Report catalogues delays, failings of Westpac board

Westpac is one of the largest, most complex businesses in the country but the bank’s New Zealand arm did not have a board capable of ensuring it was managed well, a report ordered by the Reserve Bank says.

The report, by consultancy Oliver Wyman, found some of Westpac NZ’s directors lacked the skills and expertise to effectively hold the bank’s executives to account. It also found flaws and delays in the way Westpac’s board oversaw the ‘‘substantial number’’ of remediation programmes to fix past failures to treat customers well.

The review was ordered in March by the Reserve Bank of New Zealand Te Pū tea Matau, which regulates banks, after finding Westpac had failed to manage risk well.

Since the report was ordered, Westpac has overhauled its board. Five of Westpac’s nine directors have been appointed since then, including former Kiwibank chief executive Sam Knowles and chief executive Catherine McGrath.

The report highlights multiple failures by the Westpac board.

The bank’s independent non-executive directors collectively lacked sufficient expertise in the critical areas of banking, risk management and banking technology to guide the business, the report found.

‘‘As a result, the independent nonexecutive directors were not able to engage with and provide robust challenge to the executive on risk topics,’’ Oliver Wyman said. ‘‘The independent non-executive directors also placed too much trust in the executive without sufficient substantiation.

‘‘Their relationship lacked the degree of transparency, respect and constructive tension necessary to support effective risk governance.’’ They also lacked the fluency and depth of understanding of risk appetite expected of directors on a bank board, and tolerated the bank being outside its desired risk settings for far too long.

The board also failed to ensure adequate investment in risk management at the bank.

‘‘Agendas were lengthy, dominated by items ‘for noting’ and were not always aligned with priority risks and issues,’’ the report said.

‘‘This reduced the opportunity for sufficient discussion and debate, and reduced the board’s ability to focus and provide challenge on important key areas.’’

Board papers were voluminous. ‘‘This inhibited the board’s ability to identify salient points quickly and garner an appropriate understanding of key issues.’’

Board and board committee meetings were attended by a significant number of non-board members, the report said.

Non-board members materially outnumbered directors on most occasions.

‘‘This created an environment of increased formality, reduced the opportunity for director discussion, and led some directors to feel uncomfortable challenging the executive in the presence of their direct reports for fear of undermining them.’’

The relationship between the board and the Reserve Bank suffered from miscommunication, the report found.

Westpac was in the process of fixing a substantial number of risk and regulatory issues. These included the failures to manage risk that prompted the Reserve Bank to order the report, and also failures to do the right thing by customers, such as paying back money they had been overcharged.

‘‘The board had a strong focus on these; however, the underlying programmes had design weaknesses that resulted in delayed or ineffective delivery,’’ the report said.

‘‘Timelines appeared to have been set without full consideration of available capability, capacity and priorities.’’ This resulted in some delays, which appeared to have been only for the remediation programmes related to customers.

The report recommended changes Westpac needed to make but said: ‘‘At the time of this report’s publication, [Westpac New Zealand] has already made progress towards implementing these recommendations.