer satisfaction. The plan stated that the Bank needed to grow in order to:

". Meet the expectations of the shareholders, the Bank's Board of Directors and Management, and the community;

. Remain competitive in terms of resources, size, product and service range;

. Generate a growing stream of profits to satisfy both the internal and external needs of the organisation." ()

The plan noted that while growth in the Bank's "traditionally dominating retail operations has been limited to the South Australian State boundaries (and the Northern Territory)", such growth would be restricted in the future by a variety of factors, including the "limited potential and limited growth of the State economy and population".() The Bank, however, "does not encounter a similar set of restrictions in the corporate/international area, where it has, in fact, greater growth opportunities." Accordingly, the Bank's growth strategy was "based largely on strong corporate/international business growth and growth in treasury operations, gradually throughout Australia and offshore". Business expansion interstate and overseas were identified as "major initiatives" aimed at closing "the strategic gap":

"As a result of growing competition, the acquisition of subsidiaries, and the emergence of new opportunities both interstate and overseas, the Bank will seek to win more business outside South Australia. Selective geographic expansion is a vital component of the Group's strategy." ()

The 1986 plan included a "strategic programs supplement", which identified forty programs relating to business growth and diversification, information systems, marketing, personnel and planning. The programs included plans for the interstate expansion of corporate lending, and the growth of the Bank's London office, which together had been "identified as the major growth area for" the Bank. The stated objective was for corporate and international assets to reach $4,772.0M by June 1991 (with London office assets of $853.0M), representing 42 per cent of the Bank's total assets. This growth, which was seen as necessary if the Bank wanted to "achieve substantial growth in assets and take full advantage of its exceptional capital position", was anticipated to have "an extremely significant impact upon the overall structure of the organisation." ()

The planned expansion of non-housing lending was also driven by the nature of the Bank's funding, which increasingly relied on wholesale sources. A change in the composition of the Bank's assets by "reducing the growth of housing loans" was proposed as one means of improving the Bank's asset and liability management, and so its profitability.()

The plan also stated that acquisitions and takeovers could provide "an immediate and effective way of achieving business/profitability growth as well as diversification. The Group will seek profit growth by becoming a financial powerhouse in the State". The plan stated that "the issue of a more definite determination of the acquisition strategy aimed explicitly at business growth should be addressed at end 1986/beginning 1987", but that "any acquisition opportunities that may arise before that time should also be considered". The plan proposed that consideration be given to expanding the Bank's real estate operations, acquiring "a funds management company to manage superannuation funds, an equity trust and possibly a property trust", and encouraging SVB Day Porter to "become a nationally operating stock broker." ()

Whereas the 1985 strategic plan had described its financial projections as being only "projections", which represented "the most favourable results based on current average expectations", the 1986 plan expressly stated that the statement of assets and profits over the five year period of the plan represented "the business growth objective" and the "profitability growth objectives" of the Bank.()

Although the 1986 strategic plan emphasised growth in corporate and international assets, and budgeted for retail loans to increase during 1987 by only 11.8 per cent while corporate loans were to increase by 21.9 per cent and overseas assets by 138.6 per cent, the profit plan for 1987 budgeted for retail loans to increase by 19.8 per cent, and corporate loans by only 17.7 per cent. The profit plan budgeted for retail deposits to increase by 8.1 per cent, while wholesale deposits were to rise 25.8 per cent.

The minutes of the Board of Directors' meeting on 27 March 1986 record that the strategic plan was endorsed by the Board as presented, after "lengthy debate".() The meeting was attended by "all chief managers and observers of Executive Committee and the Chief Economist".

1987

The 1987 Strategic Plan stressed the need for the Bank to increase its profitability without relying on increasing assets. The strategic objectives of the 1987 strategic plan placed less emphasis on business growth for its own sake, in favour of a greater emphasis on profitability, stating that the Group would "seek to make profit growth, and not purely business growth, the more important objective over the plan period". The plan observed that profit growth had in the past been achieved by growing assets:

"The Bank has grown extremely quickly since merger (total assets up 24 per cent in 1984/85, and up 59 per cent in 1985/86). With declining margins, the only way the Bank has been able to maintain acceptable profit growth has been through faster-than-average asset growth." ()

The key strategy was "that the Group will seek faster growth in specifically selected profitable market segments, rather than continuing the current more general approach to growth. These selected markets will cover both the traditional market areas (eg commercial lending) and new market areas (eg superannuation, investment products, insurance, etc.)". The budgeted increase in assets of the Bank in 1988 was 20.8 per cent. In 1987, the budgeted increase had been 24.6 per cent, and the actual increase 28.4 per cent.

The plan stated that:

"... establishment of representation offices in Sydney and Melbourne will precipitate growth of profitable corporate/international business in the eastern States. There will also be gradual interstate growth in non-bank financial areas, either directly by the Bank or through subsidiaries. This interstate thrust will accelerate over the Plan period."

In respect of the Bank's corporate and international business, the plan noted that the "lack of restrictions to growth outside SA provides exceptional potential outside the State's borders. The Bank will aggressively target the lower end of the market, where our market share is relatively low and where lending margins are good." The assets of overseas offices were projected to increase over the year ended 30 June 1988 by 66.7 per cent, to $1,500.0M.

The plan stated that:

"... acquisition is a key aspect of the growth strategy, and will be actively pursued as a viable alternative to internal expansion, particularly in new market areas .... Over the Plan Period the Group may seek to acquire:

. an insurance company;

. a merchant bank and/or an investment bank;

. an Asian or international bank;

. an investment and financial planning company;

. a funds management company;

. a travel company." ()

The 1987 plan provided for a decentralisation of responsibility to the Bank's divisions, stating that the Bank would "gradually adopt a more segmented approach to the market, whereby market segment managers are made increasingly responsible for servicing the financial needs of a specific market". The plan did not include specific strategic programs, stating that "it is recognised that organisational efficiency and the accepted strategic objectives cannot be achieved by single improvements, and that only a comprehensive set of concerted efforts in the form of major strategic initiatives can provide positive results". Accordingly, the plan was limited to broad descriptions of the major objectives of the various business units and subsidiaries.

The minutes of the Board of Directors' meeting on 23 April 1987, at which the strategic plan was approved, record in respect of the plan that (among other things):

"It was emphasised that any new services/products offered by the Bank would be submitted to the Board for approval prior to introduction"; and that

"Although Directors agreed that diversification in the banking industry was desirable, they advised that training and development of staff to cope with the many changes would be a real challenge." ()

The emphasis on profit growth without relying on asset growth was echoed in the profit plan for 1988. Mr Clark's memorandum to the Board dated 17 July 1987, recommending "acceptance and approval" of the profit plan, stated that the "emphasis this year will be concentrated on profitability, accepting if necessary the possibility of some loss of market share". The profit plan budgeted for the Bank's assets to increase by 19.5 per cent, with most of the increase being in off-shore assets (up 127.6 per cent to $1,700.0M). On-shore loans were budgeted to increase by 13.2 per cent, with retail loans increasing by 16.6 per cent (housing up 14.1 per cent), and corporate loans to increase by 35.8 per cent. Bank profit was budgeted to increase by 33.2 per cent to $47.7M.

The increase in off-shore assets was principally related to the establishment of an off-shore banking unit. The minutes of the Board of Directors' meeting at which the profit plan was approved, on 23 July 1987, record that this unit would "increase the Bank's balance sheet by a targeted $940M" in the year ended 30 June 1988. The minutes further record that:

"The Managing Director advised the Board that off-shore banking operations would be closely monitored to ensure that growth is achieved in a controlled manner." ()

1988

The 1988 Strategic Plan (for the years 1989-1993) again emphasised profitability over asset growth. During 1988, total assets of the Bank had increased by 39.4 per cent, against a budgeted increase of only 19.5 per cent. The focus of 1988 strategic plan was directed to the establishment of "four core beliefs and values: customer satisfaction, respect for the individual, performance, and profitability. A key strategic objective was the achievement of "outstanding group performance and balanced business growth" - "the group will seek outstanding performance and business growth through better penetration of the South Australian market, interstate expansion and offshore business development. We shall strengthen our position as the dominant Bank in SA, regional Bank Australia-wide and a niche player in the international markets." Corporate lending was anticipated to grow more rapidly interstate than in South Australia, requiring "increased capital and human resources".

Particular emphasis was placed upon the need to improve the Bank Group's profitability measured in terms of its return on assets, and on shareholders' funds. Noting that a "profitability/performance gap" had been identified, the plan stated the need to:

(a) carefully consider balance sheet structure and asset/liability management;

(b) establish a system to measure and manage the Group's aggregate exposure to customers, industries and countries (Group Global Risk Management); and

(c) carefully evaluate the costs of meeting the Bank's social responsibility in areas such as house lending, branch banking, and the provision of high-cost customer services.()

Among the "major aspects" of the Bank's focus on "growth with profitability" identified in the plan were asset/liability management and balance sheet structure; the cost and availability of capital; interstate and overseas expansion; and the need for a "Group global risk management approach." ()

The strategic plan projected that the growth in the Bank's assets during 1989 would be only 13.1 per cent.

The 1988 plan included, as a separate document dated 27 January 1988, an extensive listing of particular strategic programs that were focused on improving the management, information systems, and performance, of the various divisions and subsidiaries of the Bank.

The profit plan for 1989 budgeted for asset growth of 14.5 per cent for the Bank (14.8 per cent for the Bank Group). Average retail assets were budgeted to increase only 4.9 per cent, and retail's net contribution to increase 3.0 per cent. By contrast, average international assets were budgeted to increase by 59.3 per cent, and average corporate assets by 53.0 per cent. The minutes of the Board meeting held on 28 July 1988, at which the profit plan for 1989 was approved, recorded that the:

"Directors noted that it was the Bank's intention to consolidate its position in this financial year rather than to pursue further rapid growth." ()

1989

The 1989 strategic plan (for the years 1990-1994) was very similar in its focus to the 1988 plan, emphasising the Bank Group's core values, service quality and "group efficiency - growth with profitability". Projected asset growth in 1990 was 20.6 per cent, compared to budgeted growth in 1989 of 14.5 per cent and actual asset growth in that year of 33.1 per cent. The plan expressly noted that the planned growth figures did not include an acquisition by retail banking, although "the purchase of another bank and/or the ownership of a major building society is a possible scenario." ()

The 1989 Strategic Plan expressly identified as "key tasks", improvement to the management of the Bank's capital, and the need to develop "effective global risk management on a group basis."

The profit plan for the 1990 financial year budgeted for an increase in Bank assets of 26.9 per cent (22.0 per cent for the Bank Group), described in the plan as "in line with strategic plan growth". Mr Clark's memorandum to the Board of Directors recommending acceptance of the profit plan stated that "this year's profit plan calls for continued strong growth and profitability", with expansion occurring "through selected market niches within Australia and continued careful expansion of operations in the International arena."

4.3.3 PLANNING FOR MANAGEMENT SYSTEMS, HUMAN RESOURCES AND CAPITAL ADEQUACY

The Bank's strategic plans and profit plans were not limited to consideration of how the Bank could grow and diversify its businesses, improve market share, and increase profitability. The plans addressed, as well, some of the Bank's internal resources - particularly management information systems, human resources and capital resources - that would be essential to ensure that the planned asset growth could be achieved prudently, and that the budgeted long-term profitability could be achieved.

The relevant parts of the Bank's operations are referred to in the plans in three ways:

(a) in the form of general comments in the strategic plans regarding the need for these resources;

(b) in specific strategic programs directed at establishing those resources; and

(c) in the particular actions identified in the profit plans as having been included in the budgeted activities of the Bank over the ensuing year.

It is not necessary to review or describe here the references in the strategic and profit plans to the resource requirements of the Bank. Some of the more significant references to these requirements have been noted above (Section 4.3.2), and they are dealt with in detail, as appropriate, in other Chapters of this Report.

For present purposes, it need only be noted that there is a necessary relationship between the rate of growth and diversification of the Bank's business assets, on the one hand and the resources that are necessary to ensure that the growth is prudently managed and controlled on the other hand. The planned growth of the Bank's business should not exceed that which can be adequately managed by the planned resources of the Bank.

This point was, in fact, expressly addressed by the Board of Directors of Beneficial Finance in respect of that company's own rapid growth. The minutes of the meeting of the Board of Directors of Beneficial Finance held on 24 June 1988 record that the:

"... question of whether Beneficial Finance is growing too quickly was raised in view of the volume and complexity of sales during 1987/88 ... It was queried whether there is enough talent down the line to control the growth and complexity of business being transacted".

4.3.4 SUMMARY

The important aspects of the content of the strategic and profit plans are:

(a) The Bank's Board of Directors and Management placed particular emphasis upon the asset growth, diversification, and profitability, of the Bank as being an essential pre-requisite to the Bank meeting its objectives under the State Bank Act, 1983.

(b) The strategic plans and profit plans of the Bank expounded both the reasons for, and the general direction of, the Bank's business growth, profitability and diversification objectives. In particular, they proposed and in most cases budgeted:

(i) the expansion of the Bank's corporate and other wholesale lending activities;

(ii) diversification of the Bank business to include a broad-range of financial services, to be achieved in part by acquisition of existing businesses as and when the opportunity arose;

(iii) expansion of the Bank's business activities interstate; and

(iv) the development of overseas operations.

(c) The strategic plans and profit plans focused particularly upon the need for asset growth in the 1986 and, to a lesser extent, the 1987 financial year. Later plans sought to optimise profitability without relying on asset growth. In 1988, the Board was told that it was "the Bank's intention to consolidate its position in this financial year (1989) rather than to pursue further rapid growth", and budgeted growth in 1989 was only 14.5 per cent. The profit plan for 1990, however, budgeted for higher asset growth - 26.9 per cent.

(d) Being "high-level" planning documents, the strategic and profit plans were quite general in their terms - for example, although they stated that acquisitions may be undertaken, there was no detailed analysis of the particular acquisitions that would be pursued. Nor did they set budgeted limits for the development of some new lending business, such as corporate loans outside South Australia. Such detailed planning was treated as being outside the scope of the strategic and profit plans submitted to the Board of Directors.

(e) The Board of Directors was assured that detailed plans had been prepared at management level for attaining the objectives identified in the plans. The 1988 strategic plan expressly stated that "each Bank Division, subsidiary and affiliated company has developed a set of appropriate programs" to translate the strategic plan into action.

(f) The strategic plans and profit plans commonly described the business growth and profitability targets as "aggressive", "challenging" and "stretching". However, the "planned rate" of asset growth budgeted by the Bank (as compared to actual rate of asset growth), was, judged against the actual asset growth of the banking industry at the time, not necessarily excessive:

Page 4-41

Year Ended 30 June	The Bank’s Budgeted Asset Growth Per Cent	Actual Growth Assets Other State Banks Non-State Banks Per Cent Per Cent
1985	11.9	26.0	21.9
1986	34.7	34.0	26.4
1987	24.4	21.5	15.8
1988	19.5	25.4	19.8
1989	14.5	25.2	21.4
1990	26.9	19.3	11.7

(i) Budgeted Growth for the Bank from the Profit Plans.

(ii) Budgeted increase in income earning assets.

(iii) Figures for Non-State banks are for the consolidated groups.

4.4 IMPLEMENTATION OF THE STRATEGIC PLANS

As stated by the Board of Directors in June 1984, the implementation of the Bank's strategic and profit plans was the role of Management. The Board's function was to review and approve the plans, and to monitor the Bank's progress toward achieving its objectives.

As described in the previous Section, the strategic and profit plans did, in broad terms, plan and budget for the growth and diversification of the Bank's business activities, and did address, in general terms, many of the internal resources needed by the Bank to manage that growth. Details of the implementation of the particular strategic programs relating to the Bank's management systems and human resources and skills were not included in the plans; that was regarded as the responsibility of Management. The adequacy of the Board's treatment of the strategic programs, of their actual implementation, and of the Bank's internal systems, are examined in later Chapters.

In the usual course of events, the Board of Directors was entitled to rely on Management to implement the strategic plans, generally, and the strategic programs, in particular. The Bank's Board established a reporting procedure to enable it to monitor the performance of the Bank. As noted earlier, however, that monitoring - in the form of the monthly and quarterly operating reviews, did not provide details of the implementation of the Bank's strategic programs.

There was, however, information available to the Board, as part of the strategic and profit planning process, which provided some insight into the implementation of the strategic plans as they related to the Bank's ability to adequately manage its growth.

4.4.1 THE PROFIT PLANS

It has been noted earlier that the profit plans were the principal planning documents for implementation of the Bank's strategic plans. The particular importance of the profit plans is that they represented the aggregation of the budgets of the Bank's various divisions and subsidiaries, and so included each division's estimates of the costs that would be incurred in implementing the strategic programs identified in the strategic plans. One test of the implementation of the strategic programs would, therefore, be the consistency between the financial projections of the strategic and profit plans.

With a period of four months between preparation of the strategic plan and the profit plan, it is to be expected that there may be some divergence between asset growth and profit projections as stated in a strategic plan and the subsequent profit plan, as economic or business circumstances changed. A comparison of the strategic and profit plans shows that, generally, the profit and asset growth projections contained in the strategic and profit plans were reasonably consistent:

Projected Profit Before Tax
	Bank		Bank Group
Year Ended 30 June	Strategic Plan Projection $M	Profit Plan Budget $M	Strategic Plan Projection $M	Profit Plan Budget $M
1986	31.4	35.1	40.5	47.5
1987	29.4	41.9	45.2	59.4
1988	52.8	48.2	72.7	70.9
1989	64.8	65.8	85.0	96.6
1990	113.6	88.1	156.7	136.6

The rate of growth of the Bank's total assets projected in the strategic and profit plans are shown below at Section 4.4.3. The higher growth budgeted in the profit plan for 1986 was explained in the plan as being the result of "continued buoyancy of the economy" which suggested that "increased targets are feasible".

As can be seen, the profit for 1987 budgeted in the profit plan was significantly in excess of that stated as the 1987 objective in the 1986 strategic plan. A memorandum from the Planning division dated 24 June 1986 to the Executive Committee stated that:

"At last Friday's meeting the Executive Committee was not prepared to commit to the $42.4m pre-tax profit proposed in the 2nd Run Profit without the assistance of additional information.

The proposed plan was presented on the basis that the Committee accept a commitment to the achievement of a sufficient level of bank profit in 1986/87 which would support a $50.0m group profit distributable in S.A. The Committee immediately recognised the problem in achieving improved interest margins early into the plan year because of the retail/wholesale funding mismatch now occurring.

A pre-tax profit of $42.4m is an extremely difficult objective, especially given recent months' interest margin performances. In this respect a 3rd run profit plan with more achievable interest margins is now proposed for your discussion.

The Managing Director has reviewed this 3rd Run of the 1986/87 Profit Plan and has indicated that a plan resulting in a Bank profit after Federal tax of $31.0M is not acceptable. He is still committed to a Group profit of $50.0M (Bank $40.0M). Discussion at Wednesday morning's meeting will be centred on ways and means of realistically achieving the desired level of profit through further cuts in expenditure and income improvement measures."

While the budgeted profit was significantly higher than that projected in the strategic plan, Mr Clark's memorandum to the Board recommending approval of the 1986 Profit Plan informed the Board that the plan was "stretching and challenging", and achievement of the budgeted profit would not be easy in the difficult economic environment. Mr Clark assured the Board that "top management and I are committed to its achievement".

Although the financial projections of the profit plans were, within the reasonable variation arising from changing circumstances, consistent with the strategic plans, there were suggestions in the strategic plans that the profit plans were not adequately focused on or directed at advancing the longer-term objectives of the strategic plans.

The 1986 strategic plan identified as a key program for the Planning division, the "development of long term planning, coordination and monitoring procedures" within the Bank and Bank Group, including:

". establishment of more effective strategic planning standards and procedures within the Bank; and

. continued development of procedures for monitoring annual profit plan performance against strategic plan objectives with a view to providing consistency of short-term and long-term planning."

The 1987 strategic plan again referred to the need for:

". Incorporation of Strategic Plan directions into the annual Profit Plan;

. More effective long-term focused allocation of resources;

. Half-yearly monitoring of the strategic progress;

. Development of a long term approach to business development throughout the management team;

. Improvements in the planning and monitoring processes and tools, including yearly divisional Strategic Planning Conferences, productivity improvement plans, interest sensitivity analyses, etc."

The profit plan approved in July 1987 stated that the Planning division would "pursue closer integration of the profit planning and strategic planning processes", and "encourage and support the development of planning functions within individual departments and closer integration of Group long term planning processes".

Similarly, the 1988 strategic programs included that of "closer integration of group profit planning and strategic planning processes". The profit plan submitted in July 1988 stated that the Planning division would "promote acceleration of the process of developing strategic planning functions to individual departments and group members." ()

These statements suggest that there were deficiencies in planning at a divisional level, and that the profit plans did not adequately implement the long-term strategic objectives of the Bank.

4.4.2 STRATEGIC MONITORING AND REPORTING

It has been noted above (Section 4.2.2) that the profit plan for 1987 stated that half-yearly audits of the strategic programs would be implemented from December 1986. The profit plan stated that "quantifiable information on progress, wherever possible, will be included in the December half yearly Operating Review". The profit plans for 1988 and 1989 also provided that monitoring and reporting on the implementation of strategic programs would be undertaken.

The 1988 strategic plan informed the Board that there were "currently 47 strategic programs" in place, and that each:

"Bank Division, subsidiary and affiliated company has developed a set of appropriate programs. These programs outline the responsibility, cost and deadlines for a course of action to implement a strategy.

A regular monitoring and reporting process ensures that programs are implemented in an effective and timely manner. A Strategic Audit is undertaken every six months to assess our progress against the set objectives. Simultaneously, we review our position against competitors. The outcomes of this monitoring will continue to be reported to the Board of Directors."

Only one month later, however, at its meeting on 28 April 1988, the Board was informed of significant weaknesses in the implementation of strategic programs:

"Whilst the monitoring process has given us some indication of our strategic progress, it has been frustrated by a number of problems:

- Due to the way some programs or parts of programs are formulated it is difficult to provide quantitative or qualitative assessment of their implementation;

- No deadlines are provided for some actions;

- Accountability for program implementation is not always delegated to the appropriate management level within the Strategic Business Unit;

- Insufficient communication of Strategic Programs within the Strategic Business Units;

- There are too many Strategic Programs. This situation tends to defocus attention and action of top priority issues."() [Emphasis Added]

The report stated that:

"More effective procedures for strategic monitoring are being developed. To this end we shall be advising Strategic Business Unit Heads of specific program actions and deadlines to meet in the ensuing 3 month's periods".

Notwithstanding that statement no further strategic monitoring reports were presented to the Board.

4.4.3 PLANNED GROWTH AND ACTUAL GROWTH

A third indication of the effectiveness of the implementation of the strategic and profit plans is a comparison of the actual rate of growth of the Bank's assets against that which was budgeted.

This comparison shows that, between 1984 and 1991, the actual growth of the Bank's total assets was far in excess of that which was planned, projected or budgeted.

Appendix B shows the total assets of the Bank at the end of each financial year from 1984 to 1991, and the total assets projected at those dates in each of the strategic plans from 1985 to 1990. Appendix C provides the same information for the total assets of the Bank Group.

As can be seen, the actual growth in total assets of both the Bank and the Bank Group greatly exceed that which was forecast or projected in the five-year strategic plans. The 1985 strategic plan, for example, projected that the Bank's total assets by 30 June 1990 would be $7,325.0M: in fact, the Bank grew to be more than double that size. Even the 1988 plan, approved in March 1988, projected total assets at 30 June 1990 - only two years away - of $11,265.0M. The actual total assets were 54 per cent higher.

A fairer indication of the relationship between actual and planned growth can be found by comparing the budgeted increase in total assets in the annual profit plans with that actually achieved:

Project Assets Growth - Bank
Year Ended 30 June	Strategic Plan Projection			Profit Plan Forecast		Actual
	$M	%	$M		%	$M	%
1985						739.4	27.5
1986	931.0	25.8	1,168.3		34.7	1,902.1	55.5
1987	1,171.1	24.6	1,311.7		24.4	1,514.2	28.4
1988	1,367.4	20.8	1,302.2		19.5	2,829.0	41.3
1989	1,156.7	13.1	1,398.3		14.5	3,156.1	33.1
1990	2,603.0	20.6	3,409.0		26.9	4,611.6	36.3

As can be seen, the actual increase in total assets exceeded that which was planned and budgeted for in every year for which the strategic and profit planning procedure operated. Only in 1987 was the growth in assets reasonably near that planned: in every other year, the growth was greatly in excess of budget. Over the five years 1986-1990, the growth in assets that was planned for totalled $8,589.5M. Actual growth was $14,015.4M. $5,425.9M - 38.7 per cent of the Bank's asset acquisitions over the period - was unplanned. These figures demonstrate the essential relevance of the planning process to the Bank's actual growth.

While the rate of growth of the Bank's assets was much greater than that which was budgeted, this was not reflected in similar levels of unbudgeted profits:

Profit After Federal Income Tax
	Bank		Bank Group
	Budget	Actual	Budget	Actual
	$M	$M	$M	$M
1986	35.1	33.6	43.1	36.8
1987	41.9	40.8	50.2	45.9
1988	47.7	55.5	60.6	66.4
1989	65.8	78.5	97.3	90.8
1990	88.1	35.9	130.1	24.1

Concern about the Bank's rapid growth was expressed by the Bank's Board of Directors in April 1989. Although the Board had been told, in July 1988, that the Bank would not pursue a policy of rapid growth during 1989, the Bank's assets grew during the year by 33.1 per cent. The minutes of the Board meeting on 27 April 1989 record that:

"A number of Directors expressed concern at the rate of growth of the Bank and the ability of staff to cope with the pressure caused by this growth.

Directors were advised that the Bank was currently undertaking a major review of its organisational structure in conjunction with PA Consultants, and in addition external consultants had been engaged to review the structure of corporate banking. These reviews were being carried out to ensure that the Bank had appropriate personnel to meet the demands of the Bank's operations."

In July 1989, the Board approved the profit plan for 1990. The plan budgeted for an increase in the Bank's assets during 1990 of 26.9 per cent - the second highest annual growth ever budgeted in the profit plan, and a rate of growth in excess of that projected for any year by any of the strategic plans. The minutes of the Board of Directors' meeting on 27 July 1989 at which the plan was approved record that the plan "called for continued strong growth and profitability" in 1990.

4.4.4 SUMMARY

(a) There are, broadly stated, two features of the implementation of the strategic plans of the Bank that must be satisfactorily made good:

(i) the growth and diversification of the Bank's business activities and assets; and

(ii) the establishment of the necessary management systems, human resource skills, and capital resources, necessary to support the planned growth.

(b) The establishment of adequate resources and skills within the Bank to prudently manage and control that growth was, in the first instance, a function of management (including the Chief Executive Officer), to be followed by the examination, approval, and oversight by the Board of Directors.

(c) There were, within the terms of the strategic planning and budgeting procedure, indications that the establishment of internal arrangements to manage growth were not adequate. In particular:

(i) there were repeated references in the strategic plans to the need to integrate and co-ordinate the short-term profit planning with the longer-term strategic plans, and to implement more effective planning at a divisional level. These references clearly raise the inference that the profit plans were not effectively directed at implementing the long-term strategic objectives of the Bank, including particularly the specific strategic programs;

(ii) no useful reports were provided to the Board regarding the implementation of the Bank's strategic programs. In April 1988, the Board was informed that the implementation of the strategic programs suffered from a lack of deadlines, insufficient communication of the programs, and failure to allocate responsibility for their implementation; and

(iii) most importantly, the growth in the Bank's assets greatly exceeded that which was planned or budgeted. Actual asset growth exceeded planned growth by 63.2 per cent in the financial years 1986-1990. Of the Bank's increase in assets over those years totalling $14,015.4M, $5,425.9M, or 38.7 per cent, was not planned or budgeted.

(d) These matters, particularly the unbudgeted growth, cast serious doubts on the adequacy or effectiveness of the Bank's strategic programs in providing for the internal resources, (ie information systems, management and staff skills, and capital), necessary to prudently sustain the growth. With asset acquisitions running so far ahead, not only of the long-term projections, but even of the annual profit plans, and with express reference being made in reports to the Board of deficiencies in strategic planning and implementation of programs at a divisional level, there were grounds for concluding that the Bank's internal management arrangements were inadequate.

4.5 FINDINGS AND CONCLUSIONS

In the introduction to this Chapter, I included an acknowledgment that its scope was limited to the review of processes established by the Board of Directors in the planning, implementation and control of the Bank's business growth and diversification. Before stating my conclusions with respect to this matter, it is appropriate to draw the readers attention to other matters which relate in a broader sense to the Banks' Planning and Strategic management and that are examined in the following Chapters:

(a) Chapter 5: "The Management of the Bank Group's Diversifiable Credit Risk.

(b) Chapters 17 and 18: "Case Study in Acquisition Management: The Oceanic Capital Corporation" and "Case Study in Acquisition Management: The United Building Society". These two Chapters deal with the acquisitions of subsidiaries.

(d) Chapters 20 and 21: "The Management of Senior Executives at the State Bank" and "The Relationship between the Board and the Chief Executive". These Chapters deal with human resource management issues.

(e) Chapter 22: "Executive Information Management at the State Bank".

As required by Terms of Appointment, I have investigated the Bank's Planning and Strategic management over the period from July 1984 to February 1991. For the reasons given in this Chapter of the Report, my general conclusions regarding the Bank's strategic planning processes is that they were largely irrelevant to the Bank's actual business development. The excessive rate of growth over and above that which was planned meant that the planning procedures did not operate as an effective management control in the Bank. More specific conclusions can be stated as follows:

(a) The procedure was established by the Bank's Board of Directors, in June 1984, as a principal means by which the Board would set policy, oversee the plans of Management and review the Bank's progress in attaining its goals.

(b) The procedure of strategic planning, which culminated in the approval by the Board of the profit plan for the coming financial year, was extensive and involved the dedication of considerable resources. The Board was entitled to regard the strategic and profit plans produced for their approval as carrying the weight properly to be ascribed to them in the circumstances. In essence in the absence of evidence that they were not being implemented they were entitled to rely upon management. For the reasons stated in this Chapter, in my opinion, the Board was on notice that the planning process was inadequate.

(c) The Board of Directors was given various assurances of, the acceptance of and commitment, to the plans by all senior management.

(d) The strategic and profit plans did identify, support, and propose, the business growth and diversification strategy pursued by the Bank. The general strategy of growth and diversification was therefore expressly adopted and approved by Management and the Board of Directors.

(e) The planned rate of asset growth budgeted in the strategic and profit plans was, judged by the standard of the actual rate of growth of other Banks, not necessarily excessive (although, as noted in (i) below, the actual rate of growth was, in my opinion, excessive). The State Bank of South Australia Act, 1983 did not, however, establish the State Bank as simply "another" Bank.

(f) The strategic and profit plans were high-level documents, drafted in reasonably general terms. Details regarding the evaluation and implementation of many strategies and strategic programs were not included in the plans. Although the Board had the prime responsibility for strategic and consequential profit plans the implementation of the strategies and programs was the responsibility of Management.

(g) The Board of Directors had before it information, which should have put it on notice that, it could not place reliance upon the strategic planning and budgeting procedure in undertaking its functions of policy setting, overseeing Management, and reviewing progress. That information was:

(i) repeated references in the strategic plans to the need to ensure that the profit plans were prepared with adequate regard to the long-term objectives of the Bank;

(ii) the failure of Management to provide any meaningful strategic monitoring reports, culminating, in April 1988, with express advice that some programs lacked deadlines, some had not been delegated to the appropriate Management level, some were not sufficiently communicated to the particular business unit, and that there were too many programs; and

(iii) most importantly, the actual growth of the Bank's assets was greatly in excess of that which was planned.

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

(i) The actual growth - which exceeded that of most other banks in Australia - over and above that planned, gave rise to an obligation on the Board to take reasonable steps to ensure that Management had plans for obtaining the resources needed, and that the Bank in fact had adequate systems, skills and capital to prudently manage that growth. This was even more imperative in view of the repeated description of the planned growth as "aggressive" and "ambitious". In particular:

(i) the rapid growth in loan assets, at a rate in excess of that of most other banks and in markets where the Bank had little experience, clearly warrants the inference that the Bank's credit assessment standards were imprudently low;

(ii) unbudgeted growth has clear implications for the ability of the Bank to adequately manage its asset and liability profile;

(iii) unbudgeted growth has important implications for the Bank's capital resources; and

(iv) rapid growth, particularly in a diversified financial group, has implications for the adequacy of the Bank's management information systems.

The Non-Executive Directors acknowledged, in their submission to me in respect of this Chapter, that such an obligation arose.()

(j) The matters examined in this Chapter do not, by themselves, allow me to make conclusive findings regarding any of my Terms of Appointment, since any deficiencies in respect of the strategic planning procedure might conceivably have been compensated for by other aspects of the Board's and Management's activities. The adequacy and appropriateness of actions taken by the Board and by Management in respect of the important aspects of the Bank's businesses are considered in the following Chapters. In evaluating whether those actions were adequate and proper, regard must be had to the obligations arising from the knowledge of the Board and of Management that much of the growth of the Bank's business was unplanned and unbudgeted.

(k) It was submitted to me on behalf of the Non-Executive Directors of the Bank that the Board had "clearly discharged" the obligation referred to in (i) above by "regularly querying management about the adequacy of the Bank's staff and systems to cope with the growth of the Bank." () As noted in (j) above, the adequacy of the Board's actions is considered in later Chapters of this Report. For the reasons stated in those Chapters, I do not accept this submission on behalf of the Non-Executive Directors.

4.6 REPORT IN ACCORDANCE WITH TERMS OF APPOINTMENT

It was noted earlier that the matters examined in this Chapter do not, by themselves, allow me to make conclusive findings regarding my Terms of Appointment. The reason is that the strategic planning and budgeting process is only one aspect of the systems by which the Bank's activities can be managed and controlled. It is possible that the deficiencies in the planning and budgeting process could be compensated for by the detailed attendance to particular business developments and acquisitions on a case-by-case basis.

Nevertheless, the Bank did devote considerable resources to the planning and budgeting process, which were regarded - as witnessed by the Board's approval of the process in 1984 - as an important aspect of the Bank's management and control systems.

I therefore make the following findings in respect of the relevant Terms of Appointment:

4.6.1 TERMS OF APPOINTMENT A

The processes which led the Bank to engage in operations which have resulted in material losses, or holding significant assets which are non-performing, included the strategic planning and budgeting of the Bank, which expressly planned to engage in most aspects of the business activities which resulted in the acquisition of such assets. However, the actual acquisition of the majority of assets was, in quantitative terms at least, unplanned.

4.6.2 TERM OF APPOINTMENT C

Based on the evidence reviewed in this Chapter, I am unable to conclude, for the reasons expressed above, whether the operations, affairs and transactions of the Bank were adequately or properly supervised, directed and controlled by the directors, officers and employees of the Bank.

However, I find that the procedure of strategic planning and budgeting did not amount to an adequate or proper system for supervision, direction and control of the Bank's activities. The excessive rate of growth over and above that budgeted, essentially meant that the strategic plans and budgets became largely irrelevant to the procedure of supervision, direction and control.

In evaluating the adequacy of the supervision, direction and control of the Bank's operations, affairs and transactions in later Chapters, the adequacy is to be measured having regard to the lack of effective strategic planning and budgeting, and to the suspicions that should reasonably have been raised by the strategic plans, the lack of strategic monitoring reports, and by the excessive growth, as to whether the Bank's internal systems for evaluating and managing growth were adequate.

4.7 APPENDICES

APPENDIX A

DIVISIONAL RESPONSIBILITY FOR

THE BANK’S STRATEGIC PLANNING DEPARTMENT

DATE	DIVISION	CHIEF MANAGER
September 1985	Planning	Mr Chris Guille (Acting Chief Manager)
September 1985 - December 1985	Planning	Mr J Bruce Macky
January 1986 - April 1986	Finance and Planning	Mr Graham Ottaway
August 1986 - August 1987	Finance and Planning	Mr Ken Matthews (Chief General Manager)
June 1987 - December 1988	Finance and Planning	Mr Kevin Copley
January 1989 - June 1989	Chief Economist	Mr Darryl Gobbett
July 1989 - September 1989	Group Planning and Subsidiaries	Mr Michael Hamilton
November 1989 - March 1991	Group Planning	Mr Ian Kowalick

APPENDIX B

PROJECTED AND ACTUAL TOTAL ASSTS

OF THE BANK

Actual		Total Assets Projected in the Strategic Plans of the Years:
Year Ended 30 June	Total Assets	1985	1986	1987	1988	1989
				($M)
1984	2,691
1985	3,430
1986	5,470	4,535
1987	6,846	5,143	5,926
1988	9,532	5,775	7,041	7,955
1989	12,688	6,451	8,303	8,908	9,957
1990	17,300	7,325	9,773	9,829	11,265	15,215
1991	20,191		11,436	10,821	12,613

APPENDIX C

PROJECTED AND ACTUAL TOTAL ASSETS

OF THE BANK GROUP

Actual		Total Assets Projected in the Strategic Plans of the Years:
Year Ended 30 June	Total Assets	1985	1986	1987	1988	1989
				($M)
1984	3,143
1985	4,130
1986	6,313	5,357
1987	7,887	6,094	6,901
1988	11,003	6,844	8,145	9,229
1989	15,029	7,643	9,546	10,333	11,845
1990	21,142	8,640	11,165	11,421	13,498	18,046
1991	21,620		12,998	12,597	15,093

CHAPTER 4 DIRECTION-SETTING AND PLANNING