Earlier this week the Final Report of the Australian Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (“the Royal Commission”) was released to the public. Responses from financial institutions, regulators and other market participants will continue to develop over the coming weeks, months and years given the potential for criminal proceedings.

These developments will dictate the long-term impact of the Royal Commission. While the dust has yet to settle, we at CGI Glass Lewis have considered our initial reaction to the Final Report and how it may impact our approach to analysing remuneration and governance practices and, ultimately, influence our voting policies going forward.

We preface this discussion by acknowledging that our approach to corporate governance is through the lens of long-term investors – where long-term stable financial growth and reputation go hand-in-hand.

Like Chapter 6 of the Final Report, we present our initial reactions under three headings: Remuneration, Governance and Culture.


We believe that there are two key takeaways from the Final Report which require remuneration structures to change to avoid repeating the misconduct of yesterday.

First is strengthening clawback/malus provisions, and having an honest debate on the appropriate length for deferral periods. As the evidence presented at the Royal Commission indicates, misconduct can be ignored or hidden for months and years – such as the fees for no service scandals at a number of institutions, which started around a decade ago.

Acknowledging that misconduct may only be revealed over longer time periods, remuneration structures need to have effective malus and clawback mechanisms as well as deferral arrangements that appropriately disincentivise executives and other staff from failing to behave appropriately. The Banking Executive Accountability Regime (“BEAR”) has set vesting periods for long-term incentives at four years. Given the length of time some of the misconduct remained “under the rug”, we believe that for malus and clawback arrangements to be effective at dealing with misconduct, deferral/vesting arrangements must be pushed back significantly further than four years.

The Investment Association in the UK has also taken note of malus and clawback provisions. We agree with their views that malus and clawback provisions need to be broadened to include additional triggers beyond ‘gross misconduct’ or ‘misstatement of financial results’ to enhance their effectiveness for discouraging the behaviour discussed by the Royal Commission.

CGI Glass Lewis will be encouraging greater deferral of remuneration subject to malus and clawback over long periods of time. This should also include deferral of fixed remuneration where variable remuneration is less significant to executives, a feature which has already been demonstrated by Bendigo and Adelaide Bank. Additionally, for malus and clawback to be appropriate disincentives, boards will need to demonstrate that they are enacted appropriately. These mechanisms must be seen to be used as needed otherwise they will soon become “toothless tigers”. For upcoming AGMs we will be looking for boards to have demonstrated action where clawback provisions exist and their enactment has been warranted.

Second, remuneration structures need to have a greater emphasis on non-financial risks. The high weighting of financial metrics, including Relative Total Shareholder Return metrics, was criticized as incentivizing profits before people.

The focus on annual or short-term profits overrode any focus on building sustainable business to yield income for decades. In some cases, the history of Australia’s financial institutions dates back over a century. It is clear that these institutions hold value beyond the next five years and performance metrics need to reflect this.

With respect to designing a remuneration structure to account for non-financial risk, we will question structures which pay bonuses to executives strictly to act in an ethical way and within applicable laws – this is already a base level expectation we have of executives. Executives should face accountability and punishment for poor behaviour, rather than receiving benefits paid for the lack of poor behaviour. As such, we may look more favourably at remuneration structures which incorporate risk matters as gateways or modifiers to remuneration outcomes rather than stand-alone performance criteria.


In our shoes and those of investors, the key governance consideration is board accountability, given directors, not officers, are directly appointed with shareholder support.

The Royal Commission has touched on many instances where boards did not receive information that would warrant them to act. This is a failure by omission on the part of the board and is a separate issue from the failure of a board to act on information presented to them.

Commissioner Hayne notes that in many cases where the board was not presented with information detailing misconduct, other information existed that ought to have put the directors on notice of the risk of misconduct. In these instances, the directors ought to have sought further information. Directors should be held accountable for failing to sufficiently challenge management where the circumstances warrant. Based on voting outcomes at AGMs held in 2018, many investors appear to already be leaning this way.

While we believe investors need to hold boards accountable, boards need to hold the officers of financial institutions accountable. Good governance starts at the top.

The Final Report discusses the tension for the board to disclose when it has imposed penalties on executives for risk-related reasons in situations where the public disclosure would disadvantage the company. The Commissioner concludes that public disclosure is not required for the penalties to have the appropriate impact on demonstrating accountability internally. We accept this statement, however reflect that without public disclosure investors will not be able to consider any track record of enforcing accountability failings when considering how to vote at AGMs.

Boards must strike a balance if investors are to believe that accountability is being enforced. Macquarie Group’s approach to disclosing the statistics of staff who have faced consequences for conduct policy breaches, including termination numbers resulting from the breaches, is a good starting point for further discussion.


It is widely acknowledged that an organisation’s culture has a profound impact on the risk of misconduct. More broadly, an organisation’s culture may be a competitive advantage among its peers, or an Achilles heel. Nonetheless, we believe that an assessment of a culture is an extremely challenging task for investors as outsiders looking in.

In our experience, there is limited benefit to investors for a company to talk about the good elements of its culture in the annual report. Such discussion does not often contain information that can be considered reliable and, in most instances, will ultimately be boilerplate, white washed and rolled forward from year to year. We believe it more informative for companies to disclose negative aspects of their culture, and how the disciplinary process has dealt with these issues. This demonstrates an effective enforcement function and can be much more informative than a positive cultural blurb.

Overall, we believe culture is to a significant degree a function of remuneration and governance.  Beyond these elements, which are discussed above, shareholders face a challenge of evaluating and making voting decisions based on cultural issues which are opaque – typically it is only once misconduct has already occurred and been revealed that shareholders can properly react.  A culture risk weighted approach to voting shares is a difficult area and requires further thought and development.


Going forward we will be monitoring the responses of the various market participants closely.  The Final Report may have been submitted, but there is much to play out including the reactions of boardrooms and investigations by the “twin peaks” regulators, APRA and ASIC.