Treasury’s Banking Executive Accountability Regime (BEAR) provides food for thought for any industry looking to implement policies to ensure key management personnel manage resources in the long-term interests of the organisation.
Treasury has this month released a consultation paper calling for comment on key aspects of its regime (announced in the May budget) including:
- Authorised deposit-taking institutions (ADIs) will need to advise APRA before appointing senior executives and Directors. Upon appointment, they will need to be registered with APRA and accountability maps provided for their role.
- A minimum of 40% of the variable remuneration for executives of ADIs must be deferred for a minimum period of four years. This proportion rises to 60% for certain executives such as the CEO.
- APRA will receive stronger powers to “review and adjust” the remuneration policies of ADIs if it believes the policies are producing inappropriate outcomes.
- APRA will also receive heightened powers to remove and qualify persons from APRA-regulated institutions so that individuals who do not meet standards of competency and conduct cannot remain in their position. This may include streamlining disqualification processes and broadening the scope of people who can be disqualified. APRA may require ADIs to inform it where individuals have been subject to internal disciplinary hearings.
- Penalties to apply where ADIs do not adhere to the regime.
The objective of the BEAR is “to apply a heightened responsibility and accountability framework to the most senior and influential Directors and executives within ADIs, rather than replacing or changing the existing prudential framework or Directors’ duties”.
The banking industry has been targeted for a number of reasons, including its importance to the Australian (and other) economies, its power over consumers and businesses and past episodes of misbehaviour. That other industries have not been targeted does not mean they do not need to clearly document the accountability and monitor the performance of executives in their organisations. Indeed, in an era where intense focus has been placed on environmental, social and governance aspects of a company, inappropriate actions or poor decisions made by subcultures of the company can have far reaching ramifications.
Yet, this does not mean companies should rush to implement the specific recommendations proposed by Treasury. The focus of the BEAR is making it easier to “hold senior individuals to account for their behaviour in carrying out their responsibilities”. Note the emphasis we have placed in the above sentence. Egan Associates believes that the concepts of accountability and responsibility need to remain at the heart of the matter, whatever policies are implemented.
According to the Oxford Dictionary, the definition of responsible is:
Having an obligation to do something, or having control over or care for someone, as part of one’s job or role.
The definition of accountable is:
Required or expected to justify actions or decisions.
The difference between the two is subtle, but important.
An accountable person is responsible. They are obliged to undertake certain actions and behaviours. Yet, more than a responsible person, they are also held to account for those actions. In common parlance “the buck stops with them”.
A common concern in the community is that while executives are responsible for behaviour at their organisations, when poor behaviour arises, they are not held to account – many would consider this to be proven by the lack of senior resignations or terminations after inappropriate bank behaviour came to light.
The BEAR regime will guide the banks in:
- Knowing who in the organisation is accountable, and for what
- Knowing whether accountable persons are competent enough to conduct their roles effectively
- Knowing when accountable persons have not met their obligations and taking appropriate action
- Implementing a remuneration structure where accountable persons who have failed in their responsibilities see reductions in their take home pay as a consequence and are therefore held to account.
Other industries could implement a similar regime internally, and would likely benefit from the added transparency on accountability within the organisation.
On remuneration, the proposal to have 60% of accountable executives’ variable remuneration deferred for a period of four years is a very specific requirement aiming to increase accountability of executives.
The idea is of course to prolong the period between executives meeting the criteria to receive a bonus and the payment of that bonus, such that if inappropriate behaviour comes to light, the payment can be cancelled or clawed back.
More fixed remuneration?
Treasury asked whether the implementation would cause companies to reduce variable remuneration and increase fixed remuneration.
The EU introduced a banking remuneration cap earlier this decade that limits the variable remuneration of certain financial executives to twice fixed remuneration. Similar fears were voiced at the time about potential increases to fixed remuneration. The EU’s post implementation review found that fixed remuneration had only increased by an amount not considered to be material. Yet that report came less than a month after a statement from the Bank of England claiming the opposite.
Both may be correct within their dataset. The question becomes whether Australian banks would react to the additional deferral by raising fixed remuneration, as it is clear that such an action would reduce accountability for actions unless policies could put into place to claw back fixed remuneration when inappropriate behaviour comes to light (problematic as money is likely to be spent by the time such claw back would occur).
The inflation of fixed remuneration could be discouraged by capping the amount of fixed remuneration that is tax deductable, although similar legislation has had unintended consequences in the US.
Organisations are potentially best placed to decide how they might ensure remuneration holds executives account for their actions – as long as they have explained to APRA and/or shareholders how their remuneration policies do so and the explanation is accepted. Such flexibility may result in better policy that achieves the goal of accountability.
Treasury also asked whether a principles-based definition of variable remuneration would be suitable. It stated:
“Variable remuneration could be defined to include that part of total remuneration that is discretionary and conditional upon performance and the delivery of results, including individual and business performance and results. The definition could clarify that it is intended to reward performance and the delivery of results in excess of that required to fulfil a job description.”
After the EU bonus cap was introduced, UK banks responded by introducing “allowances” and “role based payments” that were not related to performance, but were also not part of fixed remuneration and could be increased or decreased year-on-year. The banks did not include these allowances as variable remuneration. The EU later ruled that such payments were not fixed remuneration and should be included in the bonus cap calculation as variable remuneration. The Australian definition above could potentially to allow the allowances loophole to be utilised.
In Egan Associates opinion, it is not enough to purely make executives accountable via their remuneration. In former Public Service Commissioner Steven Sedgwick’s recent Retail Banking Remuneration Review, he stated: “In a hierarchical organisation like a large bank the extent of consistency and alignment of the performance assessment criteria in play at each layer of the organisation is important to achieving a consistent cultural orientation.”
It is impossible to hold an executive accountable for all actions in the organisation beneath them if there is no system to hold the ranks below accountable as well. Therefore, in the same way performance assessment criteria should be consistent at each layer of the organisation, Egan Associates believes that each layer of the organisation should be held accountable for the outcomes of their team and the manner in which they are achieved via their remuneration.
This may take a different form than deferral of remuneration depending on the role and level of the role, but the effect should be the same – remuneration-based consequences for inappropriate actions or behaviour.