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Storytelling In The News: #108

Competing stories at the board of National Australia Bank

April 3, 2004

I spent the last week in Australia and found that the top business story throughout the week concerned competing stories as to what is going on at the board of directors of the largest Australian financial institution, the National Australia Bank (NAB).

The story so far

The story at the origin of the trauma is a relatively small one - a a $360 million dollar loss in rogue foreign exchange trading, or an amount that involves about 6 per cent of NAB's annual earnings. But the story has had mammoth consequences for the bank, tearing apart its governance structure and threatening to do even more damage in the future.

In deciding what to do about the foreign exchange loss, the board adopted a report that contained the story that responsibility lay with one of its own, the only female director, Catherine Walter, who had been head of the audit committee that oversaw foreign exchange trading. But when Walter refused to resign, the board proposed a resolution to the shareholders at an extraordinary general meeting to remove her, citing "irreconcilable differences".

Walter in turn fought back with the story that the entire board was culpable and, in "a fiendishly clever move", proposed a set of resolutions removing all the directors, along with their pension rights. Walter suggested that the board was on a witch hunt and that she was being harassed. She pointed out that the current chairman, Graham Kraehe, also served on the audit committee and argued that there was no basis for making her the sole scapegoat.

The cost of the storytelling so far

The extraordinary boardroom squabble is a departure from the normally clubby, tightly-knit male-chauvinist financial sector in Australia. It threatens to undermine confidence in NAB's rehabilitation after $A360m of losses from rogue foreign exchange trading. Shareholders will soon be forced to make a choice - back dissident director Walter or the rest of the board seeking a vote to oust her.

The competing storytelling has already caused substantial under-performance in the NAB's share price.

The cost in terms of executive departures has also been significant. In the last two months, the bank has lost its chairman, chief executive, chief financial officer, the head of its corporate and institutional banking division, its head of markets, head of risk management and a string of other managers and staff. It now looks inevitable that the instability will not just continue but could increase.

The new chief executive, John Stewart, has experience that is largely confined to retail banking. He now has to manage a major overhaul and restocking of his senior executive team while complying with Australian Prudential Regulation Authority requirements that will involve major changes to the bank's processes and culture.

Whatever the outcome of that meeting - whether the majority of non-executives prevail and Walter is dumped from the board or whether her proposed forced ejection of all non-executives over a three-year period is endorsed by shareholders - the board will be further discredited, even more dysfunctional and the task of returning it to normal even more difficult and protracted.

If the majority of the non-executives do gain the support of shareholders, that support will be begrudging and conditional. Institutional shareholders are talking about supporting the majority provided there is further, albeit more orderly, change, including the departure of Kraehe.

Who is to blame for the current corporate governance fiasco?

Some commentators criticize Walter for having provoked the public squabble by refusing to resign as requested and then by tabling competing resolutions before the extraordinary general meeting to oust her.

Others blame Kraehe. The claim that there are "irreconcilable differences" with Walter that have emerged in the last three weeks is hard to fit with the fact that they have worked with her on the board for a number of years. After all, it was chairman Kraehe, not Walter, who escalated the situation by calling for her formal ouster by an extraordinary general meeting. In effect, he and his fellow non-executive directors embarked on a lose-lose confrontation with Walter.

One commentator asks "why isn't Kraehe exercising a bit of that management skill and dealing with the situation? Not all board members are easy to deal with and clearly Walter has been extremely agitated about the bank and her position. But requisitioning an extraordinary general meeting, costing millions of dollars, to relieve the tension in the boardroom seems absurd."

Bottom line

Walter quotes Warren Buffett that collegiality can trump independence. But when independence reaches the point where the competing storytelling about what has gone wrong and who is responsible has reached the point where competing factions are placing opposite resolutions before shareholders at an extraordinary general meeting, it is apparent that NAB no longer has governance: rather it is being torn apart by civil war.

Whatever the eventual outcome of the squabble, one thing is abundantly clear: the devastating corporate consequences of competing storytelling.

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