There is recognition that the bonus element of executive pay is designed to reward performance, above and beyond the basic stewardship of a KMP’s core accountabilities. Fixed remuneration addresses the latter.
In certain settings, overall corporate attainments maybe lacklustre because of reputational damage.
Reputation is said to be hard won and easily lost.
When reputation is damaged in a corporate environment, scrutiny by regulators and shareholders, particularly when it impacts on the bottom line and/or market value, will often increase.
Ian Narev, CEO of CBA, and his fellow group executives forfeited their short-term incentives for the 2017 in early August after Chair Ms Livingstone and the Board decreed the bank had been negatively impacted by too many reputational issues. CBA Chair said in a statement to the ASX on 8 August 2017: “In reaching this conclusion the overriding consideration of the board was the collective accountability of senior management for the overall reputation of the group.”
Remuneration committee chairman David Higgins says that while the group delivered strong results for shareholders, the board “recognises the significant damage caused to the group’s trust and reputation as a result of risk matters, most notably the recent civil penalty proceedings” initiated by AUSTRAC.
The CEO was seen as accountable for the culture that allowed the money laundering scandal, especially in taking an unco-operative and combative stance with Police and AUSTRAC officials in the investigation.
Bonuses are intended as a reward for improving an organisation’s performance and achieving stretch targets. CBA’s reputation has been tarnished by sub-optimal attention to the company’s code of conduct and corporate governance protocols.
On the basis of the market’s observations, it would appear that the Bank Board, under the leadership of Catherine Livingstone, they are clearly endeavouring to manage the current challenges with a more forensic eye. The Bank Executive Accountability Regime foreshadowed by APRA is also likely to be front and centre and this recent experience with the CBA, which we understand may extend to other leading financial institutions, could well lead to different reporting structures or dual reporting structures between Board or Board Committees and senior executives within the Bank who will be held to account for fully informing the Board on all matters associated with the conduct of business, the management of risk, the imposition of regulation, domestically and internationally, with the Board taking a somewhat more forensic engagement in matters which will impact on the shareholders whom they represent and, in particular, the organisation’s reputation, ethics and adherence to appropriate governance protocols.
Seven’s CEO, Tim Worner, agreed to forfeit his bonus this year following a recent Court action with a prior member of staff, Amber Harrison. Similarly to CBA executives, Worner is paying for the reputational damage he caused Seven. The company’s initiative in this context may well have been inevitable given the stand taken by QBE’s Chairman at the end of the 2016 Financial Year in respect of their CEO. In this context, from a governance perspective, QBE’s Board reputation would have been enhanced.
If Board’s continue to adopt a rigorous assessment of culture, adherence to a company’s stated code of conduct and governance protocols in a manner similar to that above, or indeed establish reputation as a zero-harm element and a gateway for incentives, it should have a positive impact.
A fundamental principle of incentive reward is what gets rewarded gets attention.
A greater desire to forfeit or denying executive bonuses for performance and governance shortcomings may fix the corporate culture surrounding executive remuneration or, at the least, fix the public perception that executive pay is more acutely sensitive to accountability issues.