Overview of Scandals and Leadership Crisis at CBA

The series of scandals at Commonwealth of Australia reveals a leadership crisis and organizational culture at the most profitable bank in the country. From the damning revelations of refusal to access insurance cover for ailing workers, money laundering and financing of terrorism activities to failure of the bank to compensate victims of its financial impropriety, the bank has gone from bad to worst case scenarios. Subsequently, the attempts to cover up for such financial indiscipline exposed its weakest link in leadership.

In 2017, the bank was accused of not monitoring over 50,000 money transactions in the period of 2012-2015 (Hiscock, 2017). It is alleged that the transactions probably were used to fund terrorism activities. The company was also embroiled in a health insurance scandal whereby sick and dying patients were prevented from accessing their insurance benefits. In another scandal, the bank admitted that it had been charging fees knowingly to customers that had passed away (Shane, 2018). The bank was also embroiled in the Storm Financial scandal whereby 14,000 were affected. It has also been accused of money laundering activities amongst other irregularities.
The bank displayed serious responsibility and accountability issues in leadership. Despite offering several apologies as a result of the scandals that plagued the institution, the top level management did not take responsibility over their actions. In the much publicized scandal, the board of management of CBA paid a total of NZ$264million to New Zealand Revenue which is a department in the public service. As was later revealed by the New Zealand High Court, the payments were a shady deal that was made in order to avoid paying taxes. This payment was made through ASB Bank which is a local subsidiary of Continental Bank of Australia. The payments reflected on the Bank’s group profit. It was explicitly revealed that this was a ploy to turn expenditures to profits through creation of “interest rate swaps” (McConell, 2017).
Even after the unethical and irresponsible behavior by the senior management, no one took responsibility of the actions. In fact, instead of resigning and taking responsibility, the CEO of the local subsidiary was promoted to become the CEO of the group. Throughout the litigation process, the CBA board reiterated that their payments were legal and never owned up for the malpractices. While Ian Narev the CEO of the bank expressed disappointment at the ill treatment to the customers, there was no action at the top level management. There were no significant sackings of senior management levels that would have shown personal and shared responsibility for the malpractices The CEO also casually remarked that the money laundering scandal was a “mistake” that he was eager to fix. This shows a serious flaw in the leadership accountability framework.

There was also unethical leadership in the management of the bank. Ethical leadership is defined as the actions of role models in demonstrating proper conducts to their employees through their personal behavior and inter-relationships, decision making (Neil, 2018). In the CBAs example, the CEO and the board was unaware of the financial planer’s rogue behavior up until it was raised by whistleblowers. The CEO, Ian Narev only came up with review of programs and compensation of victims only when the scandal had become full blown (Whalley, 2014). This shows a classic example of kind of knee jerk decision making. It also displays the lack of ethical leadership by the management. The management failed terribly in putting across control mechanisms to shield the customers from rogue financial mismanagement. A survey carried out in 2018 revealed that leaders did not always ‘walk the talk’ in their actions and that there were serious accountability issues. (Pash, 2018).

Lack of Ethical Leadership

A major leadership concern was failure to provide governance. On governance issues, the bank’s top leadership failed in not asking the right questions and also not seeking appropriate information (Maddock, 2018). For instance, on the Insurance scandal, the leadership relied on outdated information in proving health insurance covers for employees. Another major leadership issue that emerged is lack of a proper link between top level managers and middle and lower level managers. As was evident throughout the scandals, top level managers were caught unawares about the happenings. The lower level managers at the branch levels were always aware as well as proactive in identifying these malpractices (Westland, 2017) than the senior level management.

The leadership displayed a lack of focus in executing some of the decisions. The board utilized most of the time in damage control and defensive mechanisms than in speaking out against these malpractices within the board. In other words the leadership board was so accommodating. The board was also criticized by the investigating panel for not being “The scandal also revealed a failure of the leadership in transparency and accommodating whistle blowing culture. The board did not propose a change of structure in their internal operations and decision making processes. When confronted with the scandals, the bank opted to sack the whistle blower instead of following up on the issues. The banks leadership was complacent and failed to put in place mechanisms to prevent future occurrences (Knaus, 2018).
Secondly, the leadership and management of the board was least concerned in matters of risk management and compliance and also internal audit queries. For instance, a red flag was ostensibly ignored in 2013. Again, another concern was raised in 2015 reiterating on the earlier red flag that was ignored. After these two queries were ignored, another audit report was presented to the BAC. The audit report on risks of money laundering concluded that the board was unable to look into previous issues that had cast aspersions on the bank’s activities (Thompson, 2018). The management failed to prioritize issues efficiently and as a result, the management approach was always defensive (Maddock, 2018).

It was evident that the organizational structure of the bank displayed weaknesses. As a result of these weaknesses, scandals are bound to happen consequently. The role of the board as constituted is to set the tone for the culture of the company. The board also ensures that there are competent leaders in place in the top leadership and also issues of remuneration. It also ensures that the company is compliant with regulations and risk management issues. The improprieties of Commonwealth Bank show a weak link in the structures of leadership, culture as well as remuneration. The CBA leadership from the CEO reveals an organization that is obsessed with making huge profits at the expense of people. The bank also cares more about shareholders than customers. The governor of the Reserve Bank lamented the “short term profit mindset and culture collapse” by the bank after the unfolding of events following the scandal. He further reiterated that the banks are so much focused on making short term, profits that they forget the basics of risk management and as a result, banks can no longer be trusted. The CommInsure scandal revealed horrifying stories of sick and dying patients being denied their rightful insurance packages by the bank. This shows a bank that puts profits before customers (Ferguson, 2018).
On remuneration, the way the bank remunerates its staff is likely to influence how they behave. In this case, Commonwealth bank remunerates the staff according to revenues they generate for the bank. Incentives in form of bonuses, commissions and overseas trips were offered to financial planners in order to meet their target sales (Ferguson & Vedelago, Targets, bonuses, trips – inside the CBA boiler room, 2013). The leadership developed a culture based on sales. Financial planners became actively engaged in generating sales for the bank and were sometimes threatened when they did not meet the set targets. Similarly, the top executives are paid excessively high salaries compared to other middle and lower level management. For instance, the CEO receives a remuneration of $8 million and the chairman who receives $900,000 and other hefty remuneration for other board members. It is therefore appalling that with all those financial benefits, they failed to follow up on scandals or even use their intellectual conscience (Pascoe, 2014).

Governance and Risk Management Issues

The leadership and the board of management of the bank displayed a dysfunctional crisis response mechanism. Ever since the onset of the first revelation of the scandal, the board was out of touch, slow and aloof. The board was also inconsistent with responding to issues raised. Instead of having a coordinated and timely response, the board attempted to cover up the financial misconducts. The board is accused of failing to reveal financial information issues to shareholders before share prices dropped in the stock market. The bank is accused of withholding information of over a$70 million on unusual transactions. It was revealed that the bank had withheld information since 2015 up to when legal action was proposed by AUSTRAC (Mann, 2017). The bank also stands accused of attempts to cover up activities by rogue financial planners. In 2006 when the CBA was made aware of financial misappropriates by Don Nguyen, it only suspended him for a month and even promoted him a position of “senior financial planner. Jeff Morris a whistle blower alleged that the recommendations from compliance team was for the immediate sacking by CBA but then senior level managers warned the team to “back off (Ferguson & Vedelago, CBA covered up misconduct by rogue financial planner, 2013).

The banks leadership should have been transparent and accountable. The series of scandals bedeviling the bank would have been avoided had the leadership provided information about share prizes, transaction and employee records. The board ought to have practiced ethical behavior in providing leadership to the middle and lower level managers. It is also prudent for the management to encourage whistle blowing culture so that issues can be solved amicably before they blow out of proportion. The leaders also have a responsibility of planning ahead and cautioning customers from losses. The bank also requires a functioning crisis response strategy to deal with future issues. The Harvard review proposes that an effective leader should act promptly and not hurriedly, should manage expectations and should also demonstrate control.

References

Hiscock, J. (2017, August 09). Australia’s biggest bank dealing with reputation scandal. Retrieved August 22, 2018, from https://asia.nikkei.com/Business/Banking-

Knaus, C. (2018, May 3). Commonwealth Bank board ‘asleep at the wheel’ during scandals, advocates say . Retrieved August 22, 2018, from

https://www.theguardian.com/australia-news/2018/may/04/commonwealth-bank-board-asleep-at-the-wheel-during-scandals-advocates-say

Maddock, R. (2018, May 2). How Commonwealth Bank got itself into such a mess. Retrieved August 22, 2018, from https://www.afr.com/opinion/columnists/cbas-ordeal-does-australia-a-service-20180502-h0zizj

Mann, P. (2017, December 20). Commonwealth Bank of Australia_In the midst of a money laundering scandal. Retrieved from https://internationalbanker.com/banking/commonwealth-bank-australia-midst-money-laundering-scandal/

McConell, P. (2017, September 14). Where the Accountability Problems started at CBA. Retrieved August 22, 2018, from https://theconversation.com/columns/pat-mcconnell-13137

Neil, G. (2018, March 6). Ethics, Leadership and Decision Making: A Case Study on CBA. Retrieved August 22, 2018, from https://thinkspace.csu.edu.au/bamr/2018/03/06/ethics-leadership-and-decision-making-a-case-study-on-cba/

Pascoe, M. (2014, July). Commonwealth Bank: a case study in failure. Retrieved August 22, 2018, from https://www.smh.com.au/business/commonwealth-bank-a-case-study-in-failure-20140704-zsw83.html

Pash, C. (2018, May1). APRA’s report on CBA highlights problems with leaders not ‘walking the walk’ on values. Retrieved August 22, 2018, from https://www.businessinsider.com.au/apras-report-on-cba-highlights-problems-with-leaders-not-walking-the-walk-on-values-2018-5

Shane, D. (2018, June 4). Australia’s biggest bank hit with record fine for money laundering scandal. Retrieved August 22, 2018, from https://money.cnn.com/2018/06/04/investing/cba-fine-money-laundering/index.html

Thompson, J. (2018, May 4). Commonwealth Bank board woes a ‘turning point’ for all directors. Retrieved August 22, 2018, from https://www.afr.com/leadership/commonwealth-bank-board-woes-a-turning-point-for-all-directors-20180504-h0zn2u

Westland, T. (2017, August 8). Comm Bank scandal: what happens when too much power is placed in too few hands . Retrieved August 22, 2018, from https://www.theguardian.com/commentisfree/2017/aug/09/comm-bank-scandal-what-happens-when-too-much-power-is-placed-in-too-few-hands#img-1

Whalley, J. (2014, July 3). Commonwealth Bank chief Ian Narev pledges ‘far-reaching’ review of financial advice arm. Retrieved August 22, 2018, from https://thinkspace.csu.edu.au/bamr/2018/03/06/ethics-leadership-and-decision-making-a-case-study-on-cba/