Commonwealth Bank chair Catherine Livingstone AO on rebuilding trust after the 2018 banking Royal Commission

Two years into a three-year APRA-enforced remediation plan, Commonwealth Bank chair Catherine Livingstone AO discusses the board's approach to rebuilding culture, accountability and reputation.

There’s been a lot of water under the bridge for Catherine Livingstone AO FAICD since she became chair of CBA in January 2017. A money laundering scandal, a scathing APRA prudential inquiry and enforceable undertaking, a replaced CEO, the banking Royal Commission, court action by ASIC, shareholder and customer class actions, and massive fines and remediation costs. To cap it off, a national bushfire disaster and now the shock of a global pandemic.

For any chair, and board, these challenges would be formidable. So when in May this year, the CBA rejoined Roy Morgan’s list of the top 10 most trusted brands in Australia, two years after the scathing findings against the bank’s culture and governance in the APRA prudential inquiry and then the 2019 banking Royal Commission, there must have been at least a small sense of relief. Supporting this was the swift and coordinated offering of deferrals of loans worth $236b as the virus and efforts to contain its spread wreaked havoc on the economy.

That the bank moved quickly could be seen as a testament to the strong capital buffers mandated by APRA and the hard work of the board to redress and right a long list of wrongs after a 2018 APRA prudential review panel brutally described the century old icon’s fall from grace through risk, governance, culture, accountability and remuneration failings, dulled senses and “chronic ease”.

Reflecting on subsequent events, Graeme Samuel AC, one of three independent panel members who conducted the review, says CBA’s disciplined focus and transparency in becoming a better, simpler bank, “has set the benchmark for how to drive cultural change” and Australia needs more banks to follow its lead.

COVID circumstances

Social distancing in her corner office overlooking Sydney’s Darling Harbour above eerily quiet CBD streets, Livingstone describes the intense focus on right the banks governance and risk management as still very much a work in progress. The long tail consequences in terms of regulator scrutiny, capital requirements, penalties and customer remediation costs will ultimately run into billions. But she also wants to talk about resetting Australia’s economic agenda for the times ahead.

CBA’s head office is a reflection of the dramatically changed circumstances we are responding to as a nation. A building that usually holds 4400 staff now has only 700. Those entering have their temperatures checked, sanitise their hands and the restricted number of occupants permitted in any room is signposted on the doors.

Speaking exclusively to Company Director magazine for the first time since the tumultuous events of recent years, Livingstone is guarded and circumspect. With a Federal Court shareholder class action against current and former directors and officers stemming from allegations of inadequate disclosure of breaches of anti-money laundering and counter terrorism financing (AML/CTF) laws exposed by financial intelligence agency AUSTRAC, an ASIC investigation and court action and a number of customer class actions on foot, there are things she won’t discuss.

But after a personally and professionally searing nearly four years as chair, Livingstone has some reflections on how CBA has replaced the “chronic ease” that APRA described. Firstly, the former chair of Telstra, the CSIRO and Business Council of Australia president references the pandemic, joining a growing group of business leaders urging a national effort to “optimise” Australia’s economic recovery. “We have to get on top of this pandemic and recover as best we can, and in doing that, think about how we can and should change things,” she says.

Livingstone says things have changed in past months in terms of the social contract. “It has just demonstrated the really powerful impact of business and government and research working together. We want collaboration? It took a pandemic to achieve that. The focus on solving the problem together has been the most extraordinary lesson. Everyone sought to find that middle ground and signed on to the problem. In this case, everyone’s optimising the country. In optimising for the country, you also optimise for community and business.”

For the banks, as during the GFC, “liquidity and capital is your job” and the priority was working closely on how to provide financial support to people in need, quickly, at scale. “What has been demonstrated is that the government can move quickly and business can move quickly,” says Livingstone.

She is also impressed by the number of enterprises that quickly adapted their business models, and the rapid uptake of digital platforms — from health, to universities to banking and shopping — which also highlighted where we could do better in terms of that digital capability. “There’s more confidence in the community around digital technology and we should build on that mindset. People suddenly realised it’s not as frightening, not as difficult, not as scary and, in fact, has a lot of advantages.”

Collaboration, moving quickly and leveraging the improved willingness to engage in a digital environment will need to be foundational elements in resetting the economic agenda, says Livingstone. In recent decades, she adds, we’ve had an open economy based on trade agreements and a business model that relies on three main exports — resources, tourism and international education — dependent for about 35 per cent of exports on one key customer, China. We’ve also relied on immigration for growth, but we have not not backed it up with the necessary investment and infrastructure.

“All of that is absolutely right, but we’ve had set and forget, this lazy mantra,” says Livingstone. “We have to look at the whole coronavirus circumstance that’s caused a discontinuity and ask, right, what opportunity does that present? It presents many considerable challenges. The government’s doing a really solid job in the circumstances, iterating on its decisions, which is the way it should be working. But we need to be looking at the economy now with a different lens. It’s not just addressing the coronavirus issues, huge as they are, it’s saying with a more purposeful intent, ‘Where could we take the economy now? Where is the growth coming from? How can we underpin it? Where is it vulnerable, exposed? In what ways could we leverage it?’ We haven’t had that purposeful strategy in that sense.”

Technology take-up

Just as the deployment of electricity was the technology that drove rapid growth in the 1920s after the economic shock of the Spanish flu pandemic in 1919, Livingstone says pervasive digital technology must do the equivalent in the 2020s.

“It’s AI, data engineering, automation. It’s all the capability you can build on top of a truly digital environment,” she says. “I don’t mean just having a few nice apps and websites. It’s a deeper point about the technology infrastructure we have in Australia. It is about an economy that is truly sitting on a technology platform, and we are not there.”

Certain sectors are doing well in developing and adopting technology, Livingstone says, but “we could do a lot more”. She notes the context provided by NASA’s TRL scale — assessing technology readiness levels.

“It has stages one to nine, ranging from generating ideas, to how you take those ideas and turn them into a technology, to what products and services and markets emerge,” she says. “You’'ll hear lots of comments about, ‘we’re no good at commercialising’. It’s the wrong way of looking at it. What we’re not so good at is stages four, five and six — which is to take your proof of concept, build your prototype and do a demonstration model. Test it, demonstrate that it works then scale it up. That’s hard work, and that’s where we need to invest as a country. Where we lack the critical mass of skills is in this connector zone.”

To escape the TRL middle zone and have pervasive technology infrastructure, Livingstone argues that Australia needs a broad-based upskilling of the workforce to provide familiarity, capability and confidence, and to deepen its intellectual capital infrastructure. “If we’re talking about working in a data-driven world and a digital world, if we’re going to be purposeful about this, that broad-based upskilling [needs to occur] not just in business, but also in government,” she says.

For example, Livingstone is encouraged that the initiatives of the National Cabinet will finally get things moving on the critical economic pillar of vocational skills and technology, ending years of state-federal paralysis. “It isn’t about how much money needs to be spent, it’s a facilitation role,” she says. “If there’s ever a time to do it, it’s now. If everyone gives a bit, you find that middle ground. We need to find that middle ground and find the pragmatic, practical things that work, not seek perfection. Let’s find that practical way forward.”

Responding to events

Reflecting on the shift in public sentiment to the CBA during the pandemic, Livingstone is realistic. “It hasn’t been dramatic, it has been a long, hard, persistent road,” she says. “Where we are today reflects three and a bit years of very hard work by a lot of people throughout the whole organisation. The best thing that happened out of that [AUSTRAC scandal] was the APRA prudential review because it was insightful, it was incontrovertible, it was independent, it was thorough (see breakout p21). That gave the board working with management, through a remedial action plan, the mandate to look at our process system capability in a thorough, integrated way.”

The review was initiated after AUSTRAC launched court action in August 2017, alleging more than 53,700 contraventions of the Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) Act 2006 after an investigation into its compliance. Days later, Livingstone announced the early retirement of CEO Ian Narev. The CBA head of retail, Matt Comyn, took over in April 2018.

“When we hit the bushfires and the coronavirus [in January 2020] that team was working as a team,” says Livingstone. “We devoted considerable time to board and management working as a meta-team. This team, with Matt’s leadership, was able to move quickly into action in response on both the bushfire front and then on the coronavirus front.”

As COVID-19 escalated, Livingstone says the board met out of cycle. She and the CEO would check in almost every day and keep the board informed as its pandemic measures cut in. “You don’t want the board getting in the way and taking up valuable management time when time is of the essence, so we had a rhythm. My communication with Matt, Matt keeping the board informed, having board meetings, risk committee chair Rob Whitfield working with the CRO. There was a controlled intensity.”

Motivation

Livingstone says the national interest and the role CBA plays in that is a strong motivating factor for her. It’s a strong thread through her career. Born in Kenya, her family moved to Sydney’s upper north shore via a brief stint in England when she was five. After studying accounting, she worked as a chartered accountant in Sydney and London before joining medical technology company Nucleus under the late tech pioneer, Paul Trainor AO. She became CEO of Cochlear in 1994, and saw it through its initial public offering and international expansion. She became chair of the CSIRO in 2001, then Telstra in 2009. Livingstone is chancellor of the University of Technology Sydney and a director of The Australian Ballet and CSIRO Australia Telescope National Facility Steering Committee, but gave up other roles given the demands of the role at CBA.

A directorship on Australia’s biggest bank must have been a career highlight, but given the corrosive issues that subsequently blew up CBA, was Livingstone’s due diligence adequate? “It’s not until you're actually on the board that you understand how it works, she says. “You join a board and you make a commitment. As a director you have to deal with what comes your way is all I can say. You’ve got a responsibility and just because it’s hard, doesn’t mean you can resile from that responsibility. I think it’s just to recognise the challenge that comes with being a director. It’s very non-trivial.”

Off duty

Livingstone’s work ethic has been legendary and she has been accused of shouldering too much of the burden as a chair. She says chairing a board is a hard job and a chair should be devoting quite a bit of time to the role. “I’ve always worked hard, so I don’t really know any other way,” she says.

“Inevitably you talk to people, to colleagues, read a lot, think a lot, lots of different inputs. I always make sure I take breaks and the breaks usually involve hiking somewhere. When I take a break it’s always in the natural environment, it’s not to resorts or cities.”

Livingstone is a big reader and a long-time member of a book group. “I read things that might relate to technology or psychology, but not management books.” she says. On her bookshelf are: Say Nothing: A True Story of Murder and Memory in Northern Ireland by Patrick Radden Keefe about the troubles in Northern Ireland — “It’s an extraordinary book, very, very confronting, but very good” — American Dirt by Jeanine Cummins, a novel about migrants trying to get into the US, and The Spy and the Traitor and other books about the Cold War by Ben Macintyre.

In the dock

Any conversation must turn to banking Royal Commission matters and Livingstone’s tense cross-examination in November 2018 by senior counsel assisting Rowena Orr QC. Orr challenged Livingstone’s narrative over the degree to which she said she had taken management to task over the handling of breaches, given a series of “red-rated” audit reports and the matter of board minutes. It led to a joint statement by the AICD and the Governance Institute of Australia on the relevant legal obligations, the level of detail that should be included in minutes and the status of drafts and notes.

The Commission noted that CBA’s internal audit department identified “red rated” issues with compliance with AML/CTF laws in 2013, 2015 and 2016. “When the audit committee was informed in December 2016 of the third ‘red’ rated audit report for AML/CTF issues, it did not do enough... It did not challenge, or at least adequately challenge, management about why three audit reports for the same issue over four years had all been rated ‘red’, or about management’s assurances that the matter was being dealt with.”

So what has changed in the approach to minutes on the boards she’s involved in? CBA has improved its approach, but Livingstone won’t elaborate. “There has been so much said on board minutes, whether it's the AICD or whether it’s lawyers writing about it,” she says. “I will leave it to all that commentary.”

Lessons learned

Livingstone says there has been a lesson on the power of having strong frameworks and processes. “You have to be very clear on what your governance landscape is,” she says. “Then you can form a view about where you might have weaknesses and where you’ve got strengths.”

For example, CBA’s significant work to improve its risk management framework, to bring in non-financial risk reporting and its remuneration framework. “The engine room and the strategy are the yin and yang really,” she says. “You can’t have one without the other and we’ve had to run them in parallel, which is particularly challenging.”

Livingstone also refers to the unease that John Laker (former APRA chair and prudential panel chair) drew out. “Directors should always have unease. And as the APRA report said, there wasn’t that level of unease on the CBA board. As a director, you have to have a sense of ‘do things feel right?’ And if you don’t think they feel right, regardless of what everyone else on the board might think, then you have to respond to your own concerns. As a director, you’ve got to form your own judgement. And ask yourself, have I done what I think was right?”

Livingstone says that although a board is a unit, ultimately, a director has to be comfortable with the actions they have or have not taken. “You have to form judgement about what you’re going to do about it,” she says. “On three occasions over my career, I’ve resigned from a board or a council because I didn’t feel enough was being done about particular aspects. I spoke to the chair, who said nothing more was going to happen. So I resigned. If you feel change is necessary and you can’t make the change, then actually your only option is to resign”.

Samuel is quick to record his admiration for Livingstone. “I look at her overall behaviour and actions and say this is one effective chairperson and we need a few more effective chairpersons around town like that. To fess up and not gild the lily, and with a steely determination and some micro-managing when it is needed. The tone starts at the top.”

Disclaimer: the writer has shares in CBA.