Introduction
Background
Commonly known with its initials ‘NAB’, the National Australia Bank is the largest publicly listed financial institution in Australia. In addition, the company is ranked above 30 in the most profitable institutions in the financial sector in the world (Thompson & Jain 2008). As a financial institution and publicly listed, the company’s disclosure and reporting are vital to the bourse as well as the public in general (Thompson & Jain 2008).
Thus, the company’s principles, practices and protocols of corporate governance are important in analyzing its performance and determining its financial future. Despite being one of the world’s largest profit makers in the financial sector, NAB has faced a number of problems due to its corporate governance. For instance, in January 2004, the company disclosed that it was suffering heavy losses related to unauthorized trading in foreign exchange, which was more than A$350 million (Thompson & Jain 2008).
However, the issue revived the debate on the need for effective corporate governance for financial institutions, especially banks. Concurrently, the company was facing financial issues in the US, where it is listed in the New York stock exchange. In the US case, the company had suffered a loss of about $4 billion (AUD) on its ‘HomeSide’ loan initiative in 2001 (Thompson & Jain 2008). This event led to a strong debate in the financial sector, with several analysts and the US Security and Exchange Commission calling for an investigation into the company’s degree of strength in terms of risk management practices as well as the independence of the external and internal auditors.
It was hypothesized that NAB did not give corporate governance the priority it deserved in the preceding fiscal years. Nevertheless, the company has continued to trade at home and on the international market, receiving criticisms over its commitment to give priority to its corporate governance, especially in terms of independence of the auditors (Thompson & Jain 2008).
Purpose statement
Thus, the purpose of this paper is to develop a critical analysis of NAB’S corporate governance in terms of the protocols and practices in relation to the guiding and standard principles relevant to the Australian authorities.
Importance and criteria for the review of corporate governance at NAB
This analysis considers corporate governance as one of the most important aspect of corporate management in the modern world. This review seeks to draw information on theoretical perspectives of corporate governance. The information will be used to analyze the case of NAB. In addition, the case study will be analyzed based on the Australian perspectives of corporate governance. The board of directors (governors) is responsible for the corporate governance of the firm it manages (ASX 2003).
In fact, some literature asserts that the boards of directors in corporations should act as internal auditing body in order to enhance the process of implementing and monitoring a set of relationships between the shareholders, managers, regulators and the board members. Noteworthy, it is the responsibility of a company’s internal governance to create an effective and clear structure of ensuring that accountability is achieved (Chiang 2005).
The primary concern of the internal governance and the management is to determine the best way of fostering competitive performance that drives the company towards achieving its goals and objectives, with special focus on value creation for the shareholders. It is also worth noting that the theory of corporate governance states that the role of corporate governance is not only to create wealth, but also to manage the risks involved in trading (Heracleous 2011).
The problems facing NAB during the two scandals reveal the existence of corporate environment indicated by laxity and ineffective oversight by the internal governance and line managers. In addition, the events reveal that adherence to risk management controls and systems were relatively poor. They further reveal that the internal governance at the firm had some weaknesses, with little evidence that the leaders were concerned with risk management (Thompson & Jain 2008).
Significance of the review
In the last few years, a number of corporations have collapsed in Australia due to poor governance and governance practices. This phenomenon has triggered several concerns over the processes involved in enforcing law and regulations on goon corporate governance. Moreover, the collapse of organizations like NAB, which has a large contribution to the economic and social system in the country, is likely to indicate the Australia lacks the required laws and regulations to control and monitor the right practices and protocols for corporate management (Thompson & Jain 2008).
Nevertheless, ASIC is an effective government agent that ensures that corporations comply with the laws and regulations in corporate governance, including taking responsibilities and disclosing of account records. Therefore, it is important to review the corporate governance protocols and practices at NAB in order to reveal important information about possible failures or causes of failure by the bank’s corporate management that led to the problems facing the institution over the last decade (Thompson & Jain 2008).
In this context, this study will attempt to review NAB’s corporate governance and practices from a number of perspectives, paying attention to the independence of directors, their length of tenure, responsibilities and scope of work. In addition, the study compares these aspects with the standards and principles set by the Australian law and enforceable under ASX (Thompson & Jain 2008).
Review of corporate governance at NAB: Governance Protocols and practices
Noteworthy, NAB has a strong criterion for describing and outlining the protocols and practices under its corporate governance. It abides with the laws and regulations, including the Corporations Act 2001. Under its corporate governance, the company’s framework plays a critical role in supporting business operations (NAB 2013). In addition, the company argues that the purpose of the framework is “…to provide on how individuals and departments exercise authority…” (NAB 2013).
As such, the framework provides guidance for establishing an effective decision-making protocol in all areas of the corporation. To achieve this feature, the company argues that it uses four major processes (Thompson & Jain 2008). First, it has a strategic and operational planning system. Secondly, it argues that there is a strong method for risk management and compliance. In addition, it argues that the financial management and external reporting method is established. Finally, the company says that it has a strong succession and culture (Thompson & Jain 2008).
The board of directors
Under its constitution, NAB Group (NAB) has an established board of directors that provide corporate governance. First, the constitution outlines the roles and responsibilities of the board of directors. The company’s constitution has a formalized charter that highlights the functions and responsibilities of the corporate governing body. However, for the purpose of analysis and review, this paper will look at the most significant responsibilities of the BOD at NAB (Thompson & Jain 2008).
First, the issue of stakeholder’s interest is well described. The board of directors is tasked with the responsibility of guiding the company with a view on establishing long-term returns to the shareholders. It states that the BOD must have high regards to the shareholders’ interests, including the interest of the staff, regulators, customers and the communities within the company’s area of operation.
The constitution also states that the BOD is tasked with the responsibility of providing strategic direction to the company with a focus on establishing and promoting consistency in business performance, transparency accountability and behavior. In addition, the constitution tasks the BOD with the responsibility to review and monitor the corporate governance as well as corporate CSR throughout its life.
It also states that the BOD has two functions in developing corporate performance criterion- reviewing the company business results and monitoring its budgets (Jones 2011). It also requires the directors to take the responsibility of providing integrity and accuracy in the reported accounting and financial statements or records. Reporting to shareholders and regulators is emphasized in the constitution, which is stated as a responsibility of the BOD.
Independence of directors
According to the company’s practices and procedures outlined in the constitution, the BOD is expected to bring independence judgments and points of view to the deliberations at the BOD meetings. According to the clause, each director is independent of the executive body. This means that the directors have the right and ability to give independent and free judgments. It emphasizes that any judgment should be free of any other business or relationship that could interfere with the directors’ ability to act on behalf of NAB.
It further insists that the directors’ material interest should be registered (NAB 2013).
The constitution states that the company assesses whether a director is independent by making the relevant reference to the adopted rules and regulations under the Australian law, rules and regulations and the corporate governance and principles recommended by ASX.
Tenure of directors
The constitution states that each member of the BOD is expected to retire after serving for 10 years. It states that the right procedures and protocols must be used when removing a director from the board for any reason associated with misappropriation of the rules and regulations stated therein (Jones 2011).
Responsibilities of directors
The responsibilities of the BOD are outlined in the company’s constitution. These responsibilities are stated according to the committees established under the board. First, the audit committees is given a number of responsibilities (Jones 2011). For instance, it is responsible for establishing integrity of the company’s accounting and financial reporting procedures. It is also responsible for the company’s external and internal audits as well as compliance with the accounting standards applicable to provide a true and fair representation of the company’s financial performance and position at a given time.
The risk committee, which is also established under the BOD, is responsible for reviewing the risk profile for the company (Jones 2011). It is also responsible for making recommendations to the BOD about the company’s risk and risk management practices. It is also tasked with promoting the awareness of the company in achieving the right balance between risks and rewards. Other committees include nomination and remuneration committees.
Relevant Standards and principles of corporate governance learnt during the review
Theoretical perspective
According to Gray and Simnet (2010), corporate governance is a system through which companies are controlled, regulated or governed. According to Woodward, Bird and Sievers (2011), the term “corporate governance” is refers to the tasks, issues, practices and procedures used in the corporate management. It also includes mechanisms and supervisory incorporations that make the governance responsible for their activities as well as the welfare of the shareholders, customers, creditors, suppliers, employees as well as the community in general.
Australian perspective
In Australia, corporate governance principles and standards are established under the corporations Act 2001 and the recommendations under the principles of good corporate governance and best practice, which was developed by ASX in 2003 (Thompson & Jain 2008). The aim of the regulations is to describe the independence of the directors, their accountability and transparency in disclosing.
In addition, the ASX has established additional principles of god corporate governance under the “disclosure listing rule 3.1 and 18.7A” (Jones 2011). These were also developed in 2003 and seek to provide SX with evidence of a BOD’s continuous disclosures (Thompson & Jain 2008). The commonwealth government also established rules and regulations on corporate governance under the international financial reporting standards that were developed in 2005, seeking to increase the accountability of BODs (Jones 2011).
Failures of corporate governance at NAB
When analyzing the corporate governance practices and procedures under NAB against an analysis of the standard principles of good corporate governance in Australia, it is evident that a number of issues indicate that NAB failed to incorporate the standards effectively. In fact, the company has failed two times to incorporate good corporate governance.
First, the company failed in the “HomeSide US Loans” case, which occurred between 1998 and 2002. The company reported that a simple mistake was done at the executive level, causing the problems. They argued that it was a simple calculation error at the level of calculating computations fees in the mortgage dealings. A simple additional mistake involving an outdated method of calculating gross interest rates led to a loss of more than A$ 755 million (Thompson & Jain 2008).
In the second case, the company’s corporate governance failed to mitigate risks involved in foreign currency trading. In 2004, it was reported that unauthorized trading by the company’s foreign currency traders in London and Melbourne had led to a loss of not less than A$360 million (Jones 2011). It was evident that the traders had taken the advantage of the company’s weaknesses in its internal procedures to deal with risks of foreign currency trade and protection of bonuses. Evidently, the corporate governance had failed to play its role as required by the constitution and the law.
Recommendations
From this analysis, it is evident that the causes of public chastisement of NAB in America, the UK and Australia have resulted from a number of failures in the company’s corporate governance. It is quite clear that the company’s constitution as well as the rules and regulations under the Australian, American and British laws were not followed as required. Most important, it is clear that the board of directors was unable to execute its responsibilities as required. Therefore, these loopholes and weaknesses should be addressed.
To address these problems, it is recommended that companies should emphasize and take great care when establishing and providing independence of the auditing bodies, whether internal or external. It is clear that the board failed to implement the rules and regulations under ASX and Corporations Act 2001. Secondly, it is recommended that ASX enhance its ability to regulate auditors and ensure that corporations provide the required evidence to both external and internal auditors.
It is also recommended that further legislations be established in order to manage risks involved in corporate trading. For instance, it is recommended that new prudential standards be established with an aim of controlling business continuity management as well as authorized deposit-taking firms. These institutions are required to implement a new approach to the nature of corporate operations, which will allow them monitor the processes from a “whole business” perspective.
Conclusion
This analysis reveals that NAB’s corporate governance was responsible for the financial problems affecting the organization. It shows that corporate governance is an important aspect of any listed or unlisted organization. While the directors should work for the best of the shareholders’ value, it is also worth noting that they are responsible for risk management.
In addition, they should be aware that they are responsible for the welfare of other parties, including the customers, creditors, employees and the general community. Therefore, they should be accountable for any losses or misfortunes that happen at the company, especially where financial problems occur. They are independent entities. They should ensure that the company established and implements freedom of the auditing bodies.
References
Australian Stock Exchange Corporate Governance Council (ASX), 2003, principles of good corporate governance and best practice recommendations, ASX, Sydney.
Chiang, H, 2005, “An empirical study of corporate governance and corporate performance”, The Journal of American Academy of Business, vol. 6, no. 2, pp. 95-101.
Gay, G & Simnet, R, 2010, Auditing and assurance services in Australia, McGraw Hill, Sydney.
Heracleous, L, 2011, “What is the impact of corporate governance on organizational performance?”, Corporate Governance, vol. 9, no. 3, pp. 321-329.
Jones, E, 2011, Illusion and reality at the national Australia bank, University of Sydney press, Sydney.
National Australia Bank (NAB), 2013, National Australia bank limited- 2012 full year base II risk and capital report, NAB, Docklands, Vic.
Thompson, D & Jain, A, 2008, “Corporate governance failure and its impact on the national Australia bank’s performance”, Journal of business case studies, vol. 2, no. 1, pp. 41-56.
Woodward, S, Bird, H & Sievers, S, 2011, Corporations law: In principles. Law Book Co, Sydney.