More importantly, APRA’s paper will likely include a discussion of what factors to consider when it comes to handing out short and long term bonuses.
In particular, APRA should lobby to limit the importance given to financial parameters – such as total returns to shareholders – in calculating the compensation of top bankers.
Non-financial risks and bonuses
Instead, bankers expect APRA to place much more weight on mitigating non-financial risks – such as compliance breaches, faults, technology failures, and operational issues – when ‘it is a matter of calculating the bonuses.
But seasoned bankers point out that APRA’s approach poses major measurement problems. It’s straightforward to calculate a profit and an improvement in market capitalization, but non-financial risks are notoriously difficult to identify, let alone measure.
In addition, the APRA document will arouse suspicion from investors who fear that basing long-term incentives on intangibles such as risk, culture, strategy, customer service and people will allow investors to bank boards to revert to their traditional practice of giving huge bonuses to senior executives.
But APRA is not the only regulator to tackle poor corporate culture. ASIC has also devised a new plan to have an organizational psychologist sit in the boardrooms of 21 of the country’s largest companies.
Organizational psychologist Elizabeth Arzadon of the Kiel Advisory Group will report to ASIC on how the various boardrooms are doing their risk monitoring task.
Despite howls of indignation from some directors, there is a general consensus among highly esteemed business leaders that it is reasonable for ASIC to obtain a new and independent assessment of corporate culture.
An imprecise science
But, they add, it is essential that ASIC does not place undue emphasis on the psychologist’s conclusions. After all, psychology is a notoriously imprecise science that over the past century has created various theories that have since been discredited and abandoned.
Nonetheless, it is likely that the organizational psychologist will be able to report to ASIC on whether board meetings are properly structured and whether polite and respectful discussions are taking place.
The psychologist will also be able to observe if the directors seem attentive, and are sufficiently committed to question and challenge the senior management.
The problem is that asking relevant questions is only part of a good decision-making process. It is much more important for business leaders to have an overview of the right answers.
And here the psychologist risks being at a complete disadvantage. She may be able to assess whether a reasonable number of questions are asked, but she is simply not qualified to assess the quality of the answers.
If it was serious about assessing the caliber of the nation’s boardrooms, ASIC would probably have been better off finding people with a proven track record of business success – as APRA did when it created a panel of high level consisting of John Laker, Graeme Samuel and Jillian. Broadbent to examine the struggling Commonwealth Bank culture.