Why we missed Opes Prime
The recent article by Robert Gottliebsen remarked on comments I made during an interview on ABC TV's Lateline Business with Ali Moore (An Opes Prime example, June 29). The article implied that the CEO is accountable for all serious issues that arise in the company and that a part of the solution is to kick the tyres more effectively.
While Bob is right in both respects, the context of the interview was that I agreed to comment on the global economy – I have generally tried to avoid commenting on ANZ since I left and the interview became surprisingly sidetracked with a question on my risk legacy at ANZ in the light of Opes Prime, which I answered imperfectly.
The real issue here, as it is for any CEO, is how to measure success. Given the job comes down to basic tasks, such as setting the agenda, building capability, leading the senior team, allocating capital and resources, and making sure it happens. The outcomes impact the company long after the CEO leaves. So how did I do overall?
When I took on the role in 1997, the bank was regarded as the most risky of the big four, with less sustainable businesses with a sub-optimal retail presence, the highest cost-to-income ratio, flat profitability, and low levels of staff engagement.
By 2007, ANZ was the leading bank globally in the Fortune Global 500 for leadership; the leading bank globally in the Dow Jones Sustainability Index; had the highest staff engagement of all the major companies in Australia; had the leading retail banking customer satisfaction of the major banks; and was rebuilding a sustainable presence and capability in Asia through partnership investments, organic growth, and recruiting experienced Asian executives like Alex Thursby.
Of course not everything went well as we all know. The main risk was always centred in Institutional. We did a great deal over the whole period to reduce this, to the extent that asset growth fell to one third of our major competitors, and many, including me, thought we may have taken things too far. How wrong we were. In particular, the board and I were unaware of the extent and nature of the Opes relationship. As Bob says, this is no excuse, and unfortunately for bank CEOs, it seems some consider they are only as good as their last mistake. Clearly during the global financial crisis we've seen that it's not until the water level dropped that issues that lie deep come to the surface.
In Australia, these issues are slowly emerging at a number of institutions. The comfort we can take, however, is that these issues have been modest in a global context and the four major Australian banks, including ANZ, have come through the global financial crisis in an incredibly strong position.
Clearly I regret, particularly for my successor Mike Smith for whom I have considerable regard, that ANZ suffered reputational damage regarding this matter last year. For me, it's a matter of embarrassment that in an organisation that we did so much to change over 10 years, that things that we thought were not present, were alive and under the radar of the board, senior management, divisional management, risk, internal audit, and external audit. I do find it curious though that it was Opes’ bankers who bore the brunt of the criticism for investor losses, rather than the organisation and its management that lent the money to investors in the first place.
ANZ had well-laid down policies, regarding its exposure to equities that restricted the amount advanced to value, the liquidity of the stock, the percentage shareholding and the diversification of the portfolio. Despite this and many other risk controls including those established to meet Basel II Advanced IRB, none gave even a minor signal such that questions should have been asked and action taken when there was time and circumstances to do so. Unfortunately in this case there wasn't one until several months after I retired. In this case it was not about simply about kicking the tyres, but stripping the gearbox while it appeared to be working properly.
We must remind ourselves, though, that over a decade there are always specific issues that arise in large banks which are a matter of regret in hindsight, but they need to be kept in perspective.
For me, the bottom line on ANZ's risk profile is that it improved substantially during my period as CEO, such that Mike Smith had the right foundation for ANZ to be able to retain its coveted AA risk rating while weathering the global financial crisis – one of just eight banks worldwide to do so.
John McFarlane is the former chief executive of Australia and New Zealand Banking Group and presently an independent executive director of the Royal Bank of Scotland.
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