Clarify, simplify and don’t mess around — at the Australian Governance Summit, Westpac chair and banker of 46 years John McFarlane OBE MAICD said leadership for the times involves individual accountability, cultural change and board diversity.
When John McFarlane OBE MAICD faced the task of chairing a traumatised Westpac in April 2020, his first steps were to restructure the board so it could focus more on strategy and devolve responsibility and accountability to individual executives. Already reeling from the banking Royal Commission disclosures, Westpac was in turmoil, rocked by AUSTRAC court allegations that it failed to properly monitor payments potentially linked to child exploitation. It had lost chair Lindsay Maxsted FAICD, the CEO, and the audit committee chair in quick succession, and would ultimately be fined $1.3b in Federal Court.
The former Barclays, TheCityUK and Aviva chair, and ANZ Bank CEO found a very centralised organisation with decisions made by senior executives in committees sometimes numbering as many as 40 people. “Everything went into the centre,” McFarlane told the Australian Governance Summit on 3 March. “Decisions were slow because loads of people were involved in decision-making. Accountability was weak because it was shared.”
As a former banking CEO and chair, he was clear on what was needed. He wanted individual accountability rather than collective diffused responsibility, so the bank could create a much smaller centre and delegate to the division and business lines.
McFarlane pursues the same approach in his dealings with former CFO turned CEO Peter King and in the boardroom. “One of the good things about Peter King is I have not made a single decision as a chair since I’ve been there,” he says.
He told King: “You can ask my advice, but you’re not going to come back and tell me you did it my way and then work. I want to hold you accountable, not me accountable. I’ll be accountable for the whole, but you’ve got to be accountable for your piece.”
He recalls an occasion when the board had to decide on a $300m contract renewal. When he asked why, King told him he only had authority to spend $70m — so the board upped the limit to $300m.
McFarlane also delegated a lot of decisions to board committees, although that had to go hand in hand with more comprehensive reporting to the board. “That meant the board had the time to deal with the most important matters,” he says.
He also restructured meeting agendas to ensure the most important matter for discussion came at the start and standard reporting items came at the end, so the board didn’t get bogged down in them and leave too little time for important discussions. McFarlane feels boards should be on “autopilot” in ordinary circumstances, taking the day-to-day in their stride, but regrouping in crisis circumstances.
Financial disarray
Westpac also had financial problems, which McFarlane discovered when — in anticipation of being approached to take the job — he spreadsheeted the bank’s financials over the past decade and discovered five years of underperformance.
The bank is now nearly two years into its three- year “fix, simplify, perform” turnaround plan and “we’ve almost broken the back of it,” he says.
Part of this is a cultural change program, after the banking Royal Commission found the poor culture at the major banks facilitated their misdeeds. The program started with a survey, to discover what staff values actually were and compare them to the values they want. “People think of it as soft subject, touchy-feely, but that’s complete rubbish,” says McFarlane. “It’s like a cost-reduction program and a revenue enhancement program. That’s what we want, that’s what we’ve got — these are the biggest issues, run a program on that, monitor it, make sure it happens. Once it’s fixed, have another one.”
For a hands-off chair, McFarlane still manages to get his views across, saying he is opposed to incentive-based remuneration, arguing it incentivises the wrong behaviour — a view echoed in the banking Royal Commission findings. Instead, all staff receive $1000 a year in stock tax-free to ensure they are aligned to the overall success of the company.
He also outlines how he pushed management to make more diverse appointments, commissioning a study that revealed men appointed men from their own departments and women appointed about 60 per cent women and 40 per cent men.
Appointing women and outsiders was the solution, but was easier said than done, so McFarlane insisted one outsider and one woman be included in every job shortlist. However, management gamed the system, stacking their lists with men from inside the department. McFarlane solved that problem by requiring the shortlists to have a maximum of three candidates, including an outsider and a woman.
Asked what keeps him awake at night, he says, “Nothing, but a glass of wine before bed helps.”
Inflating capital
Getting on top of increased inflation is a task that requires proactive steps for boards, according to John McFarlane OBE MAICD. Reflecting on the impacts of the Russia- Ukraine conflict, he says the bigger picture around economic insecurity should prompt directors to act preemptively.
“The real issue is the general situation deteriorating. Oil prices and gas prices will rise. There’s a likelihood of increased inflation, there may be an implication for economic growth. Therefore, from a board standpoint, you deal with the tactical things, but you’ve also got to deal with the strategic things.” He cautions directors against inertia. “You never do nothing. Given the heightened uncertainty, you have to make sure you’re in a stronger position than you otherwise would have been, because you don’t know how deep this effect is and how long it’s going to be.”
There are two necessary components to a board’s defence against uncertainty, says McFarlane. “You need to be very long on capital and very strong on liquidity, just in case it dries up.”
Drawing upon the notion that there is a capital “flight to quality” — where institutions de-risk their investments during crises, McFarlane recalls the confusion during the global financial crisis of 2008, when Australians became collateral to the interdependence of global banks.
“Nobody knew where quality was, and therefore money didn’t come to Australia. Even though it wasn’t an Australian problem, the government had to guarantee deposits and the funding of the banks. It just shows that even though things are not directly affected, you do get a secondary effect, and it could be material.”
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