Poor Risk Culture Leads to Largest Corporate Fine in Australia’s History

I had an interesting conversation a few months ago with a risk professional in Australia who told me about a scandal involving his country’s largest bank, the Commonwealth Bank of Australia (CBA). CBA not only operates in Australia, but also New Zealand, Asia, the U.S. and the U.K.

Unlike banks in the U.S. and Europe, Australian banks emerged from the 2008-09 financial crisis relatively unscathed.

At one time, CBA was considered an industry icon because of its long history, its financial success, and its technological innovations for customers.

After a series of scandals culminating in a record fine by Australia’s financial regulators ($734 million Australian dollars, or $521 million USD), the bank’s reputation has taken a serious hit with the public. You can learn more about CBA’s multitude of scandals here, here, and here.

Image courtesy of Maksym Koslenko via Wikimedia Commons

The Australian Prudential Regulation Authority (APRA) placed much of the blame for CBA’s woes on poor risk culture.

The report issued by the APRA explained how CBA focused a lot of risk-related attention on financial risks but was grossly ineffective at addressing operational and reputational risks.

APRA’s report identified four factors that contributed to a poor risk culture and the scandals.

  1. Complacency – Because of its robust profits and consistently high rankings on various financial measures, complacency took root throughout all levels of the company. This complacency meant non-financial risks were being missed. Also, the bank focused more on processes (as is the case with its Intelligent ATMs) rather than outcomes.
  1. Reactive – Another misstep by CBA was how it would handle operational risks and compliance issues that came up. Instead of being proactive and handling issues before they arise, the bank would only address something when ramifications became apparent, which as I explain here, leads to a host of consequences. (Being proactive instead of reactive is one key difference between traditional and enterprise risk management.)
  1. Poor reflection – APRA’s report also explains how CBA’s Board, executive leaders, managers, and employees did not take steps to learn from mistakes. Lessons were not documented and shared across the company. By not taking a “big picture” view of risk issues, the company was unable to learn, anticipate, and adapt. (More on this topic at a later date.)
  1. Placing too high of a value on consensus – CBA’s casual work atmosphere was identified as another contributing factor to the emergence of the scandals. The emphasis on consensus translated to less constructive criticism, slower decision-making, and a lack of ownership of risks. Overall, consensus leadership sounds great but leads to mostly bad outcomes.

APRA’s report made a series of recommendations and benchmarks aimed at helping CBA improve its governance, accountability, and poor risk culture. You can check out the report to learn about these recommendations and more details about CBA’s conduct.

Addressing risk and organizational culture is vital to ensuring situations do not erupt into damaging scandals.

My conversation and research about CBA brought to mind other scandals connected to risk and organizational culture.

Wells Fargo for example is still trying to recover following a scandal involving employees creating fraudulent accounts. Uber is another company attempting to deal with the reputational fallout from sexual harassment scandals.

Even back in 2006, a survey by Standard & Poor determined that companies in Australia and New Zealand were more advanced as a whole with ERM. But even then, unless the risk mindset is embedded throughout the organization, scandals like this can still happen.

At the foundation of the CBA scandal, its executives, managers, and employees were not approaching projects and outcomes with a risk mindset.

When the bank launched its intelligent deposit machines in 2012 that allowed anonymous cash deposits, no one considered risks associated with this new technology. Did anyone stop to ask if there were any regulatory requirements CBA needed to satisfy as part of this project? What about security protocols to prevent hackers or misuse of the technology?

Due to the lax culture around risk, crime syndicates and other nefarious actors were able to use the new ATM technology to launder money. By not reporting certain transactions based on dollar thresholds as required, huge fines were levied against CBA, not to mention the damage to its reputation.

Conduct risk, which is closely tied to reputational risk, has become an increasingly significant consideration, especially for financial institutions. Bad or negligent conduct on the part of executives and employees carries a much higher cost in today’s business climate.

Addressing conduct risk at your company can be complex because of what it implies – that someone is behaving inappropriately. It’s important for you, the risk professional, to be careful to not bring up past instances or to use a tone that could be interpreted as aggressive or judgmental. Rather, you are wanting your organization to be proactive about this topic and help avoid it occurring in the first place,

To learn more about how you can understand the significance of reputational risk and how to address it, I urge you to check out our previous article 5 Ways to Better Understand and Quantify Reputational Risk.

Has your company dealt with ramifications of a poor risk culture?

What does your company do to address risks surrounding compliance, reputation, and more?

I’m interested to hear your thoughts about CBA and poor risk culture in general. Leave a comment below or join the conversation on LinkedIn.

And if your company is struggling to articulate its policies around conduct or address poor risk culture in general, contact me to discuss your specific situation, or complete this form to be notified when availability opens on my calendar.

Featured image courtesy of David Iliff via Wikimedia Commons

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Meet Carol

Helping companies achieve their vision and strategy, and succeeding in today's turbulent world, is something I'm honored to be a part of. Whether you're an occasional blog visitor or a long-term client, thank you for letting us be a part of your journey.

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