how the Westpac crisis will play out


It’s an accusation so horrendous, a breach of the bank’s social licence that’s so extreme that shareholders, customers and the community will require the spilling of management blood.

There is no coming back from this situation without retribution – and this is regardless of what Hartzer and the board knew or didn’t know.

But decisions by large bureaucratic organisations are never made on the turn of a dime.

Before anything is done the board needs to ascertain the lay of the land and the key personnel in this process are the lawyers and the public relations professionals. The lawyers will provide an assessment of the merits of AUSTRAC’s case and the potential fine Westpac faces.

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Public relations people will assess the extent of the reputational hit inflicted on Hartzer, Maxsted and the bank and evaluate the potential brand damage and estimate the intensity and longevity of media pressure.

In responding to the crisis, Westpac will go through a series of processes that one could call the stages of corporate grief.

First comes disbelief. Within hours of AUSTRAC releasing its statement of claim, a seemingly shell-shocked Hartzer faced the press, declaring he was “disgusted and appalled” to learn of the detailed allegations about potential child exploitation.

Right on cue.

Next comes forgiveness and denial. Hartzer immediately apologised for what happened and vowed to do whatever it takes to get to the bottom of the mess. And by Friday the board had delivered an “unreserved apology”.

“The notion that any child has been hurt as a result of any failings by Westpac is deeply
distressing and we are truly sorry,” it said in a statement.

No scalps. No falling on swords. But there was an assurance that the company is working on fixing the problems.

Hartzer denies AUSTRAC’s claims that the senior management had been indifferent and the board had insufficient oversight.

And then comes the bargaining. This will take place over the course of the next week as the chairman does the rounds of Westpac’s major shareholders.

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Maxsted will see what he can offer shareholders that could provide a sufficiently large pound of flesh to head off a vote against various shareholder resolutions at the upcoming annual meeting in December.

For Maxsted he will need to ascertain whether he and Hartzer can survive or whether throwing Hartzer under the bus is a more plausible option.

There will undoubtedly be a groundswell of concern from small retail shareholders and comments already made by the Australian Council of Superannuation Investors suggest industry funds and other large shareholders are waiting to see what Westpac will offer.

The offshore index funds, also well represented on the Westpac share register, are harder to read.

Some voted against Westpac’s remuneration report at last year’s annual meeting, contributing to a 66 per cent vote against the resolution and a “first strike” under the two-strike policy.

Ultimately, every trustee will need to assess how their unit holders would want them to vote at the Westpac annual meeting.

Many of the offshore passive funds will take their voting advice from proxy adviser ISS which will need to assess its recommendation through a governance lens.

If a second strike is recorded at next month’s meeting, it will trigger a resolution for a board spill.

Stepping into the breach

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Westpac could go through these various stages of corporate grief quicker than either National Australia Bank or CBA.

It easy to argue that the sins of NAB’s Andrew Thorburn and Ken Henry were nowhere near as egregious as those being levelled at Westpac’s board and management.

But Westpac doesn’t have a Phil Chronican on its board.

Chronican was the well-regarded and well-known elder of banking who took control of governance and forced a response from the NAB board. He was able to fill the gap (on an interim basis) left by Thorburn and ultimately slid into the chairman’s role.

In CBA’s case, the chairman, Catherine Livingstone, had joined the board in the year before its AUSTRAC scandal erupted and was therefore a relative clean skin. Thus she had a mandate for executive scalping.

Westpac has two senior directors who could possibly take charge. The first is the former chief financial officer at ANZ, Peter Marriott. The other is former high-flying corporate lawyer Ewen Crouch.

Both have been on the Westpac board since 2013 and both are up for re-election at this year’s annual meeting and could find themselves on the wrong side of shareholder protest vote.

Ultimately Westpac has to get to its final stage of grieving – acceptance. We seem to be a way off that yet.

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