VOLUME TEN
MANAGEMENT ISSUES

 

 

CHAPTER 21
THE RELATIONSHIP BETWEEN THE BOARD
AND THE CHIEF EXECUTIVE

 

 

TABLE OF CONTENTS

1.1 INTRODUCTION

21.2 THE APPOINTMENT OF THE CHIEF EXECUTIVE OFFICER
21.2.1 INTRODUCTION
21.2.2 THE MANDATE OF THE FIRST CHIEF EXECUTIVE OF THE STATE BANK OF SOUTH AUSTRALIA
21.2.3 THE SEARCH AND RECRUITMENT PROCESS FOR THE BANK'S FIRST CHIEF EXECUTIVE OFFICER
21.2.4 THE SELECTION OF MR T M CLARK AS CHIEF EXECUTIVE OFFICER
21.2.5 ACCEPTANCE OF THE POSITION BY MR T M CLARK
21.2.6 OBSERVATIONS AND CONCLUSIONS

21.3 PLANNING THE SUCCESSION OF THE CHIEF EXECUTIVE OFFICER
21.3.1 INTRODUCTION
21.3.2 THE FIRST SUCCESSION: THE 1986 RE-APPOINTMENT OF MR T M CLARK, AS MANAGING DIRECTOR
21.3.3 OBSERVATIONS AND CONCLUSIONS ON THE 1986 RE-APPOINTMENT OF MR T M CLARK AS MANAGING DIRECTOR
21.3.4 THE SECOND SUCCESSION: THE 1988 RE-APPOINTMENT OF MR T M CLARK AS MANAGING DIRECTOR
21.3.5 OBSERVATIONS AND CONCLUSIONS ON THE 1988 RE-APPOINTMENT OF MR T M CLARK AS MANAGING DIRECTOR

21.4 MANAGING THE PERFORMANCE OF THE CHIEF EXECUTIVE OFFICER
21.4.1 THE RESPONSIBILITY FOR MONITORING THE PERFORMANCE OF THE CHIEF EXECUTIVE OFFICER
21.4.2 PERFORMANCE EXPECTATIONS VIS-A-VIS THE CHIEF EXECUTIVE OFFICER
21.4.3 PERFORMANCE MONITORING AND REVIEW PROCESSES
21.4.4 PERFORMANCE REVIEW OF THE CHIEF EXECUTIVE BY THE EXECUTIVE COMMITTEE
21.4.5 PERFORMANCE REVIEW OF THE CHIEF EXECUTIVE BY THE BOARD OF THE STATE BANK
21.4.6 THE PERFORMANCE OF THE MANAGING DIRECTOR AS PERCEIVED BY THE DIRECTORS
21.4.7 OBSERVATIONS AND CONCLUSIONS ON THE MANAGEMENT OF THE PERFORMANCE OF THE MANAGING DIRECTOR

21.5 THE REMUNERATION OF THE MANAGING DIRECTOR AS A FUNCTION OF HIS PERFORMANCE
21.5.1 THE MAKE-UP OF THE MANAGING DIRECTOR'S REMUNERATION
21.5.2 DIRECTOR'S FEES AS A DIRECTOR OF THE STATE BANK AND OF SUBSIDIARIES OF THE STATE BANK GROUP
21.5.3 DIRECTOR'S FEES AS A DIRECTOR OF ENTITIES UNRELATED TO THE STATE BANK GROUP OF COMPANIES
21.5.4 THE BASIS AND MECHANISM FOR THE REVIEW OF THE MANAGING DIRECTOR'S REMUNERATION
21.5.5 THE EVOLUTION OF THE MANAGING DIRECTOR'S REMUNERATION FROM 1984 TO 1991
21.5.5.1 Setting The Initial Remuneration
21.5.5.2 In 1985
21.5.5.3 In 1986
21.5.5.4 In 1987
21.5.5.5 In 1988
21.5.5.6 In 1989
21.5.5.7 In 1990
21.5.5.8 In 1991
21.5.6 OBSERVATIONS AND CONCLUSIONS ON THE REMUNERATION OF THE MANAGING DIRECTOR

21.6 FINDINGS AND CONCLUSIONS

21.7 REPORT IN ACCORDANCE WITH TERMS OF APPOINTMENT
21.7.1 TERMS OF APPOINTMENT A
21.7.2 TERM OF APPOINTMENT C

 

 

 

21.1 INTRODUCTION

 

The starting point for any analysis of the relationship between the Board and the Chief Executive is the statutory framework within the State Bank of South Australia Act 1983 ("the Act"). In so far as it is relevant to the topic of this Chapter, the Act provides:

"14. (1) The Board is the governing body of the Bank and has full power to transact any business of the Bank.

...

15. (1) In its administration of the Bank's affairs, the Board shall act with a view to promoting-

(a) the balanced development of the State's economy; and

(b) the maximum advantage to the people of the State,

and shall pay due regard to the importance both to the State's economy and to the people of the State of the availability of housing loans.

(2) The Board shall administer the Bank's affairs in accordance with accepted principles of financial management and with a view to achieving a profit.

...

16. (1) There shall be a Chief Executive Officer of the Bank.

(2) The Chief Executive Officer is, subject to the control of the Board, responsible for the management of the Bank.

(3) The Chief Executive Officer shall be appointed by the Board.

17. (1) The Board may appoint such officers of the Bank as it thinks necessary for the effective operation of the Bank.

(2) The officers of the Bank are not subject to the provisions of the Public Service Act, 1967.

(3) The provisions of the Second Schedule of this Act (which are incorporated with, and shall be read as part of, this Act) shall apply to officers appointed under this section.

18. (1) The Board may delegate any of its powers or functions under this Act.

(2) The Chief Executive Officer may delegate any of his powers or functions under this Act.

(3) A delegation under this section-

(a) may be absolute or conditional;

(b) is revocable at will; and

(c) does not derogate from the powers of the delegator."

The Second Schedule to the Act provided, in so far as it is relevant:

"2 Subject to this Act, the Board may-

(a) employ officers and other persons subject to such conditions as it thinks fit;

(b) transfer an officer from one office to another office having the same classification; and

(c) terminate the employment of an officer or employee.

3 (1) The Board may declare any office in the Bank to be a prescribed office.

...

4 (1) The Board may, pursuant to this clause, classify an office in the Bank (other than a prescribed office) by reference to the level of salary payable in respect of that office.

...

11 (1) If, after making a full inquiry, the Board is satisfied that an officer is guilty of misconduct it may impose one or more of the following penalties.

(a) it may reprimand the officer;

(b) it may transfer him to another office in the Bank at a lower classification;

(c) it may reduce the salary or allowances payable to him;

(d) it may suspend him from office with or without pay for a period fixed by the Board;

or

(e) it may dismiss him."

As the governing body of the Bank, the Board thus numbers among its responsibilities that of appointing the Chief Executive Officer.() Through delegations granted to him by the Board(), and through the delegations which he may in turn grant to his sub-ordinates(), the Chief Executive is responsible for the management of the Bank, "subject to the control of the Board".()

The management of the affairs of the Bank occurs through a range of functions, the activities of which are supervised by senior executives. These senior executives are appointed at the behest of the Chief Executive, with the approval of the Board.() They are accountable to the Chief Executive who directs and supervises their actions, and monitors their performance.

In the course of this Investigation, and as reported on in various Chapters of this Report, I have found numerous deficiencies in key functions of management within the State Bank. I refer here, in particular, to identified shortcomings in the following management processes: the setting of the Bank's direction(); the monitoring of risks within the Bank(); the management of funding(); the management of credit(); the management of its overseas operations(); and the management of a range of controls, both internal and external.()

I have found, as indicated elsewhere in this Report, that these deficiencies in management functions have resulted in material losses, and both directly and indirectly depending on the nature of the functions concerned, caused the Bank to hold significant assets which are non-performing.()

In that those material deficiencies were manifest in functions under the supervision of the Chief Executive Officer, and in that they occurred, in varying degrees, over the period of this investigation, rather than solely as the result of unforeseen external events at any particular time, I have been brought to consider two issues: firstly, the manner in which the Board, as the governing body of the Bank, monitored the activities of the Chief Executive Officer, Mr T M Clark, hereinafter in this Chapter also referred to as the Group Managing Director and the Managing Director, so as to ensure that his activities accorded with sections 15 (1) and (2)() and Section 16() of the State Bank Act; and secondly, the nature, degree, and effectiveness, of the control that the Board exercised over his management as a result of that monitoring, as required by the Act.

The Bank Board, as with most boards, could exercise control over the management of the Bank's affairs, as conducted by its Chief Executive, through a range of measures. Key among those means are the following:

(a) the initial appointment (or subsequent re-appointment, as the case may be) of the Chief Executive Officer;

(b) the monitoring and control of his performance;

(c) the remuneration of the Chief Executive as a function of his performance;

(d) the definition of his role in relation to that of the Board, and the division of powers between the two parties; and

(e) should the need arise, the removal and replacement of the Chief Executive.()

As a result of my review of those matters, and as discussed in detail in this Chapter, I am of the opinion that:

(a) The level of control exercised by the Board was comparatively weaker and less effective between July 1984 and June 1989 than at other times. During that time a substantial proportion of the matters and events, which caused the financial position of the Bank and the Bank Group as reported by the Bank and the Treasurer, occurred or were transacted.

The Board did not maintain, during critical years of growth in the Bank's history, useful or effective control and supervision over the Chief Executive; conversely by express grant or simple default, it enabled the Chief Executive to exercise a disproportionate degree of influence in the bank's decision-making process.

(b) While the Board endeavoured to exercise a far closer degree of control from 1989 onwards, the endeavour was not, in practical terms, an effective or timely one.

Once alert to shortcomings in the Bank's management by the increase in the number of non-performing assets and other matters, which I shall refer to, the Board's efforts to resume control of a situation which it felt had eluded it were only of limited effect. In any case, those efforts were not such as to redress or reverse the trend in the Bank's performance to the degree necessary to stave off the financial disaster of February 1991.

In particular, I am of the opinion that the Bank Board failed to adequately supervise, direct, and control the affairs of the Bank with respect to such matters as:

(a) the succession of the Chief Executive between 1984 and 1988, and the renewal of Mr Clark's service agreement in 1988;

(b) the framing of mandates and objectives for the Chief Executive, as a platform for his actions and initiatives, on the one hand, and for the later review of his - and the Bank's - progress, on the other hand, from 1987 to 1990;

(c) the formal, structured, and effective, monitoring of the performance of the Chief Executive against any agreed mandates and objectives, from 1984 to 1991, particularly, once shortcomings had been identified from 1988 onwards;

(d) the rewards and remuneration granted to the Chief Executive as a measure of his performance, and of the Board's satisfaction, particularly from 1988 to 1990; and

(e) the definition and enforcement of the respective powers of the Board vis-a-vis those of the Chief Executive, at a time when many directors were clearly dissatisfied with their balance, and the influence exercised by Mr Clark on the direction of the Bank and the Bank Group.

That the Board failed to adequately attend to those matters may be attributed to a number of reasons that I explore in the following sections of this Chapter.

Taken as whole, however, those reasons have brought me to believe that, over the period 1984 to 1991, the play of wills between the Chief Executive and the Board, as a reflection of their respective determination to achieve particular goals, and as a source of either action or inaction of the parties, influenced substantially what business affairs the Bank considered and entered into.

In the course of this Investigation, numerous submissions have been made and received from the past directors regarding the duties and responsibilities of directors under the law in general and under the State Bank Act, in particular. Those submissions carefully set out the responsibilities which it is claimed can be ascribed to members of a board and those, which can be ascribed to the Chief Executive Officer.

I acknowledge those submissions and have been mindful of their content in forming my views.

I now turn to the examination of the four areas identified earlier:

(a) the initial appointment (or subsequent re-appointment, as the case may be) of the Chief Executive Officer, and the planning of his success;

(b) the monitoring and control of his performance;

(c) the remuneration of the Chief Executive, as a function of his performance; and

(d) the definition of his role in relation to that of the Board, and the division of powers between the two parties over the period 1984-1990.

I have done so under Terms of Appointment A(a), A(b), A(c) and C.

Term of Appointment A(a) requires me to investigate and inquire into and report on:

"... what matters and events caused the financial position of the Bank and the Bank Group as reported by the Bank and the Treasurer in public statements on 10th February 1991 and in a Ministerial Statement by the Treasurer on 12th February 1991."

Terms of Appointment A(b) and A(c) require me further to investigate and inquire into and report on:

"... what were the processes which led the Bank or a member of the Bank Group to engage in operations which have resulted in material losses or in the Bank or a member of the Bank Group holdings significant assets which are non-performing"

and

"... whether those processes were appropriate".

Under Term of Appointment C, I am also required to:

"... investigate and inquire into and report, with reference to the above matters, whether the operations, affairs and transactions of the Bank and the Bank Group were adequately or properly supervised, directed and controlled by:

(a) the Board of Directors of the Bank;

(b) the Chief Executive Officer of the Bank;

(c) other officers and employees of the Bank;

(d) the Directors, officers and employees of the members of the Bank Group".

 

21.2 THE APPOINTMENT OF THE CHIEF EXECUTIVE OFFICER

 

21.2.1 INTRODUCTION

The selection of a chief executive is commonly recognised as one of the most important tasks that falls to a board.

The particular responsibility of the Bank Board, vis-a-vis the selection and appointment of the Chief Executive, is set out in the State Bank Act. Section 16 (1) directs that "there shall be a Chief Executive Officer of the Bank", while Section 16(3) states that: "The Chief Executive Officer shall be appointed by the Board."

21.2.2 THE MANDATE OF THE FIRST CHIEF EXECUTIVE OF THE STATE BANK OF SOUTH AUSTRALIA

The initial mandate of the Chief Executive took shape under the supervision of the Merger Advisory Group() and through the work of its Recruitment Sub-Committee() , in June 1983.

This mandate served as the starting point in the quest for a suitable candidate, and thereafter the foundation of the first Chief Executive's brief.

I believe two points are to be made in regard to this initial brief. Firstly, it was a defined brief, in that it comprised three agreed objectives. Secondly, it was a brief that was to be executed in a specific time-frame, corresponding to the term of the Chief Executive's appointment.()

Mr K J Hancock, then Chairman of the `old' State Bank of South Australia and one of the two Chairmen of the Merger Advisory Group() identified the three objectives that were to be those of the new Chief Executive as follows:

(a) the execution of a successful merger of the two predecessor organisations;

(b) the development of an executive team capable of ensuring the on-going management of the new bank at the conclusion of the Chief Executive's term; and

(c) the `commercialisation' of the new bank, to ensure the organisation's survival and growth in a deregulated environment.()

These three objectives are also those recalled by Mr Clark() as basis of the brief conveyed to him in the course of his early discussions with Mr L Barrett and Mr Hancock.()

In relation to the executive team development objective, Mr Hancock, moreover, underscored the fact that:

"It was made very clear to him [Mr Clark] that one of his functions was to train up people in the Bank who would be there when he left ... One of them might end up as his successor ... but whether it [happened] or not, he ought to be developing a team of highly competent people" ()

an emphasis with which Mr Clark concurred in his own account to the Investigation.()

The requirements of this objective and its implications for the management of the Bank were significant; both are discussed at greater length in Chapter 20 - "The Management of Senior Executives at the State Bank" which deals with the development and management of the senior executive team at the State Bank, from July 1984 to February 1991.

The first Chief Executive was, therefore, to be asked, in essence, to carry out a `bridging' and `start-up' task. On completion of that task at the end of three years, the first Chief Executive would then depart, and the Board would inherit a stabilised, suitably staffed, and equipped, organisation at the head of which would be appointed a long-term Chief Executive.()

It is on those premises that the search for potential candidates was based. The quest was not for a long-term leader, and the Board would thus have to address the issue of his succession at an appropriate time. Indeed, mention has been made to the Investigation of an expectation that the second Chief Executive would be appointed from the ranks of the Bank's own staff.()

21.2.3 THE SEARCH AND RECRUITMENT PROCESS FOR THE BANK'S FIRST CHIEF EXECUTIVE OFFICER

I now turn to the manner in which the search and recruitment process was conducted, as a preliminary to setting out the reasons that motivated the selection of Mr Clark.

In order to deal with the recruitment of a suitable Chief Executive Officer for the new bank, the Merger Advisory Group established a Recruitment Sub-Committee early in the latter part of 1983.

In June 1983 or shortly thereafter, the Recruitment Sub-Committee sought the assistance of executive search consultants and commissioned the firm of Spencer Stuart & Associates,

"... to provide a short list of potential appointees of between three and six".()

adding that the final selection made by the consultants would be subject to the recommendation of the two Chairmen of the Merger Advisory Group, Mr Barrett and Mr Hancock, and to the approval of the full Merger Advisory Group.()

In a letter dated 21 September 1983, Mr R H King, then of Spencer Stuart & Associates, wrote to the two Chairmen to report on his progress, and to put forward the name of three candidates, one of whom was Mr Clark.()

Before presenting a synopsis of the credentials of the three candidates, Mr King pointed out that:

"... the notes we enclose are less comprehensive than those which we usually prepare and this is because we have been talking about a very senior post with some very senior people where the terms under which they might undertake such an appointment are fairly flexible, and, in these circumstances, we have only been able to have general discussions with them to elicit a prima facie interest in exploring the matter with you first before they confirm their definite interest." () [Emphasis added]

Mr King's comment highlights the exploratory nature, to this point at least, of the discussions with the potential candidates, a fact which is confirmed by his assertion, in the following paragraph of the same letter, that:

" ... [Spencer Stuart & Associates] have not been able to conduct our usual interviews and have had to rely on notes and information gathered in our records over many years or information which is otherwise publicly available."

The information presented regarding Mr Clark was nevertheless sufficiently persuasive to overcome any reservations the readers of the letter may have felt, as Mr Barrett and Mr Hancock proceeded to interview him. In Mr Hancock's words, Mr Clark was interviewed:

"... at least twice. On one occasion Mr Barrett and I went to Melbourne and interviewed him in the offices of Spencer Stuart, and then he was also interviewed by the full Merger Committee [sic]. Whether there was any other interview, I can't remember, but there was certainly those two interviews." ()

I understand that the Recruitment Sub-Committee, relied on Spencer Stuart & Associates to elicit matters of relevance with respect to Mr Clark's past work experience.() References on Mr Clark were obtained and passed on to the Merger Advisory Group.()

On the strength of those interviews and of further discussions with Mr King of Spencer Stuart, the decision to offer the position to Mr Clark was arrived at "... by the full Merger Committee [sic]".() The offer was accepted and finalised in December 1983, and Mr Clark took up his duties as Chief Executive Officer - Merger in February 1984.()

There are two aspects of the selection process which are worthy of comment for their relevance to the future course of events in the Bank and to matters raised elsewhere in this Chapter.

They relate, in the first instance, to the reasons for the selection of Mr Clark by the Merger Advisory Group; and, in the second, to two of the factors in Mr Clark's acceptance of the offer.

21.2.4 THE SELECTION OF MR T M CLARK AS CHIEF EXECUTIVE OFFICER

In reviewing the evidence placed before me on this issue, I have formed the view that the selection of Mr Clark as the best candidate rested principally on two factors, being those of his experience, on the one hand, and of some of his personal attributes or qualities, on the other.

Such a view concurs with Mr Clark's own opinion on the matter, as expressed in another context:

"I was appointed because of my experience and because I was aggressive and optimistic." ()

On the matter of experience, a review of the curriculum vitae and the "Summary of Business Experience" submitted by Mr King on behalf of Mr Clark, would have indicated that the bulk of Mr Clark's experience had been acquired in retail organisations (some twenty years, from 1952 to 1972), rather than in banks, the first of which he joined in 1972.

His role at the Commercial Bank of Australia capitalised, until 1981, on his retail industry experience rather than on "mainstream" banking, as he was appointed General Manager, Subsidiaries and Affiliates. In that capacity, he "oversaw the growth" of General Credits Limited, "negotiated the acquisition" and participated in the management of Henry Jones (IXL) Limited and was a director of both Marac Holdings Limited (NZ) and Euro-Pacific Finance Corporation Limited. It was from that position that he moved in 1981, following his appointment to the four-man negotiation team, charged with the task of shaping a merger between the Commercial Bank of Australia and the Bank of New South Wales.

Thus there were limitations to Mr Clark's experience as a chief executive officer and as a mainstream banker, although, it must be conceded that he did have considerable experience in the management of senior executives in other organisations, and had come highly recommended to the Bank. Interviewed in the context of a consulting exercise conducted by the firm of Cordiner King Warburton on the quality of senior management resources, Mr D W Simmons noted that, in his view, Mr Clark:

"... was not so strong in banking, but as a retailer he was fantastic ()... [he was] more of a salesman than a banker...".()

Nor was Mr Simmons alone in that impression. While it was agreed that Mr Clark could project a confident style as a banker, his lesser banking experience became, over time, a facet of Mr Clark's profile that other directors also commented upon, describing Mr Clark: "... as a brilliant salesman, ... one of Australia's best ..." ,() but also one, who, because of the very characteristics of his profile, might require "supplementing and controlling".()

That Mr Clark's salesmanship and marketing abilities were, indeed, recognised will later be reflected in the role given to him after September 1990, when, as a result of the Board's deliberations as to his management or operational effectiveness, his activities were refocussed on an `ambassadorial role' aimed at business development.()

There was also the matter of Mr Clark's lack of experience as a Chief Executive. In that regard, Mr King indicated to the members of the Recruitment Sub-Committee that Mr Clark " ... [did] not have experience as a Chief Executive of a large organisation ..." (). At the time of his appointment, therefore, Mr Clark had not had - to quote an expression reportedly used by Mr Clark - "his hand on the tiller".

On the positive side, Mr King drew the selectors' attention to the fact that:

"... among the three people we are suggesting you meet, Tim Clark [sic] is the only one with very direct and relevant experience in the merger of trading and savings banks".()

The execution of such a merger was, of course, the first and immediate task confronting the Merger Advisory Group, in its endeavours to establish the new State Bank of South Australia. Mr Clark's experience in the matter would have been seen, therefore, as a definite asset.

On the topic of personality, the Merger Advisory Group were made aware by Mr King of Mr Clark's "... considerable stature, energy, enthusiasm and will to win." () This `energy and enthusiasm' are also traits which representatives of the Government appointed to the Merger Advisory Group took notice of. Referring to a verbal communication between a representative of Spencer Stuart & Associates and the members of the Merger Advisory Group, regarding Mr Clark's profile, Mr I J Kowalick recollects: "... words to the effect that he [Mr Clark] was a very strong personality, would impose a strong leadership style and would drive the organisation." ()

Those traits were quite evident to Mr Barrett, who described Mr Clark as:

"... a very aggressive, entrepreneurial chap, keen to see the Bank do well ... keen to see the State Bank with Tim Marcus Clark become Australia's number one bank" (),

as they were to Mr Hancock, who saw in him, as did other members of the Merger Advisory Group, "... a chief executive who could influence the board." ()

So keen was Mr Clark that Mr Barrett saw the need to restrain Mr Clark's drive and some of his initiatives, adding that:

"... had [Mr Clark] been given full rein, he would have had far greater strategy plans than the board would go along with..." ()

In acknowledgment of those attributes of Mr Clark, as indicated to him by Mr King, Mr Barrett expressed the view that two restraining or controlling influences were exercised upon the activities of the Chief Executive: the first he saw as his own "quiet reserved nature" (), which he could bring into play as Chairman, while the second was represented by the Executive Committee and, more specifically, the influence of the "long-term career officers from the old Savings Bank and the former State Bank" () within that group.()

The views on Mr Clark's optimism and strength of personality were also sufficiently clear to prompt further discussions between Mr Barrett and Government members of the Merger Advisory Group as to the need "... to appoint people who had the qualities to be a balancing force to Mr Clark's [sic] obvious positive qualities." ()

In later years, the same consideration would turn to concern, and prompt calls for the "strengthening" of the Board, by both Mr Simmons() and Mr R E Hartley.() The latter would add to this call by requesting the appointment of "not less than two" () directors with banking experience or expertise to act as a counter-weight to Mr Clark's perceived `monopoly' on banking know-how and wisdom.()

I shall return to the issues of Mr Clark's experience and of his personality when discussing the exercise of their respective powers by the Board and the Chief Executive in a later section of this Chapter.

21.2.5 ACCEPTANCE OF THE POSITION BY MR T M CLARK

In reviewing the selection process which led to the appointment of Mr Clark, it is equally relevant to consider some of the reasons which prompted the prospective Managing Director to take part in exploratory discussions and, at the appropriate time, to accept the position.

The prospect of the chief executive position, presented to Mr Clark by Mr King in late 1983, would appear to have been attractive for two principal reasons: firstly, it offered a chance to overcome increasingly limited prospects within Mr Clark's working environment at the time; and, secondly, it presented him with what he described as a "challenge" () and as an opportunity to assume responsibility (and thus to satisfy an expressed ambition)() for the leadership of an organisation of substance.

Various reasons have been put forward as to why Mr Clark would have been receptive to the opportunity in the first instance. Mr King, in his report to Mr Barrett and Mr Hancock, highlighted the fact that:

"If [Mr T M Clark] is to progress within Westpac, he would need to be prepared to move to Sydney and, at this stage, he is not willing to do that for family reasons. He is, however, prepared to move to Adelaide for a defined appointment such as this..."()

Mr Hancock, for his part, recalled obstacles of a more professional or organisational nature, in that Mr Clark:

"... saw himself, perhaps accurately, as being the victim of the merger that produced Westpac ... And he had been with CBA [Commercial Bank of Australia], and he formed the view that there wasn't much future for people who had come up through CBA." ()

Whatever other reasons might have existed, it is sufficient to observe that the opportunity arose at an opportune point in Mr Clark's career progression. Of more significance, however, in Mr Clark's eventual decision would have been the fact that the prospect offered him the chance to realise a personal aspiration, in that:

"... what he dearly wanted was to have his hand on the tiller, and there was no prospect of his ever doing so in Westpac ..." ()

The strength of that aspiration, and of the prospect of its fulfilment, was such that Mr Clark was willing to "... come to a small bank ... when he could be playing in the big league"(), and willing, moreover, to purportedly take a material cut in earnings in order to do so.()

21.2.6 OBSERVATIONS AND CONCLUSIONS

My observations and conclusions, with respect to this particular matter, are as follows.

(a) Regarding the Brief of the First Chief Executive

(i) The brief given to the first chief executive was specific and focused on three objectives, agreed by all parties: to carry out a successful merger; to develop in the new Bank a commercial stance such as to ensure the on-going growth of the organisation; and, to put in place the management team required for the Bank's operations.

(ii) The brief given to the first Chief Executive Officer was limited in time, in that the three objectives stated above were to be met within three years, after which a new Chief Executive would be appointed for the long term.

(b) Regarding the Selection of Mr T M Clark as Chief Executive

In appointing Mr Clark to the position of Chief Executive Officer, the Merger Advisory Group - and thus those of its members who would be appointed directors of the new State Bank Board - were aware that:

(i) Mr Clark had direct and relevant experience in the negotiation and management of mergers in a banking environment.

(ii) Although he did not have experience as chief executive of a large organisation, he did have experience in the management of senior executives within a large organisation.

(iii) He had limited experience in `mainstream' banking operations, the better part of his experience having been acquired in retail management, as well as the management of a portfolio of affiliates and subsidiaries in a banking context.

(iv) He had, by many accounts, a strong, driving personality and a desire to lead.

(v) Those combined attributes of experience and personality made for a profile that would need "balancing", "controlling" or "restraining" - to use the terms quoted to this Investigation and in other forums - in the first instance, at Board level, and, in the second, through such organisational mechanisms as might be deemed appropriate.

In the light of those facts, I am of the opinion that the Merger Advisory Group - and thus those of its members who would be appointed directors of the new State Bank Board - were on notice, as it were, that:

(i) There would be a need to address matters of succession planning on an on-going basis for the three years of the first Chief Executive's term, particularly, if his successor was to be identified and raised from the ranks of the Bank's own staff.

(ii) For the succession planning to be effective, there would be a need to reconsider and reshape the brief to be given to the second Chief Executive, if only as a basis from which to begin the search for such a successor.

(iii) While comfort could be derived from the experience of Mr Clark in the negotiation and management of the CBA-Bank of New South Wales merger, there would be a need to support adequately his identified lack of experience as chief executive of a large organisation.

(iv) Similarly, there would be a need to support adequately his limited experience in `mainstream' banking in order to ensure that the Bank's operations (risk management, credit management, systems and personnel to name but some of the more obvious functions involved) were placed on a sound footing.

(v) That the Directors would, as a body, need to be prepared to balance a level of energy and optimism that was not tempered by adequate experience in either the management of a large organisation or of a bank per se.

The first two points speak of the Board's actions with regard to succession planning and the development of subsequent briefs. Specifically they raise two questions: firstly, what actions did the Board take (given its responsibility for the appointment of the Chief Executive), to ensure a succession at the close of the first term of appointment; and, secondly, given that the first Chief Executive was re-appointed twice over, on what basis did the Board consider and approve that re-appointment ? Those questions are dealt with in Section 21.3 of this Chapter.

The last three points speak to the manner in which the Board addressed, monitored, and controlled, the management of the affairs of the Bank by the Chief Executive under his Board-delegated powers. Those points are dealt with in Sections 21.4, 21.5 and 21.6 of this Chapter.

In all, the points above sum up, with respect to the members of the new Board, those areas which would require attention and active management in the exercise of it's responsibilities with regard to the Chief Executive's performance.

(c) Regarding the Procedures Followed for the Recruitment and the Appointment of the First Chief Executive

On matters of procedure regarding the selection and appointment of the (first) Chief Executive, I observe that the brief agreed upon by the Merger Advisory Group as the mandate of the first Chief Executive Officer of the new bank, - the same brief that would be used by the executive search consultants in their quest for suitable candidates, and which would later be discussed and settled with the selected candidate, Mr Clark - was never formalised.

Questioned as to how the tenor of the brief had been communicated to Mr Clark, Mr Hancock answered that it was advised:

"... in an informal way, both in discussion with the Board and in discussions on less formal occasions than that" (),

adding that,

"... to the best of his recollection" it had not been embodied in a contract of employment.

While Mr Clark did, contrary to Mr Hancock's statement, enter into contracts (or "Service Agreements") with the Bank regarding his employment, those contracts contained no reference to the brief described above. The spirit of Mr Hancock's comment is, therefore, correct, in that no record has been kept of the mandate given to the State Bank's first Chief Executive Officer.

This failure to effectively document or formalise an important understanding could, if it was an isolated instance, have been of little moment. In the light of subsequent difficulties and problems, however, and given the fact that it is but one of many instances of similar failures, it is, to my mind, a telling one.

The point is not, that the Board failed to keep a bureaucratic record, but rather that its failure - when considered in conjunction with similar later failures - is symptomatic of the absence of any structured, consistent, or effective, mechanism used by the Board to monitor and control the performance of a Chief Executive Officer. It is to be borne in mind that it is this same Chief Executive who, while he may have been directly responsible for the management of the Bank's affairs, was nevertheless also "... subject to the control of the Board".()

I shall elaborate further on the consequences and implications of those failures at a later stage in this Chapter, when more of the relevant facts have been set out.

I now turn to the examination of the questions of succession planning and performance monitoring and control, as they apply to the Chief Executive.

 

21.3 PLANNING THE SUCCESSION OF THE CHIEF EXECUTIVE OFFICER

 

21.3.1 INTRODUCTION

As indicated earlier, the responsibility of the Board vis-a-vis the selection and appointment of the Chief Executive is set out in the State Bank Act.()

To discharge it, the Board would perforce be required to engage in succession planning, an activity I understand to mean, in the immediate context, those steps taken by the Board to identify and prepare likely successors to the Chief Executive.()

That the Board and the Chief Executive recognised both a responsibility for the appointment of a successor to Mr Clark, and for succession planning as its prerequisite, is made clear by the statements of numerous directors.()

If the position was clear in this regard for members of the Board, it was equally so for the Managing Director, Mr Clark, who saw it as one of the objectives of his first mandate:

"... to participate in the selection of a new Chief Executive to take over from me at the expiration of my contract term." ()

Mr Clark resigned as Managing Director of the Bank on 9 February 1991, after nearly seven years as Chief Executive. In that time, he was re-appointed twice. I have reviewed the manner and circumstances of the two occasions on which Mr Clark's term of office was extended, and my comments in that regard are presented in the two parts below.

The first deals with what I refer to as the "first" succession, ie the 1986 re-appointment of Mr Clark, while the second addresses the more disputed "second" succession, ie the 1988 re-appointment of Mr Clark, a re-appointment which was to have profound consequences for the Bank.

21.3.2 THE FIRST SUCCESSION: THE 1986 RE-APPOINTMENT OF MR T M CLARK, AS MANAGING DIRECTOR

As indicated earlier, the terms of appointment drawn up by the Merger Advisory Group for the first Chief Executive of the new State Bank foresaw the need to revisit the question of the Managing Director's succession before 30 September 1987 and, presumably, within a time-frame adequate for the identification of a suitable replacement for Mr Clark.

On 15 May 1986, Mr Barrett reviewed Mr Clark's performance for the year ended February 1986, in accordance with the terms of Mr Clark's service agreement regarding remuneration adjustment.()

Evidence given to this Investigation shows that the performance of Mr Clark for the first two years of his term of office (ie from February 1984 to February 1986) was deemed most satisfactory by the senior executive of the organisation and by the Board.

Minutes of the Executive Committee meeting of 5 July 1985 record that():

"... it was generally agreed that the results spoke for themselves. The performance of the Managing Director had been as outstanding as that of the Bank." ()

Mr R P Searcy referred to the "excellent" nature of Mr Clark's performance in those early years(), while Mr R D E Bakewell declared himself to have been "extremely impressed" () with the "outstanding job" performed by the Managing Director. Mr Hartley commented that Mr Clark had been "brilliant in pulling the Bank together" (), an opinion with which Mr Simmons concurred when he observed that the Managing Director had "brought a different dimension" () to the Bank and handled the merger in a skilful manner. To Mr Hancock, the Board's satisfaction was "reflected in the decision to extend his appointment".() The Chairman, Mr Barrett, indicated for his part that, as a whole, the Directors; "... were very pleased when [Mr Clark] accepted the additional appointment ..." (), adding, moreover, that he had consulted with the Premier who, in turn, had expressed his pleasure at the extension of the term of office. The same degree of satisfaction was apparently felt by Treasury which, in a minute to the Treasurer advising of the formal outcome of the negotiations between Mr Clark and the Bank, indicated its pleasure with "this development".()

As a result of the May 1986 discussions between Mr Clark and Mr Barrett surrounding the review of the former's remuneration, Mr Clark was granted an increase in remuneration() and offered an extension to his original contract.

His acceptance of that offer was formalised in his second service agreement, signed on 28 May 1986. This new agreement superseded the first service agreement, some fourteen months before its scheduled expiry date. By this agreement, the incumbent's term of office was extended to 30 June 1989.()

Through the negotiation of this service agreement, the Board had thus discharged, to all intents and purposes, its responsibility under Section 16(3) of the State Bank Act, in that the position of Chief Executive Officer would be filled by the Board's chosen candidate for another three years.

21.3.3 OBSERVATIONS AND CONCLUSIONS ON THE 1986 RE-APPOINTMENT OF MR T M CLARK AS MANAGING DIRECTOR

Regarding the May 1986 re-appointment of Mr Clark as Managing Director, I am satisfied that:

(a) The re-appointment was based on the Board's expressed satisfaction at the performance of the Managing Director since his February 1984 appointment.

(b) The satisfaction with the performance of the Executive was essentially expressed in terms of the achievement, by the Managing Director, of the objectives set out in the brief entrusted to him in February 1984. This was particularly so with regard to what was perceived to be the successful execution of the merger of the two predecessor organisations.

(c) The Investigation has found no evidence of a revised or substitute brief having been agreed with the Managing Director at the time the extension of this term of office was discussed and agreed. The service agreement signed between Mr Clark and the Bank on 28 May 1986, like the first such agreement signed on 1 February 1984, sets down no defined objectives or particular expectations regarding the performance of the Chief Executive. Indeed, Mr Clark has indicated in this regard that his initial brief:

"... was not referred to at any later stage...[and] was certainly never formally reviewed or amended." ()

In the absence of any specific brief for the forthcoming three years, I am left to conclude, firstly, that the Board did not give the Chief Executive adequate guidance regarding its intentions, priorities and requirements for the State Bank of South Australia over the next three years of its development in that it failed to periodically monitor its instructions to Mr Clark; and, secondly, that it was therefore forced to leave the setting of objectives or directions to the Chief Executive himself, subject as always to its approval.

In forming this view, I am supported by the comments made to this Investigation by Mr Barrett and Mr Hancock regarding the leadership demonstrated by Mr Clark.

Mr Barrett agreed that, in those early years, the goals of the Board and those of Mr Clark coincided, adding that:

"... in many ways, [Mr Clark] took the lead. A lot of these overseas developments were his initiatives but he convinced the board these were initiatives we should follow ..." ().

This view finds an echo in Mr Hancock's statement to the effect that the Board, having knowingly appointed someone "who would have the ability to influence the Board" (), now "... overwhelmingly accepted his recommendations ... because they were persuasively argued." ()

I draw attention also to the perspective of both Mr Hartley and Mr Simmons on those early years, when the former stated that the Board was "fairly passive"(). The latter commented, in a similar vein, that:

"... the board was not involved very much with the bank's operations. It attended board meetings. Mr Barrett and Mr Clark [sic] got on pretty well together ...". ()

I regard the stance of the Board in this regard as incompatible with its responsibilities under Section 16(2) of the State Bank Act, and the control it is required to exercise over the Chief Executive. I find it all the more incompatible when I consider it in the light of the later comments that many of the same Directors made regarding the need for control of the same executive, so as to dislodge him from a "situation where he was running riot on the Board" () or where he was taking the Bank on a "destructive path" which required "strengthening of the Board".()

I will refer again in this Chapter to comments made by a number of Directors (and in particular Mr Simmons) regarding the "influence" of Mr Clark.

In a submission to the Investigation, prepared on behalf of the non-executive directors, objection is taken to the use I have made (on this matter) of Mr Simmons file notes, it being submitted that these notes were intended as nothing more than aide memoir and [as] ... an ongoing set of his thoughts, and that these thoughts changed as he spoke to different people.

It is further submitted these notes were not intended to be taken literally, and, in some cases, represented hyperbole on his part. On a number of occasions on this issue Mr Simmons has used in his file notes very strong, and in my opinion, deliberate language. In the circumstances, I have come to the conclusion that the notes are probably a true reflection of Mr Simmons thoughts and feelings at the time.

Similarly Mr Simmons gave evidence that he used the expression "running riot on the Board" in a colloquial sense, referring to the fact that, by 1989, Mr Simmons believed that Mr Clark had become too much for Mr Barrett to control having regard to Mr Barrett's nature and also his age.()

Again, I have come to the conclusion, that the words, in their colloquial meaning properly convey Mr Simmons feelings at the time.

I also draw attention to the failure of the Board to formalise, in any way, its expectations of the Chief Executive, as it had done with the first appointment of Mr Clark. In the present instance, moreover, there is no evidence of even a verbal brief from the Board to the Chief Executive, as had been the case in February 1984.

I therefore, re-state my opinion, that, in so doing, the Board failed in its duties as the governing body of the Bank to adequately or properly supervise, direct and control, the operations, affairs, and transactions of the Bank; deprived itself of the means required to perform any useful and structured monitoring and evaluation of the performance of the Chief Executive; and thus laid the seeds for many of the later problems it was to experience in its relations with the Chief Executive.

(d) The Investigation has found no evidence of any substantial or material alteration of the nature and extent of the delegations provided by the Board to the Chief Executive Officer, as recorded in June 1984.()

In that regard, I am therefore led to conclude that, by default, if through no other means, the Board displayed its satisfaction with the manner in which the Chief Executive exercised those powers, which had been delegated to him under the initial agreement dated 28 June 1984.

I now turn to the matter of the "second succession", ie the re-appointment of Mr Clark as Chief Executive in early 1988.

21.3.4 THE SECOND SUCCESSION: THE 1988 RE-APPOINTMENT OF MR T M CLARK AS MANAGING DIRECTOR

Under the terms of the second service agreement, signed between Mr Clark and the Bank to which I have referred above, the Bank was bound:

"... to employ the Chief Executive Officer as its chief executive officer from the date hereof until the 30th of June 1989 and until that date the Chief Executive Officer will continue to be so employed by the Bank." ()

Like the first service agreement, the second provided for annual remuneration adjustments, in that the salary of the Chief Executive Officer would:

"... be reviewed annually in the month of January it being the intention to adjust such salary having regard inter alia to the performance of the Chief Executive Officer as chief executive officer of the Bank and any national wage increase." ()

As part of this annual remuneration review process, Mr Clark wrote to the Chairman of the Board, Mr Barrett, on 15 February 1988, setting out the proposed detail of his remuneration package.()

One day later, on 16 February 1988, the Chairman replied to Mr Clark's note of the previous day, approving the proposed package for the year commencing 1 February 1988.()

Far more importantly, he also indicated, in the next paragraph that:

"... In addition I confirm my verbal advice that the Board wishes to extend the term of your appointment to 30 June 1992 ie for a further three years." ()

The Minutes of the Board meetings held on 10 February, 17 February, and 25 February 1988, have been reviewed in the course of this Investigation. They mention neither discussions with the Chief Executive Officer regarding the extension of his term of office, nor an agreement regarding the extension of that term of office, as indicated in the manuscript letter of Mr Barrett to Mr Clark, dated 16 February 1988.

Yet the note written by Mr Barrett to Mr Clark which sanctions the remuneration package, the bonus, and the extension of the term of office, states that the terms of Mr Clark's remuneration package "... are acceptable to the Board" and, furthermore, that "... the Board wishes to extend the term of your appointment to 30/6/92 ..." [Emphasis added]

A question thus arises: when did the implied consultation with other Directors (which would have been required for Mr Barrett to approve, if not Mr Clark's remuneration, at the very least, the extension of his term of appointment) actually take place?

If it took place before 15-16 February 1988, the minutes of earlier Board meetings reflect no such discussion. The silence of the minutes should not, in my view, lead to the assumption that the matter of Mr Clark's re-appointment was not discussed by the Board. Evidence (including material obtained from the Chairman's private minute book) gathered by this Investigation shows that, in fact, the matter was debated at some length, and, that there was even a measure of opposition on the part of one Director, Mr Bakewell, to the offer of an extension.

The silence of the Board Minutes, however, on such an important topic and event, reflects poorly on the Board's reporting practices. I accept that the detail of the deliberations may have been subject to a degree of confidentiality. I do not accept, however, that the fact of their existence, and the conclusions reached as a result of the deliberations, should not be recorded in the Board Minutes in a timely manner.

Mr Simmons, then a Director, recalled that the remuneration of Mr Clark had indeed been the object of a somewhat heated debate.

Mr Hartley joined the Bank Board in February 1987. His recollections on the matter introduce a different dimension, in that they point to Mr Clark's having intimated to the Chairman, Mr Barrett, that, should the Board be unable to agree to the renewal of his contract on the requested terms, he would resign from the Bank.()

Regarding the remuneration increase granted to the Managing Director, I draw attention to the fact that, as a result of the February 1988 negotiation process, the salary component of Mr Clark's package was increased by 63.6 per cent (or $70,000) to $180,000, for a total remuneration package increase of 53.8 per cent (or $140,000) to $400,000.()

I draw attention, moreover, to the fact that the basis or formula for the remuneration of the Managing Director was also modified in such a way as to provide Mr Clark with an incentive bonus above and beyond the renegotiated package I have referred to above. The evidence considered suggests that this enhancement to the package was introduced at the `suggestion' of the Board.()

In a submission to me, the non-executive directors have pointed out that Mr Clark's total remuneration package was at least commensurate with salaries paid to chief executive officers in other banks, and that the Board was entitled to have regard to the possibility that Mr Clark might leave the Bank for another organisation.

Mr Bakewell opposed the extension of Mr Clark's term of office on two grounds.

In the first instance, he was of the view that Mr Clark had been recruited for a specific purpose, namely, that of merging the two predecessor institutions. That task had now been achieved. He believed, furthermore, that Mr Clark had discharged his responsibilities particularly well in that regard:

"My assessment was in 86-87 that he had done an outstanding job bringing two perhaps archaic entities together and built successfully a new structure ... I felt - quite frankly, [that] he'd done an outstanding job in bringing the two banks together ..." ()

In that regard, Mr Bakewell's objection reflects and accords with the spirit of the brief drawn up by the Merger Advisory Group in the latter part of 1983, and thus with the mandate which had been given to the first Chief Executive of the Bank, on his appointment in February 1984.()

Furthermore, Mr Bakewell has indicated that, while he was impressed by Mr Clark's performance from 1984 to 1987, he had been less satisfied with it since 1987; his views of the Managing Director had "deteriorated" and "changed dramatically", to the point where he now felt that:

"... it was time to cut the painter and do something else." ()

In the second instance, Mr Bakewell was inclined to look upon the times ahead as a period of consolidation,() in order for the organisation to assimilate the changes which it had gone through. This new orientation or emphasis might thus require a different approach and, presumably, different skills to those which had been demonstrated to date by the incumbent.()

Mr Simmons, then a Director, recalls Mr Bakewell's objection to the extension of Mr Clark's term of office in that:

"In 1988 ... [Mr T M Clark's] contract was going to be renewed. [He thought] from memory [that] Mr Bakewell was not in favour of it being renewed ...".()

Mr Searcy shares the same recollection, and adds that Mr Hartley was "possibly" of the same mind. Irrespective of whether or not Mr Searcy's recollection is accurate regarding Mr Hartley's frame of mind, he does recall a "quite lengthy discussion on the topic" among the Directors.()

According to evidence presented to this Investigation, the Board did consider the possibility of appointing a successor to Mr Clark at that point. It eventually rejected that option, for the reasons set out below.

The Board considered two options in this respect: that of recruiting an `outsider'; and that of selecting a successor from the ranks of the senior executive team.

In his evidence to the Investigation, Mr Bakewell has indicated that the recourse to the services of executive search firms:

"... had been considered, but [the Directors] thought there could be some damage to the bank at that stage." ()

I am given to understand that the "damage" Mr Bakewell refers to would have stemmed from the failure of the Board and the Bank to have met what has been represented as the expectation of an `in-house' succession on the part of both the Treasurer and the Bank unions involved.

The expectation of the `in-house' succession was raised by Mr Barrett, who recalled that, at the time of Mr Clark's initial appointment, the Treasurer, Mr J C Bannon, had expressed the hope that; "... the next chief executive of the bank [would] come from within the Bank." ()

The matter of an agreement, or at least of an `understanding', with the unions regarding the successor to Mr Clark was referred to by a number of directors. As indicated earlier, Mr Simmons stated to the Investigation that:

"... the other factor which was at the back of [his] mind and which no-one seems to remember was that when the two banks were merged, [he] was under the impression that Mr Clark [sic] would come in and merge the two banks and the next managing director would have to be taken from within the bank itself." ()

Mr Bakewell shared the same view. It was his recollection that:

"... when the original negotiations were held with the unions and they were told about the amalgamation, it was foreshadowed that in all probability the next successor would come internally [sic] ... The banking unions ... wanted to know what was going to happen, were you just going to always bring people from outside and all the rest of it...".()

For Mr Searcy, such a consideration was a material one in his deliberations regarding the re-appointment of Mr Clark. He stated to the Investigation that, in supporting the re-appointment of Mr Clark, he:

"... was persuaded more by the fact that we had given assurances to management that the next managing director would come from within the bank and not outside ...". ()

The then Chairman of the Board, Mr Barrett, has, however, no recollection of any such agreement or understanding.()

I do not challenge the recollections of Mr Bakewell, Mr Searcy and Mr Simmons, any more than I do those of Mr Barrett. I accept that the perceived preference for an internal candidate may well have been treated by certain directors as a material consideration or even a constraint in their deliberations.

The differing recollections of those parties, however, as to the existence of any such agreement, on the one hand, and, on the other hand the confusion from those who remember such an agreement as to whether it was truly an `agreement', or an `understanding' or an `assurance' given either to the unions or to management, points to the fact that this `agreement' could not have been an overt or relevant factor in any discussion on the choice of a successor. Had it been one, the nature of the commitment given would have been far clearer to the parties concerned.

The Investigation has found no evidence that the Board ever formally visited that perception with a view to clarifying it, so as to be in a position either to adopt or to reject it as a consideration or constraint having a bearing upon their deliberations.

In the event, whether because some directors were mindful of a political expectation or because others had in mind the `agreement' referred to, the Board proceeded no further with its search for an external successor to Mr Clark in 1988.

The Board did, however, review the senior executive team of the day to determine the availability within its ranks of a successor to Mr Clark.

In exploring with a number of Directors the nature of that work, the Investigation has been presented with different descriptions of the processes used for succession planning and the amount of effort expended in that area prior to 1988.()

A paper on succession planning, dated 19 October 1987, was prepared by Mr C W Guille, then Chief Manager, Personnel, for Board discussion. It outlined "a formal succession planning process to be introduced initially for senior officers (Senior Managers and above)", and advanced a "Preliminary Succession Plan for Executive and Selected Key Positions".() Those persons, whose names were put forward as potential successors to Mr Clark, were, in order, Mr S G Paddison, Mr J A Baker, and Mr J B Macky.()

The Investigation has found no evidence that the suggestions contained in the paper were ever implemented in any formal sense.

Mr Clark has indicated that much work was done on the issue of succession planning, particularly under the leadership of Mr G D Abbott, the General Manager, Human Resources, appointed in mid 1988.()

Referring to earlier times, Mr Barrett pointed out to the Investigation that:

"... there were succession plans drawn up from time to time, because that was one of the prime responsibilities of the managing director, to make certain there was succession in the bank, and there were certainly plans presented to the board. I cannot recall they were formally approved because they changed from time to time, but I think they were taken as such and seen as a format for the future ...".()

These changes to the plan "from time to time" were also referred to by Mr Hartley, albeit in a different perspective, as a series of changes in Mr Clark's opinion as to who should replace him.()

Mr Bakewell's recollection of the Board's efforts regarding succession planning were that:

"... there was nothing formal ... There was nothing, as far as I'm aware unless it was in the MD's safe ...".()

and, while it was an important topic, it would only have been the subject of discussion on a few occasions only in those earlier years.()

Most of the Directors were, however, familiar with a "fall-back situation" in regard to Mr Clark's succession in the years to 1988, whereby:

"... if [Mr Clark] was knocked over by a bus, Mr John Baker of Beneficial was seen as the man who would step into the bridge [sic]." ()

Mr Bakewell's recollection in that respect matches that of Mr Barrett whom I have quoted above. In Mr Bakewell's view:

"... if Tim were knocked over ... we saw the possibility of John Baker, who was then Managing Director of Beneficial, being the possible successor ..." (),

a view which accords with Mr Nankivell's recollection (), as it does with Mr Hartley's statement that:

"... [there was] a situation where [Mr Clark] was telling us what an outstanding team we've got ... John Baker of Beneficial could take over from me - if I fall under a bus tomorrow, he'd take over as my number one...".()

However formal or informal the process for the identification and development of successors to Mr Clark was in February 1988, the Board concluded that no-one could have taken over from Mr Clark at that time. In Mr Barrett's words, the Board, "... couldn't see within the Bank anybody who was able to replace Mr Clark at that stage," () any more than could Mr Simmons(), Mr Bakewell(), Mr Hartley()and Mr Searcy.()

As a result, and notwithstanding the issues raised above, the Board agreed to the renewal of Mr Clark's contract, Mr Bakewell's() hesitations having been overcome.

That the decision, in the latter's case at least, may not have been a wholehearted one, was conveyed to the Investigation by Mr Bakewell's statement that, while he had finally endorsed the re-appointment, he did so believing that the Board; "... had little alternative but to continue with what we had [sic], making sure it was the last term" () [Emphasis added] a statement which can hardly be construed as anything more than a reluctant endorsement of the situation facing the Board.

On 11 August 1988, the extension of Mr Clark's term of office was set down in a third service agreement. In words similar to those used in the second service agreement, the contract states that:

"The Bank will continue to employ the Chief Executive Officer as its chief executive officer from the date hereof until the 30th of June 1992 and until that date the Chief Executive Officer will continue to be so employed by the Bank." ()

The Board held two meetings during the month of August 1988. The first took place on 25 August, and the second on 29 August. As was the case in February, neither set of Board Minutes, prepared as a result of the meetings, record the extension of the Managing Director's term of appointment, or the signature of a service agreement.

21.3.5 OBSERVATIONS AND CONCLUSIONS ON THE 1988 RE-APPOINTMENT OF MR T M CLARK AS MANAGING DIRECTOR

I set out below my observations and conclusions on issues arising from the 1988 re-appointment of Mr Clark.

(a) Regarding the Board's Activities in support of Succession Planning

(i) I have referred earlier to the fact that the Board and the Chief Executive Officer have acknowledged the importance of succession planning and their responsibility in regard thereto. It has also been established that the identification of a successor - and the development of such a successor, should he need to be drawn from the ranks of the organisation - was an integral, if not explicit, component of the brief shaped for the first Chief Executive Officer of the State Bank in early 1984, in that he was to establish:

"... an institutional structure and a management team with the ability to manage the Bank, either under [Mr Clark] as Chief Executive, or under [his] successor".()

That objective was clearly endorsed before this Investigation by Mr Hancock() as one of the fundamental matters assigned to Mr Clark, and one, moreover, that was accepted by Mr Clark himself ().

Yet, some four years later, many of the Directors expressed to this Investigation the view that:

"... there was nobody necessarily sitting there ready to move into the position". ()

In the light of the evidence placed before me in this regard, I have formed the belief that the Chief Executive Officer, Mr Clark, failed to develop, as he was required under the brief he accepted, in February 1984, from the Merger Advisory Group and, later, from the Board of the new State Bank, a credible and qualified successor from within the ranks of his senior executive team.

I am of the opinion moreover, that in regard to planning for the succession of Mr Clark, the Board failed to monitor its instructions to Mr Clark in this matter.

The fact that the Board found itself, in February 1988, four years after the commissioning of its first three year brief, without even the option of appointing an internal candidate because of the unsuitability of potential successors is as incompatible with the realisation of the objectives set down in the 1984 brief as it is with its duty of ensuring that the Chief Executive was discharging his responsibilities in that regard under the very same brief.

(ii) At least four of the directors interviewed spoke of a perceived constraint imposed upon the selection process. Under this constraint, the successor to the first Chief Executive would need to be appointed from the ranks of the Bank.

The exact nature of this constraint - if constraint it was, rather than a consideration - was ill-defined and unclear. Yet it would have represented a major determinant in the Board's conduct of any search for a successor, and his identification (and his development in the case of an `in-house' candidate).

That it was not clarified within the first term of office of the Managing Director, and that it remained unclear still in February 1991, shows that the Board neglected its responsibilities regarding appointments to the position of Chief Executive Officer.

My opinion on the matter is reinforced by the differing and hesitant recollections of a number of the directors with regard to the formality or otherwise of the process engaged in to identify and assess potential successors.

My opinion on this matter is reinforced by the informal nature, prior to 1988, of the process which led to the identification of possible candidates, a process which was by and large driven by the suggestions of the Managing Director as to who might lead the Bank in the event of his departure, with Directors performing little to no independent validation or testing of the suitability of the contenders so identified.

On the whole, therefore, I have formed the view that, prior to 1988, the Board paid only casual attention to the issue of succession planning, and was ill-prepared to address the matter in any structured fashion in February 1988, when the question of the further extension of Mr Clark's contract arose.

(iii) I believe, furthermore, that the Board had ample opportunity, had it chosen to avail itself of it, to familiarise itself, much earlier than it did, with the ability and the aptitudes of the senior executive team recruited and developed by Mr Clark over the four years from 1984 to 1988. Through familiarisation, the Board could have formed a view as to the likelihood of effecting an in-house succession, so as to meet the terms of the initial brief, either by its original due date of September 1987, or as re-negotiated in May 1986 for a 30 June 1989 expiry of the Managing Director's term of appointment. The formation of such a view would have constituted the first step towards either the development of suitable candidates or the reconsideration of the (perceived) constraint regarding the recruitment of an external successor.

The opportunity existed for the Board to achieve that familiarisation. Mr Clark has indicated in a number of forums that he, "... encouraged directors to approach members of the management team with queries ..." ,() an approach which formed part of a deliberate management policy, designed, in part:

"... to enable the Board to meet and become acquainted with the top level of management in the Bank, so that the directors would feel comfortable with following matters up outside Board meetings if they desired." ()

In his evidence to this Investigation, Mr Simmons confirmed Mr Clark's invitation to the directors in that regard when he said that:

"... the managing director [had] made it quite clear that any member of the Board could speak to any member of management ...".()

Mr Simmons went on to suggest that a limitation perceived by directors regarding this freedom of approach was the fact that the executive contacted might well report back to the Chief Executive after a discussion with a director. Even if this were so, the system does not take away the opportunity for contact.

Few directors however, in the years to 1988-1989, availed themselves of that opportunity. Mr Hartley has indicated to this Investigation that in fact:

"... there was little, if any, contact with management outside of the meetings in that period. There was subsequently very considerable [sic] - but not during that period" (),

arguing that, owing to the pressures of business, unless there was a cause for concern, "there was no reason for it." () I reject such an argument, as it suggests that the exercise of a responsibility is dependent upon whether or not there is "a cause for concern".

Moreover, in later years, the Board sought to have far more extensive contact with those whom it considered to be serious contenders for the succession, on the basis that through those meetings:

"... the board would get to know them better, and that was part of the strategy for us to ... get a feel of these people." ()

It is for the very same purpose that Mr Simmons later sought to have Mr Clark arrange for him to work with Mr Paddison on specific projects(); that he encouraged Mr Clark to take leave more often so that potential successors could be seen in action by the Directors(); and that, eventually, those same potential successors appointed as deputy managing directors (in deed, if not in name) in September 1990, so as to "be blooded" at the helm of the organisation.()

Those familiarisation initiatives, however, were still to come in February 1988, four years after the State Bank had come into existence.

(b) Regarding the Re-Appointment of Mr T M Clark and the Reasons Advanced for it

Concerning the 1988 re-appointment of Mr Clark, I draw attention to several notable facts and to this combined effect, as set out below.

(i) Regarding the timing of the 1988 re-appointment, I have referred to the fact that the second service agreement, dated 28 May 1986, had extended Mr Clark's original term of appointment, due to expire on 30 September 1987, to 30 June 1989, an extension of twenty-one months.

This third and latest service agreement, signed in August 1988, provided for an additional extension of three years on the terms set out in the re-negotiated contract of May 1986. It did so, moreover, at a time, in February 1988, when the term of the second service agreement had more than one year to run.

(ii) Regarding the remuneration increase granted to Mr Clark as a result of the February deliberations, I have already referred, to its most substantial nature, and to the modification, at the 'suggestion' of the Board of the remuneration formula to include a bonus.()

Under the terms of the new service agreement, while it is recognised that the performance of Mr Clark is one of the factors to be taken into account for the purposes of re-assessing his remuneration, Mr Clark's income is now protected by a proviso which states that:

"... provided that in effect [the performance] review the remuneration and benefits payable to the Chief Executive Officer (but disregarding benefits payable by way of bonus) shall not result in the Chief Executive receiving less than he received prior to the review being effected." [Emphasis added].

For further discussion of this issue, refer to Sections 21.4 and 21.5 of this Chapter.

(iii) Regarding the re-appointment, I have also drawn attention to the objection that was raised as to the on-going suitability of Mr Clark to fill the position of Chief Executive Officer, given the perceived evolution in the requirements of the Bank.

(iv) Regarding the re-appointment, I have reported that, when discussing the matter, Mr Barrett, Mr Simmons, Mr Bakewell, Mr Hartley, and Mr Searcy, identified the absence of a suitable successor as one of the factors which led to the re-appointment of Mr Clark, Mr Bakewell going as far as saying that:

"...There [were] various points raised but generally speaking, I think it's fair to say that the board felt there was little alternative at that stage but to re-appoint ... In the end we came to the conclusion that we had little alternative but to continue with what we had [sic], making sure it was the last term." [Emphasis added] ()

I draw attention to the negative perspective those statements convey, and this incompatibility with the more positive views expressed by Mr Barrett, who indicated the Board's unconditional satisfaction with its choice of a Chief Executive.()

If one accepts the decision taken by the Board regarding the unavailability of a senior Bank executive of sufficient stature or experience to replace Mr Clark at that time, and thus the need for the re-appointment of Mr Clark on that basis, there remains the fact that the Board could have approached the matter in such a way as to take better account of the objections or hesitation articulated by Mr Bakewell.

It could, by way of example, have established an alternative arrangement with Mr Clark. In the same situation, a more cautious board might well have preferred:

. Given a degree of reservation about the performance of the incumbent, and mindful of the Board's intent with regard to the brief of the first Chief Executive, to postpone extending the term of office until a time closer to the actual expiry date of the contract, thus giving itself time to ascertain the suitability of the incumbent against the evolving needs of the Bank in the next phase of its development.

. To draw up a revised set of objectives for the Chief Executive, and to gauge his performance over the remainder of his term of appointment in such a way, as firstly, to overcome whatever reservations may have been held with respect to his performance and secondly, to test his suitability for the evolving role of the Chief Executive.

. To make the granting of the requested remuneration increase (or a re-negotiated one), as well as the tenure of the office, conditional upon the achievement of the agreed objectives; or to grant a lesser increase in the interim, with review closer to the time of the expiry of contract and negotiations regarding the future of the position.

The Investigation has found no evidence that the Board considered such an option, any more than it has of any revised or specific brief, objectives, or directives, having been given to the Chief Executive, as was the case at the time of the first appointment.

In that regard, I conclude, therefore, that the Board, despite the doubt or hesitations expressed by Mr Bakewell regarding the suitability or performance of Mr Clark, still did not effectively address the need to provide the Managing Director with adequate guidance regarding its intentions, priorities, and requirements, for the future of the Bank. In my opinion, that such an attitude is at variance with the Board's responsibilities as the governing body of the Bank, and thus with sections 14 and 15 of the State Bank Act.

(c) Regarding the Position of Mr T M Clark in this Matter

In the light of the Board's failure to plan for Mr Clark's successor, either as a consequential responsibility of its power to appoint the Chief Executive under Section 16(3) of the Act, or as a necessary task deriving from the brief agreed to for the first Chief Executive of the new State Bank in early 1984; and in the light of the contradictory or divergent positions taken by the Board in the course of re-appointing Mr Clark, as discussed above, I am of the opinion:

(i) That Mr Clark was an active and forceful agent in his negotiations with the Board over his remuneration, based on the foreseen strong performance of the Bank for the 1988 financial year.

(ii) That he would, in all likelihood, have set conditions for his continuing employment with the Bank, one of which would have related to an extension of his term of office.

(iii) That the Board - because of its earlier lack of attention to the question of Mr Clark's succession and its largely reactive stance, because of the perceived need to appoint from within, and because of its negative assessment of the existing senior executive team - was left in a weak negotiating position, with little room to manoeuvre.

(iv) That, given this position, the Board felt constrained to re-appoint Mr Clark on the terms and conditions set out by the Managing Director.()

(v) That - partly as the result of that experience, partly as a result of the worsening performance of the Bank with regard to the 1989 incidence of non-performing loans, and partly as a result of a deterioration in the relationship between the Board and management following the change in chairmanship - the Board began actively to grapple with the problem of Mr Clark's succession.

(d) Regarding the 1988 Re-Appointment of Mr T M Clark and its Implications for the State Bank

I have referred earlier in this Section to the fact that, at the time of its signing, the third service agreement between Mr Clark and the State Bank superseded an earlier service agreement, entered into in May 1986, under the terms of which Mr Clark's term of appointment still had more than one year to run.()

It is to be observed that, within the term of the third agreement, the following matters or events emerged:

Within seven months of the signature of the third service agreement, Mr Hartley became sufficiently anxious about the management of the affairs of the Bank to voice concerns to Mr Simmons as to "... how management was conducting the bank", and to entertain, in particular, serious misgivings over the quality of information presented to the Board by that management.()

At the same time, Mr Simmons recorded his concern as to the level of control exercised by management vis-a-vis the Board, and the latter's ability to have proper input.()

Within eight months of the signing of the third service agreement, ie in April 1989, Mr Hartley reiterated his concerns to Mr Simmons about the level of information reaching the Board, and decried the fact that, in his view, the Board "... [was] being used as a rubber stamp".()

Within nine months of the signing of the third service agreement, on 18 May 1989, Mr Simmons indicated to Mr Bakewell that he was, "... very concerned with the way things were going", particularly as the full impact of the Oceanic Capital Corporation purchase and the poor performance of that Company were becoming evident.() Equally significantly, he would comment that:

"... Clark really had put himself in a situation where he could run riot on the Board." ()

Shortly thereafter, Mr Simmons - now Chairman of the State Bank Board - in his first meeting with the Treasurer(), indicated that he had had clashes with Mr Clark, and found him difficult to deal with; within days of that meeting, Mr Simmons would declare himself again "... very unhappy with the way things were proceeding with Tim" (), expressed concern with his attitude to profit reporting, and entertained, momentarily, Mr Bakewell's call for a "run-in" () with Mr Clark, a notion he ultimately rejected for fear that it could prompt the Managing Director to resign in what would have amounted to a fit of pique.()

It should also be noted that, in the wake of the re-appointment of Mr Clark, and notwithstanding the matters and difficulties noted above, the Bank was to embark under the "aggressive" Managing Directorship of Mr Clark, on two years of unprecedented asset growth in falling market conditions. The growth entered into during those years was one of the chief reasons why the Bank and members of the Bank Group accumulated a substantial portfolio of non-performing assets.

In the light of such evidence, I have formed the view that the 1988 re-appointment of Mr Clark was a decision the Board was ill-prepared to deal with; one which it need not have taken in the form that it did and at the time that it did; and one which, having taken, the Board failed to set within a framework that would better guide and control the activities of its (by all accounts, including his own) determined and aggressive Managing Director.

I now turn to an examination of the manner in which the Board, as the governing body of the Bank, monitored and controlled the performance of the Managing Director, whose activities were subject to their approval, control, and review.

 

21.4 MANAGING THE PERFORMANCE OF THE CHIEF EXECUTIVE OFFICER

 

21.4.1 THE RESPONSIBILITY FOR MONITORING THE PERFORMANCE OF THE CHIEF EXECUTIVE OFFICER

The Bank Board is responsible for the appointment of the Chief Executive Officer.()

In exercising its control over the affairs of the Bank, as prescribed by section 16(2), it is incumbent upon the directors who appoint the Chief Executive to monitor the performance of that person, as, in turn, the Chief Executive is required to monitor the performance of those whom he appoints under his delegations.

Aside from the responsibilities of the Board under the Act, each of the three service agreements signed by Mr Clark and the Bank provided for a yearly review of the former's performance, as a basis for the assessment of remuneration increases.

The terms under which this performance review was envisaged were consistent throughout the three service agreements.

The first service agreement, dated 1 February 1984, stated that:

"... the said annual salary shall be reviewed annually ... and such review will have regard to movements in the Consumer Price Index, movements in Executive salaries and the performance by the Chief Executive Officer of his duties hereunder." () [Emphasis added]

The second service agreement, dated 28 May 1986, provided that:

"... such annual salary shall be reviewed annually in the month of January it being the intention to adjust such salary having regard inter alia to the performance of the Chief Executive Officer as chief executive officer of the Bank and any national wage increases." () [Emphasis added]

a statement which is reproduced word for word in the third service agreement, dated 11 August 1988.()

There was therefore an expectation - as a pre-condition, albeit partial, of remuneration increases - that the performance of the Chief Executive would be monitored, measured, and commented upon, on a regular basis. The responsibility for the carriage of those activities fell to the directors of the State Bank.

By definition, the monitoring of performance implies the existence of agreed and explicit standards, goals, or targets, against which performance is to be measured.

It is therefore appropriate to set out, in the first instance, what standards or expectations existed regarding the Chief Executive's performance, before discussing the organisational processes used to monitor that performance, and the questions which arose as a result of that monitoring.

21.4.2 PERFORMANCE EXPECTATIONS VIS-A-VIS THE CHIEF EXECUTIVE OFFICER

In order to review the directions that could have been given to the Chief Executive Officer by the Board, and against which the Board might have wished to review the performance of the Chief Executive Officer, the Investigation examined the formal service agreements entered into by the Bank and Mr Clark, and specific briefs which might have been given to him upon appointment or re-appointment.

With regard to the service agreements, the Investigation has examined each of the three contracts which were entered into between Mr Clark and the State Bank. As indicated in sections 2 and 3 of this Chapter, the first contract was signed on 1 February 1984, the second on 28 May 1986, and the third on 11 August 1988.

These contracts do not provide specific guidance as to what was expected of the Chief Executive Officer, in anything other than the most general terms.

The first document states, for example, that the Chief Executive is:

"... to diligently and faithfully serve the State Savings Bank of South Australia ... and thereafter when appointed as Chief Executive Officer of the New Bank [sic] will serve the New Bank ...". ()

He is further enjoined:

"... to conform to all reasonable instructions that may be given to him from time to time ... by the Board of the New Bank ... and [to] devote the whole of his time and attention to the performance of his duties and use his best endeavours to promote the interests and welfare of the business...of the New Bank." ()

Expectations of a similarly broad and general nature are reflected in the subsequent service agreements. By virtue of their very breadth and generality, however, those expectations cannot be said to constitute a set of manageable goals or objectives against which performance could be assessed effectively, a fact which Mr Clark acknowledged to this Investigation.()

With regard to specific briefs given to the Chief Executive upon his appointment or re-appointment, I have already mentioned the existence of a brief, shaped in late 1983, for the purposes of the recruitment of the first chief executive officer of the new State Bank.

Set in a three-year time-frame, this brief comprised the three basic objectives referred to earlier: the execution of a successful merger of the two predecessor organisations; the development of an executive team capable of ensuring the on-going management of the new bank; and the `commercialisation' of the new bank (necessary to ensure the organisation's survival and growth in a deregulated environment). The brief was neither formalised nor documented, but communicated verbally to the appointee who, to this day, recalls its terms clearly.()

It was, however, to the appointee's recollection, the only specific brief that he was ever given by the Board in the course of their seven-year association.() The Investigation has found no evidence of any other brief or statement of expectations having been given to Mr Clark at the time of either re-appointments, in February 1986 or February 1988.

As indicated earlier, I conclude from this that, beyond the expectations it defined in 1983-1984, the Board did not effectively address the need to give the Chief Executive any further or explicit directional guidance as to what it may have had in mind for the development of the State Bank. And, furthermore, I conclude that it was satisfied to rely on those directions and initiatives shaped by the Managing Director and presented to the Board for approval. In a submission to me the non-executive directors said the Board did effectively review the performance of the Chief Executive Officer once each year when determining whether a salary increase was justified. It was also submitted, that a review was made periodically throughout the year at monthly meetings, and that the Board was able to measure his performance against the strategic planning and profit expectation established each year. Whilst I acknowledge that these are useful mechanisms by which to judge the performance of the Chief Executive Officer, I remain of the opinion - and in any case, the results show - that they did not, in this particular case represent sufficiently defined performance expectations to enable the effective monitoring of Mr Clark.

In the absence of defined performance expectations, and, of specific briefs, other than the first one shaped in late 1983, the question arises as to what principles or indicators the Board looked to in order to assess how well the Chief Executive was managing the affairs of the Bank.

If one accepts the proposition that the performance of the organisation reflects, by and large, the performance of the Chief Executive, then an immediate point of reference becomes the plans produced by that organisation, and its achievement of the objectives stated therein.

As indicated in Chapter 4 - "Direction-Setting and Planning", the Bank set its course through two main types of plans: corporate or strategic plans, with a five-year horizon adjusted annually, and so-called `profit' plans, that equate to yearly business plans.

The review of those plans and of the mechanisms that generated them has shown that strategic plans were not, in the main, used for monitoring purposes; rather, the profit plans were, and actively so.()

The focus on profits and profitability in Mr Clark's management approach is well documented and needs little commentary here.() More to the point, however, is Mr Barrett's indication that the remuneration review process took as one of its key indicators "the Bank's growth and performance".() Mr Simmons, for his part, commented to the Investigation that the Board used "profitability" as the basic, if rudimentary, indicator of the degree of control it required to exercise vis-a-vis Mr Clark.()

While the thrust of Mr Barrett's and Mr Simmons' comments is similar, in that it ties the assessment of the Chief Executive's performance to that of the organisation as a whole, I draw attention to the significant differences between the three terms used.

Unless defined as to the measurements which give it substance, the notion of `performance' is a vacuous one. Corporate `performance' can typically be measured through a range of different indicators such as return on assets ("ROA"), return on equity ("ROE") and return on shareholders' funds ("ROSH"). There are several others.

`Growth', as stated, is not a specific term, as it covers a range of distinct indicators. The term could refer to `growth in assets' - as it most likely did in the case of the State Bank and of Mr Barrett's statement - but could also apply to growth in market share or geographical growth. As for `performance', no clear understanding of the term `growth' was ever set down, no more than its relevance to the concept of performance was defined.

The same diversity of interpretation applies to the notion of profitability, in that one could be measuring `profitability' in terms of operating profits, unallocated profits available for distribution, and so on.

In giving evidence to this Investigation, Mr Simmons indicated that there were targets that the Board was trying to reach which the Board used as measurements of performance. These were 15 per cent after tax return on equity ("ATROE") and 1 per cent return on assets ("ROA").()

In the light of the evidence referred to in the paragraphs above, as well as in Sections 21.2 and 21.3 of this Chapter, I am of the opinion, firstly, that the Board did not define, with the exception of the 1983 brief, any specific set of directions, goals, or instructions, by which the Managing Director could have been guided in the exercise of his duties. I accept that the measures or indicators referred to above by Mr Simmons were used by the Board as measurements of the performance of the Managing Director. I am, however, of the opinion the Board failed to make effective use of these indicators when monitoring Mr Clark's performance and in so doing deprived itself of the bases upon which to conduct any meaningful assessment of the Chief Executive over time.

I am of the opinion, secondly, that those measures or indicators which were allegedly used were so ill-defined, ill-understood, and inconsistently, applied as to be unreliable, if not meaningless, in any objective sense.

21.4.3 PERFORMANCE MONITORING AND REVIEW PROCESSES

While the reference base required for performance monitoring may have been largely lacking, the expectation and the need for a review of performance nevertheless remained, if only to satisfy the requirements set out in Mr Clark's three successive service agreements.

Two distinct review processes were introduced at the State Bank with a view to monitoring the performance of the Chief Executive.

The first process operated at Executive Committee level, and the second at Board level.

21.4.4 PERFORMANCE REVIEW OF THE CHIEF EXECUTIVE BY THE EXECUTIVE COMMITTEE

The Executive Committee review process was established at the behest of Mr Clark himself.

As an ex-officio member of the Executive Committee and as its Chairman, Mr Clark indicated to his fellow Executive Committee members, in July 1985, that:

"With the completion of the first year of the new bank, ... [it was] appropriate that members of the Executive Committee have the opportunity to review the performance of the Managing Director as Chief Executive Officer of the Bank, and as Chairman of the Executive Committee." ()

Mr Clark concluded his memorandum with a request that the matter be given careful thought and that participants in the performance review session "... be prepared to say what [they] think, and [not] pull any punches." ()

Mr Clark indicated that he had instigated this performance review process in order to "get some feed-back", and that the meetings were minuted, at least in part.()

The Investigation has sighted two such minutes which sum up the 1985 and 1987 performance review meetings respectively. Both offer an overall reading of the Chief Executive's performance, as well as the range of specific issues discussed.

The 1985 minute states, for example, that;"It was generally agreed that the results spoke for themselves. The performance of the Managing Director had been as outstanding as that of the Bank",() while the 1987 minute concludes that:

"...it was the strong view of Executive [sic] that in general the Managing Director had continued his high standard of performance over the previous year and was a major catalyst to the success of the Bank." ()

Specific questions raised in the two minutes cover topics as varied as personal profile, health, availability, rushed agendas, communication with sub-ordinates outside the usual reporting lines (ie through departmental heads), etc.

The results of the performance review meeting conducted with members of the Executive Committee were communicated to the Board by the Managing Director. The Board Minutes of 29 August 1988, for example, record, under the item "Managing Director's Review", that:

"... on the 19th of August 1988 the Executive Committee of the Bank had reviewed [Mr Clark's] performance and that they were generally satisfied with his performance during the period, although there were some suggestions made as to how his performance may be improved." ()

I have no reason to doubt that the Executive Committee review process was established in good faith, or that efforts were made to ensure as open as discussion as possible. It is also likely that, at least in the early years, the team spirit that many sources describe as having existed among the management group would have allowed for a frank and profitable exchange of views between the parties involved.

Although regular in the early years, the process cannot be described, however, as a formal one. While it may well have been suitable for the management "feed-back" purposes for which it was intended, it cannot be construed as a formal evaluation process, for three key reasons: firstly, because of the lack of formality, structure, and objective basis, of the mechanism itself; secondly, because of the unavoidably sub-ordinate and dependant nature of the relationship that bound the participants to the Chief Executive; and, thirdly, because of the lack of a clear tie between this process and that engaged in by the Board, or members thereof, in the yearly review and setting of the Chief Executive's remuneration.

It is, therefore, at the Board level that one must look for the appropriate process to review the performance of Mr Clark.

21.4.5 PERFORMANCE REVIEW OF THE CHIEF EXECUTIVE BY THE BOARD OF THE STATE BANK

Documentation reviewed and interviews conducted in the course of the Investigation() indicate that there was no formal review process of the Managing Director's performance. In a submission to me the non-executive directors dispute that a proper ground for criticism is that there was no "formal" review process. In support of this submission it was asserted that very few Australian companies - and none of the size of the State Bank - would expect such a formal review process. Mr Hancock asserted that in his seven years as Vice Chancellor of Flinders University no formal review was ever considered necessary. Nevertheless I am of the opinion that a properly conducted and documented (ie a "formal") review process would have enabled the Board to more effectively monitor the Managing Director's performance in that both the members of the Board and Mr Clark would have been able to have recourse to the documented reviews of past years when assessing his performance for a particular year.

It must be steadily borne in mind that the "Australian Company" I am considering here is not just any company, or any bank, but an organisation whose finances and fortunes are affected with a public interest. What may escape censure in an ordinary company under the Companies Code, does not necessarily set the standard for the State Bank governed, as it is, by its statutory responsibilities.

Instead of formal reviews at or around the appointed time for the Managing Director's yearly remuneration reviews as required under the terms of his contract, members of the Board would engage in an informal discussion of the Chief Executive's achievements over the previous twelve months. And, while the outcome of those discussions was relayed to the Managing Director by the Chairman in the context of the actual negotiation of the Managing Director's remuneration, the communication itself, though it may have been informative in a general sense, was unstructured. It did not lead to the formulation of specific and documented goals or objectives that would have provided effective guidance to the person whose performance was under scrutiny.

No records exist of those discussions as part of any `system' worthy of the name. No reference could therefore be made, in a given year, to views set out the previous year (let alone two or more years before) as to what may, or may not, have been agreed.

There are two important consequences of the informality of the review process as applied by the Board to the Chief Executive's performance.

The first and immediate consequence is that the informality or weakness of the performance assessment process deprived the remuneration review process of a substantive base. It is significant, in my view, that the only performance assessment process entered into between the Board and the Chief Executive was essentially driven by remuneration review requirements, rather than by any perceived or declared need of the Board to assess (and modify or redirect if required) the Chief Executive's performance per se, as a strictly viewed condition precedent to negotiations over rewards and remuneration.

As I have indicated above, given the virtual absence of any agreed or defined points of reference against which to assess performance, the informality of the process in place, and the subordination of that process to the remuneration review process, the yearly performance assessment of the Chief Executive could be no more than an isolated negotiation exercise from year to year, carried out on the basis of a loose co-relation between the Chief Executive's perceived performance, on the one hand, and that of the Bank, as expressed in part in its anticipated financial results, on the other.()

The second, and more serious consequence, is that in not establishing a substantive or effective performance assessment process, the Board deprived itself of one of the few means of formal control open to it to guide and direct, as circumstances dictated, the activities and behaviour of the Chief Executive.

There are two considerations which I raise in this regard.

In the first instance, I draw attention again to the fact that the Board, at the very least through those of its members who were former members of the Merger Advisory Group and its subsidiary Recruitment Sub-Committee, knew of Mr Clark's professional experience, in both their positive and negative aspects. In respect of the latter, they were aware of Mr Clark's lack of experience as a Chief Executive, of his limited experience in "mainstream" banking, and certainly of the more forceful aspects of his personality, all of which would argue the case for consistent monitoring and support.()

In the second instance, I draw attention to the fact that, beginning in 1988 and stretching through to February 1991, the Board on numerous occasions: complained of the performance of the Chief Executive; sought ways and means of curtailing his influence and restoring the level of organisational control the Board saw as its entitlement and purview; and, deplored its lack of strength over an individual whom one Director would perceive as having placed himself "... in the position of running riot over the Board".()

21.4.6 THE PERFORMANCE OF THE MANAGING DIRECTOR AS PERCEIVED BY THE DIRECTORS

I have set out below, in chronological order, a summary record of the performance of the Managing Director, as perceived by his fellow Directors.

I wish to make it clear that the comments below are not offered as representing my own assessment of the performance of Mr Clark as Chief Executive of the State Bank, but rather that of the Directors. Their views are reported here for three reasons.

In the first instance, they demonstrate the degree and level of discontent regarding the Chief Executive over a period of years, a discontent which was never relayed or channelled through a formal performance assessment.

In the second instance, they will set the background for the discussion of the remuneration of the Chief Executive in Section 5 of this Chapter.

In the third instance, they will provide the necessary backdrop to the general overview of the relationship between the Managing Director and the Board undertaken in Section 21.5 of this Chapter.

My review of the material placed before me regarding the performance of the Chief Executive shows a clear evolution of the views of Board members between July 1984 and February 1991. That evolution can be broken down into two periods which broadly correspond (but should not be limited) to the respective chairmanships of Mr Barrett and Mr Simmons, a characteristic which I shall explore at greater length in Section 21.5 of this Chapter.

As the comments below illustrate, while voices were raised against the overall performance of Mr Clark from 1988 onwards, the debate was initially focused on specific criticisms, and the correction by the Chief Executive, under the guidance of the Board, of those aspects of his management which left something to be desired.

From early 1990 onwards, however, the displeasure and dissatisfaction of many directors began to focus on the role of the Managing Director in the worsening fortunes of the Bank, on his capacity to manage the Bank and, finally, on the expressed need for his removal, as one of the key conditions in effecting a reversal of those fortunes.

FROM 1984 TO 1988

In earlier parts of this Chapter, I have already commented upon the positive assessment of the Managing Director's performance, particularly as it related to the execution of the merger of the predecessor institutions which resulted in the establishment and early 'commercialisation' of the State Bank.()

IN 1988

I have already referred to the discussions and debate surrounding the February 1988 re-appointment of Mr Clark, and the emergence, at or around that time, of the first criticisms of the Chief Executive's performance.()

In December 1988, Mr Simmons' notes attribute a view to Mr Hartley that Mr Clark was manipulating the information being presented to the Board. In his evidence to me, Mr Hartley said that, in December 1988, he did not think that anybody was manipulating information represented to the Board. Rather:

"I felt that the Board meetings were run in perhaps an over-routine way and Mr Clark was dismissive of the views of the Directors."()

I accept Mr Hartley's evidence on this matter.

Mr Simmons, for his part, voiced his dissatisfaction with the restructuring of Board processes which Mr Clark proposed to introduce, as he saw in it a threat to the Board's ability to have a meaningful input into the management of the Bank's affairs.()

IN 1989

On 6 April 1989, Mr Hartley again raised the issue of the level and quality of information available to the Board with Mr Simmons, arguing that, as a result, the Board was reduced to the role of a "rubber stamp" for management initiatives.()

On 17 May 1989, Mr Bakewell drew to the attention of Mr Simmons a degree of dissatisfaction with the manner in which Mr Clark was handling the REMM transaction.

On 18 May 1989, Mr Simmons remarked to Mr Bakewell that the Managing Director; "... really [has] put himself in a situation where he was running riot on the Board." ()

Attending his first meeting as Chairman of the State Bank Board with the Treasurer, Mr Simmons comments that he had difficulty in dealing with Mr Clark. A few clashes had occurred already and left their mark on Mr Simmons.

".... he was a hard guy for me to deal with and he was a fellow who had several strategies all worked out in advance. I said that I had had a couple of run ins but things were okay. I said he had been very proper".()

On 10 August 1989, Mr Bakewell responded to his Chairman's expressions of concern regarding the approach of Mr Clark to profit expectations for the financial year, and, more broadly, to simmering issues surrounding the level of non-performing loans, by indicating that, in his view, the Managing Director should be confronted directly with the issues. That suggestion was not accepted by the Chairman, because he feared that the "run-in" could provoke Mr Clark into a resignation, a risk that was clearly not acceptable. In Mr Simmons' words; "... The problem with that is that if he took his bat and ball and went home this would be most embarrassing to the Government prior to an election." ()

To Mr Bakewell's direct approach, Mr Simmons indicated that he preferred "... to do things quietly".()

IN 1990

Mr Clark has stated his belief that:

"... the Chairman decided that I had to go, possibly as early as May 1990, but his concerns were not discussed with me and it appears that I was being set up to be a scapegoat at an appropriate time in the future." ()

Leaving aside Mr Clark's interpretation of the motives behind the Chairman's alleged failure to discuss with him any concerns he might have had regarding the Managing Director's performance, evidence gathered in the course of this Investigation shows that, at a particular point, the dissatisfaction with Mr Clark's management of the Bank's affairs reached a level sufficient to become a call for his removal from office.

A file note of Mr Simmons, dated 3 May 1990, records a conversation with Mr Hartley, wherein Mr Hartley conveys to Mr Simmons that:

"... the Premier would be very upset if Tim Clark retired from the Bank prior to the end of his term." ()

While the note does not state any intention on the Board's part to dispense with Mr Clark's services, it points to the fact that consideration was at least being given to the possibility of his departure, and to its implications or consequences.

On 24 July 1990, Mr Simmons recorded a conversation with Mr Hartley, during which the latter declared, in what would seem to be a clear reference to the future of Mr Clark as Chief Executive, that; "... Tim's position would have to be considered",a comment that prompted Mr Simmons to add that; "...[he, Mr D W Simmons, had] been considering [his] own position as to whether or not [he] could have moved quicker." ()

On 30 July 1990, the Chairman met with the Premier to review the situation of the Bank and of its subsidiaries. The discussion ranged over a number of topics, one of which related to the position of the Managing Director in the light of the worsening performance of the Bank and of its subsidiaries.

Mr Simmons' notes for that day paint a gloomy picture of Mr Clark's management of the Bank: they ascribe responsibility to him, as head of its operations, for the state of the Bank's affairs; they point to his alleged failure to spot difficulties in spite of warning signals; they describe a man whose activities the Board must contain or restrain: whose performance is being questioned by senior management: who does not cope well with the directors' active attention; and, finally, a man who may be inclined to retire early, as a result compounding the pressure of events.()

A file note, dated 2 August 1990, records a conversation between the Chairman and Mr Hartley, in which the latter puts Mr Simmons on notice that; "... he [Mr R E Hartley] would like to review Tim's position at a subsequent date..."()

On 21 August 1990, Mr Simmons wrote to Mr Clark:

"... in relation to the group's [sic] profitability for the year ending 30 June 1991." ()

The three-page letter takes up Mr Clark's invitation, extended some two weeks earlier, to have the Chairman:

"... outline some of his thoughts about the problems of the Bank, and what might be done about them." ()

In it the author makes no comment or allusion to Mr Clark's performance, or his tenure as Chief Executive.

Six days later, however, Mr Clark replies to Mr Simmons, and raises a number of issues regarding the respective roles and responsibilities of the Board, on the one hand, and of the Chief Executive, on the other. The concluding paragraphs of the letter raise, directly, the issue of the Board's satisfaction with the performance of the Chief Executive, and invite the Board, should it be dissatisfied:

"... to replace [the Chief Executive] or outline your areas of concern and agree where improvements can be made." ()

On 21 August 1990, the position of the Chief Executive was challenged again by Mr Hartley, who, according to the Chairman:

"... basically [said] that ... Tim Clark should either retire or he should be put in a position of Executive Chairman." ()

On 29 August, the Chairman, Mr Simmons, rang Mr Clark to discuss the letters and the reply that Mr Simmons was preparing. The tenor of the conversation is recorded in the Chairman's file note of 29 August 1990. The note indicates that Mr Simmons indicated to Mr Clark:

"... that the reason that it [ie Mr Clark's letter of 27 August 1990] had been written was that he was worried about his own position." ()

Mr Simmons' reply to Mr Clark is dated 5 September 1990. In it Mr Simmons explores anew the respective roles and responsibilities of the Chairman, the Board, and of the Managing Director. While there is a passing reference to Mr Clark's "own position" (), there is again no remark that could be said to directly challenge Mr Clark's position as Chief Executive.()

Mr Clark, however, was to later comment that he ostensibly saw the exchange of letters as:

"... representative of the nature of the tensions which were building up between the Board, myself and senior management." ()

He did, nevertheless, accept the "sentiments" expressed in the last paragraph of the letter by Mr Simmons(), to the effect that:

"... having thought about this matter very deeply I do not believe that the Board and Management are at odds ... I believe that any differences or perceived differences can be dealt with by face to face discussions." ()

Mr Clark's position had, in fact, altered between the conversation of 29 August and the receipt of Mr Simmons' letter on 5 September 1990.() At its meeting of 3 September, with Mr Clark in attendance:

"... the Board had a wide ranging discussion on the operations of the Bank, the functions of the Chief Executive, functions of the Board, and the general relationships between Board and Management." ()

In respect of his role and the changes being made to it, Mr Clark wrote in his notes that:

"The Group Managing Director is to operate more as an "Executive Chairman", with more responsibility being given to Messrs Paddison, Hamilton and Mallett in the preparation of their Board papers" (),

while the formal minutes were to record that the Board resolved to have Mr Clark henceforth:

"... operate more as an Executive Chairman free to roam with a high public profile, [while] Messrs Hamilton and Paddison [would] act as "Deputy Managing Directors" and "be blooded" having regard to the fact that T M Clark [sic] will not continue as Managing Director past June 1992." ()

The notes taken by Mr Clark expand a little on the modified role the Board proposed to give to the Chief Executive, particularly with regard to his responsibilities. Mr Clark's notes state that:

"The Group Managing Director is still firstly held accountable and responsible by the Board, but his function is to be more of an overview function, establishing and maintaining a strong public face for the Bank, and is to have time to "roam" more widely over the Group's activities." ()

The continuing accountability and responsibility of Mr Clark as Chief Executive is reflected in some of the other items discussed at the meeting. As (Group) Managing Director, he is still expected, for instance, to prepare and present the Managing Director's overview, which is to "highlight key issues", and to report on "what action is being taken in reducing staff and whether space could be reduced".()

In his file note on the day, Mr Simmons indicated that he had found Mr Clark's attitude "somewhat unusual", in that:

"... [He] basically accepted what the Board's recommendations were as reflected in the minutes attached to this note, but subsequently I gather he had spoken to Michael Hamilton that evening and was quite upset".()

Mr Simmons goes on to record the reasons for Mr Clark's displeasure. They were that:

"The suggestion that Hamilton and Paddison act as joint M.D's [sic] he saw as a deliberate attempt to reduce his influence ... and [that] he was also uncertain of the position that the Board was taking." ()

Whatever uncertainty remained - and I believe there remained a substantial amount of it, as discussed later - the Board had achieved two outcomes.

In the first instance, it had removed Mr Clark from the full exercise of the functions of a Chief Executive Officer by directing him, towards a wider public-relations role, and by introducing Deputy Managing Directors with a focus on operational matters beneath him.

In the second instance, it had stated unequivocally that it would not envisage extending Mr Clark's term of appointment beyond its scheduled expiry date of 30 June 1992.

Approximately eight weeks later, on 31 October, the issue of Mr Clark's future with the Bank was raised again, notwithstanding the arrangement entered into by the Board regarding the modified role of the Chief Executive on 3 September 1990.

A file note of Mr Simmons recorded a meeting with Mr Hartley, at which Mr Hartley stated that:

"... he [wanted] to get some action in relation to Clark. He saying [sic] that he wanted to get a meeting." ()

Mr Simmons advised caution, on the grounds that he was of the view that:

"... once he proceeded with Clark, Clark was the type of guy that would leave. I said that I didn't believe that he could put it [sic] to a situation where he criticised Clark and could hope to walk away. [He] said Clark was the type of person that would not accept and would probably leave." ()

Nine days later, on 9 October 1990, Mr Hartley returned again to the issue of the Managing Director's performance, and inquired as to what the intentions of the Chairman were. In particular, he sought to have circularised a letter in which he had set down a critical review of the Managing Director's activities.() On that occasion, Mr Simmons renewed his warning to Mr Hartley that:

"... once we started there was every likelihood that the matter would be processed to a stage where Clark would have to elect to resign",

a prospect which, as noted by Mr Simmons, Mr Hartley did not consider a "big problem".()

Approximately six weeks later, on 19 November 1990, Mr Hartley formally wrote to the Chairman, outlining his concerns over the situation of the Bank, and the performance of Mr Clark, in particular, on which he commented in the following terms:

"... given the extreme seriousness of the Group's position, I believe that what remains to be discussed openly and frankly are questions regarding the performance of the most senior management of the Bank.

In particular, most Directors appear to have serious concerns about the recent performance and attitudes of the Managing Director, but these concerns have only been expressed amongst Directors in individual conversations.

A number of mistakes have been made by management in the recent past which, in terms of impact on the State Bank Group, verge on the calamitous.() It seems to me that over the last few months, hardly a Board meeting goes by without some new revelation of management incompetence. It is intolerable to me personally that, at Board level, the person responsible for these mistakes has not been identified." ()

In that same letter, Mr Hartley requested that the subject matter:

"... be discussed at a special meeting of non-Executive Directors at the earliest opportunity." ()

The matter was raised three days later at the State Bank Board meeting, on 22 November 1990, by Mr Simmons. As a result of the discussion which took place at that meeting, Mr Simmons formed and recorded the view that:

"... Bert Prowse, Bob Bakewell, Rob Searcy and myself have lost confidence in Clark and he needs to be told what is required of him to drag the Bank back to where it should be." ()

On 30 November(), Mr Simmons discussed Mr Clark's position with Mr J D Studdy and Mr Searcy. In the course of that discussion, Mr Studdy indicated that he also had lost confidence in the Managing Director, adding, moreover, that:

"...he [J D Studdy] thought that Clark [sic] was the type of guy that would fight and we would have a problem if we had to dismiss him." ()

On 5 December, in a record of conversation with Mr Searcy, Mr Simmons indicated that he believed the time had come "... to get together with Clark [sic]."() Five days later, another note records that Ms M Byrne expressed the need for all Board members to rally behind Mr Clark, a course of action Mr Simmons intimates he is disinclined to take, because of a lack of confidence in Mr Clark.() On 11 December, Mr Simmons and Mr Searcy are agreed that "... Clark [sic] should be retired".()

On 14 December, Mr Clark met with the Treasurer. During the meeting, Mr Clark covered a range of topics centering on two issues: the performance of the Bank, and the deteriorating relationship between the Board and the Chief Executive.() Regarding his own situation, Mr Clark expressed the view that he:

"... had given a lot of thought as to whether or not [he] should step down but that [he] felt it really was not an option at this stage and that [he] had to stick with it" (),

adding that he:

"... didn't think that it was a time to make changes ... We are all in this together, we have got to get out of it together." ()

Mr Hartley's letter, initially circularised at the meeting of 22 November, was given to Mr Clark on 17 December 1990.() On the following day, 18 December, Mr Simmons records that he:

"... had seen Tim Clark the preceding night. Clark had told [him] that he had read through [Mr] Hartley's letter. He had no option but to resign as there was a reference to the fact that Directors appear seem [sic] to have serious concerns about the recent performance and attitude of the Managing Director." ()

On the same day, Mr Simmons' notes also refer to a telephone conversation between the Treasurer and himself. In the course of that conversation, Mr Simmons recalled that the

Treasurer indicated that:

"... in his view it would be fatal if Clark [sic] left the employment of the Bank." ()

According to the same file note, Mr Simmons pointed out to the Treasurer that, because of the exchange of letters which had taken place, the Board was now bound to air the matter with Mr Clark. Mr Simmons then goes on to note that:

"... the long and the short of it is that [he] said to the Premier that [he] could work with Clark [sic] provided he could work with the Board" (),

adding moreover that:

"... as far as [he] was concerned, we [the Board] wanted to try to get him to work with the Board but or possibly [sic] to leave at a later date." ()

On 20 December 1990, the Treasurer addressed the Bank Board at its monthly meeting. The words of the Treasurer left very differing impressions on the participants. Mr Clark has stated that:

"... the Premier attended and addressed the meeting. He talked about the need for teamwork and for the Board and management to stick together to try to work out through the problems of the Bank" (),

while Mr Hartley conveyed to this Investigation that:

"... even in December 1990 where I was beside myself with the need to get rid of, by now, the man who had taken us on this destructive path ... the Premier still came and gave us a pep talk and stopped us and told us: to stop being so disruptive and get on with the job and get on with Mr Marcus Clark." ()

On 21 December 1990, Mr Clark went on annual leave. Owing to illness, he was not to return to the Bank until 3 February 1991.

On 2 January 1991, Mr Simmons met with the Treasurer to review the situation of the Bank. With regard to Mr Clark, Mr Simmons reportedly advised that:

"... Tim [sic] had agreed to stay to 1992 provided he acts properly and conducts himself. If he doesn't then on three months [sic] notice ... I said that the pressure in January could force a re-assessment." ()

On 29 January, Mr Simmons saw the Treasurer, accompanied by Mr Bakewell, Mr Kowalick and Mr Paddison. The file note prepared by Mr Simmons on that meeting contains a reference to the future of Mr Clark, in the light of the growing pressure generated by the situation of the Bank, and the state of health of the Managing Director.()

Notes kept by Mr Simmons for 31 January recorded a forthright exchange of views between Mr G Anderson, an adviser to the Premier, and Mr Bakewell and Mr Hartley in two separate conversations. The first of those notes record that Mr Bakewell angrily rejected the suggestion by Mr Anderson that the Board had led the Government into a most difficult situation, adding that it was only through the support of the Government that Mr Clark had been allowed to remain for so long.

The second note referred to Mr Anderson later expressing regret that:

"... they [those in Government empowered to act in the matter] hadn't got rid of Clark [sic] and realised some of the problems which Clark had caused" (), while a third note has him express the view that:

"... Tim [Clark] should resign because of ill health." ()

On 3 February 1991, Mr Clark returned to his duties from annual and sick leave, commenting:

"... there was obviously a strained atmosphere in the Bank. We had many meetings from Sunday 3 February through to Friday 8 February." ()

The Board met on 8 February. At the close of that meeting, Mr Clark was asked to attend a meeting with Mr Simmons, on 9 February.()

On 9 February 1991, the Premier called Mr Clark. According to Mr Clark, the Premier advised him that he was withdrawing his support. Querying the Premier as to whether or not his statement was a request for a resignation, the Premier reportedly indicated that it was not, as Mr Clark's position was for the Board and him to resolve.()

Shortly after the Premier's call, Mr Clark was attended by Mr Simmons who demanded the Managing Director's immediate resignation, effective that day.() A settlement letter was signed by Mr Simmons, as Chairman, at that point, regarding the conditions applying to Mr Clark's departure.()

A Board meeting was held that day. The Minutes of the meeting record that the Board resolved:

"... to accept the resignation of Group Managing Director, Mr T Marcus Clark, to take effect from 9 February 1991. The Chairman advised that Mr Clark had tendered his resignation recognising his responsibility as Chief Executive Officer, and that this had been accepted by the Chairman on the Board's behalf on the terms and conditions as outlined in the attached letter." ()

21.4.7 OBSERVATIONS AND CONCLUSIONS ON THE MANAGEMENT OF THE PERFORMANCE OF THE MANAGING DIRECTOR

In the light of the evidence gathered in the course of this Investigation, I make the observations, and conclusions noted below.

(a) Regarding the Development of Standards, Goals, and Objectives, for the Chief Executive

The Board failed to develop and establish the basic instruments of direction and measurement for the guidance of the Chief Executive's activities.

Other than a verbally communicated and agreed brief shaped in late 1983, the Board never provided either a new or revised brief to the Chief Executive through which it could have defined its own guidelines for the development of the Bank, and measured the performance of the Chief Executive, as it effectively did, albeit in a rudimentary fashion, through the 1983 brief.

As a result, the initiative was left to the Managing Director to set the course of the Bank through the generation of strategic and profit plans. The assessment of the performance of the Chief Executive was not, however, either objectively, or demonstrably, tied to the achievement of the strategic plans. Whilst both Chairmen acknowledged that they perceived a relationship to exist between the performance of the Chief Executive and the `growth', `profitability', and `performance', of the Bank nonetheless the Board failed to apply those indicators effectively to the review of the performance of the Chief Executive, and thus rendered the process largely futile.

(b) Regarding the Development of Performance Monitoring and Control Processes for the Chief Executive

The Board failed to establish, manage, and enforce, a structured performance review process with the Chief Executive, independent of, and distinct from, a remuneration review process (which the former is meant to feed).

The process which existed was, at best, informal and ineffective, which could not provide the sound basis required for any objective evaluation of the Managing Director's performance, let alone a basis for the review and adjustment of his remuneration.

In failing to recognise the need for such a process and its establishment, the Board deprived itself of one of the few means of regular and formal monitoring of the activities and initiatives of the Chief Executive, other than that which can be achieved through day-by-day management or extraordinary intervention.

It failed to do so notwithstanding the early indications (raised at the time of the appointment of the Chief Executive in 1983-1984) that monitoring and support would be required, owing to Mr Clark's lack of experience as head of a substantial organisation and his limited experience in `mainstream' banking, on the one hand, and the strength of his personality, on the other.()

It failed to do so, moreover, notwithstanding the Chairman's expressed awareness of the "entrepreneurial" spirit of the Managing Director and his penchant for "greater strategies", as well as the acknowledged and concomitant need for the restraint or control of those propensities. It failed to do so, even though the Bank, according to a comment made by Mr Barrett in support of the re-appointment of Mr Clark, remained in need of "very strong monitoring".()

The failure to actively and formally manage the performance of the Chief Executive is even less understandable from 1988 onwards(), at a time when the Board was becoming increasingly dissatisfied with Mr Clark's performance and expressing both internally and externally, its concerns - more specifically, about the perceived need for Mr Clark to be brought under the firmer control of the Board.

(c) Regarding the Actual Management of the Performance of the Chief Executive

That the Board felt increasingly displeased, from 1988 onwards, with the Managing Director's performance has been reflected in some of the examples quoted in the preceding pages of this section. Those instances are but a few of the many indications of the Board's sentiments reflected in documents, such as the file notes of Mr Simmons, or in comments made to this Investigation.

For the purposes of the present discussion, I will only restate that, in 1989 and in 1990, various members of the Board had commented adversely on specific actions or initiatives taken by Mr Clark, as well as on important aspects of his management style and attitude to the Board.

With regard to specific actions of the Managing Director in 1989 and 1990, the file notes of Mr Simmons record adverse criticisms of Mr Clark's handling of the provisioning for the Hooker account; of the expected level of profits for 1989(); of the foreseen difficulties with Beneficial(); of the REMM, Equiticorp and National Safety Council of Australia, accounts(); of the acquisition and subsequent management of the Oceanic Capital Corporation(); of the establishment of an Audit Committee(); of the appointment of staff with suitable financial management skills(); of the acquisition and subsequent management of the United Building Society of New Zealand(), to name but some of the more salient ones.

With regard to Mr Clark's management style and attitude, in 1989 and 1990, the file notes of Mr Simmons again record trenchant adverse criticisms of Mr Clark on issues such as the information provided to the Board; his dismissive stance towards the Board(), which reduced that body to the role of a "rubber stamp" () or a "plaything" (), over which he could "run riot" (); his failure to accept questioning from the Board or suggestions from the Board(); his failure to act upon requests from the Board with the required diligence(); and, lastly, his failure to accept the practical aspects of the exercise by the Directors - and the Chairman in particular - of their responsibilities as members of the Bank's "governing body".()

Many of the Directors interviewed in the course of the Investigation repeated those criticisms and expanded upon them in instances too numerous to quote.

Suffice it to recall, for the purposes of the present discussion, that, regarding the performance of the Chief Executive, Mr Bakewell has stated that his views "deteriorated" from 1987 onwards(); Mr Hartley, that by 1989-1990, "... [the Directors] had to do something about either controlling him or supplementing him" (), and that "... things were bad enough that the man should be replaced" (); Mr Searcy, that "... he had become very disappointed with him before the end of June 89, probably from February-March 89 onwards", adding that he did not think that, "... certainly after June 1990, ... his contribution to the Bank was worth anything".()

In the face of such strong, evident, and increasing, displeasure, I am critical of the Board's actions in three respects: firstly, that it did not formally and regularly monitor and control the performance of the Chief Executive, whether as a necessary process in its own right, or as part of an obligatory remuneration review process; secondly, that it did not confront the Chief Executive with a number of serious concerns held at Board level, with a view to having those rectified in a forthright and expeditious manner;() and thirdly, that, it did not properly exercise its authority and control over the activities of the Managing Director, and thus allowed an inappropriate and damaging relationship to exist from 1988 onwards.

I have dealt with the first criticism in the pages which precede this section. I deal with the other two in the paragraphs below.

(d) Regarding the Avoidance by the Board of Confrontations with the Chief Executive

Section 14(1) of the State Bank Act stipulates that the Board is the governing body of the Bank. Section 16(3) gives the Board the power to appoint the Chief Executive Officer of the Bank. Section 16(2) sets down that the Chief Executive, while responsible for the management of the Bank, exercises that responsibility subject to the control of the Board. Both Mr Barrett() and Mr Simmons, the latter forcibly so(), have stated to this Investigation their understanding that the Board had ultimate authority and responsibility within the Bank, as had Mr Clark.()

Evidence provided to this Investigation shows, from 1989 onwards, a steadily increasing incidence of discussions between the Directors and Mr Clark concerning the problems experienced by the Bank and by its subsidiaries.()

The topics covered during those discussions span the range of the business activities of the Bank: the poor performance of key accounts (National Security Council of Australia, Equiticorp, REMM); the poor performance of acquisitions (Oceanic Capital Corporation, United Building Society); the poor performance of subsidiaries (Beneficial

Finance Corporation and associated joint ventures); the setting and realisation of profit targets for the Bank and the Bank Group; the means of achieving these targets; the skills and expertise displayed by certain officers in the exercise of their duties; the structuring of Committees, of divisions, and of subsidiary groups, and so on.()

Beyond identifying the topics discussed, the evidence presented to this Investigation also shows the increasingly conflictual nature of those discussions, with the parties involved (ie the Directors and the Managing Director) holding divergent views as to either the causes of particular problems or, more frequently, the best way in which to resolve them.

The level of contention was evidently such as to leave, over time, particularly negative impressions in the minds of many of the parties involved. Mr Simmons has indicated that effecting changes was tantamount "... in many instances [to] fighting World War 3 on every matter".() Mr Hartley formed the view that the Managing Director was persistently opposing the changes desired by the Board() and that, as a result of Mr Clark's negative responses allied to his unshakeable optimism,() the Board was, on more than one occasion, left in the position where it had to prove or demonstrate the correctness of its views before the requested changes were effected and its authority accepted.() To Mr Clark, many of the differences between the Board and himself were arising out of a misguided understanding, by the Chairman, in particular, of the respective and appropriate roles of the Board and of the Chief Executive in the conduct of the Bank's affairs.()

Inevitably discussions which took place in such a climate would take on the characteristics of skirmishes in a much longer war over the fundamental issue of whose responsibility it was to effectively "run the business". They would undermine confidence and relationships as well as polarise opinions. They also explained, in part, the strategies adopted by the Board in its dealings with Mr Clark regarding the manner in which it chose to work with him in important Bank operations. The perceived need by the second Chairman, Mr Simmons, to develop an "irrefutable argument" to counter Mr Clark's "optimism", or the approach adopted by Mr Bakewell ("softly, softly catch the monkey") - both of which are referred to below - reflect a Board very much at odds with its Chief Executive, and one in which the stronger hand is held, not by eight non-executive directors, but rather by the Managing Director alone.

I have no doubt, as I will restate later in this Chapter, that the dealings which the Board would have had to enter into with Mr Clark were difficult or unpleasant in many an instance. I can further understand that, in those circumstances, one might well have been inclined to limit these dealings or adjust their nature to minimise the level of aggravation incurred. Nevertheless, despite these problems the Board should have acted but did not act, swiftly to bring to the attention of the Managing Director its doubts or concerns regarding what it considered to be significant problems, and - if need be - to confront him on those matters.

I am satisfied that the Board failed to do so in three instances at least.

The three instances I refer to relate to:

(a) the failure to confront the Chief Executive with a series of stated concerns in August 1989;

(b) the failure to confront the Chief Executive regarding the submission to the Board of information which had allegedly been `filtered'; and

(c) the delay in confronting the Chief Executive with the concerns held by a number of Directors regarding the performance of the Chief Executive.

The quoted "... failure to confront the Chief Executive with a series of stated concerns in August 1989" refers to the situation that arose when, on 10 August 1989, Mr Simmons indicated to Mr Bakewell his great unhappiness "... at the way things were proceeding with Tim".() The Chairman expressed his concern regarding Mr Clark's handling of the Hooker account and his attitude to the setting of profit targets, as well as his own concerns regarding the performance of Beneficial Finance Corporation. According to Mr Simmons, Mr Bakewell expressed the view that a "run-in" should take place with Mr Clark. Mr Simmons demurred, opting instead "... to do things quietly", for fear of provoking Mr Clark into a resignation which would prove embarrassing to the Government prior to an election. Yet in a file note dated a few weeks earlier, on 18 May 1989, Mr Simmons had indicated his concern at the Managing Director having "... put himself in a situation where he was running riot on the Board".()

The quoted "... failure to confront the Chief Executive regarding the submission to the Board of information which had allegedly been `filtered' " refers to the discovery by Mr Bakewell, in February 1990, that the Internal Auditor had been "hampered" or "restricted" in putting information to the Board; some of that information related to the level of non-accrual loans in the Bank's portfolio. Mr Bakewell spoke to the Chairman about what he clearly saw as a "serious" matter, but did not appraise other Board members of the incident for fear, as he put to this Investigation, of exposing the newly-appointed Internal Auditor to management reprisals, should the confidence be breached.

The incident, however, put Mr Bakewell "on alert" as to the quality of information presented to the Board in various papers. This "serious" matter was not raised with the Chief Executive, on the grounds that it was preferable, in Mr Bakewell's judgement, "... to sit back with the knowledge and softly, softly catch what I [wanted] to catch" (), rather than "... front up to the managing director and bang the table and scream or anything like that...".()

The quoted "delay in confronting the Chief Executive with the concerns held by a number of Directors regarding the performance of the Chief Executive" refers to the request of Mr Hartley to the Chairman for a formal assessment of the Chief Executive's performance. I have already set out the basic facts of this particular matter in the earlier section of this Chapter which reviewed the performance of the Chief Executive, as perceived by the Directors.()

Mr Hartley's concerns regarding the performance of the Chief Executive were first raised in late July 1990, yet the question was not formally addressed until late December 1990, some five months later. One reason advanced by the Chairman, against the airing of Mr Hartley's concerns regarding the performance of the Chief Executive, was the fear that the latter might resign as a result of the criticisms and confrontation.()

Mr Simmons has indicated to this Investigation that, in his view, "... [Mr T M Clark] did not like to be confronted" (); Mr Bakewell, that the Managing Director could interpret questions from Board members as "challenging his credibility" () and respond accordingly; that he could be "... very, very rude", to the point where some might hesitate to ask a question "... because you'd be made to look a damn fool ...".() Mr Searcy reported an instance where his persistent questioning had been poorly received by Mr Clark(), while the file notes of Mr Simmons record occasions upon which Mr Clark registered his displeasure at the Board's active intervention and debate of the proposals put before it.()

I am not here concerned to ascertain the details of each of the situations referred to above, or to investigate the attitude Mr Clark may or may not have adopted in response to a given situation. I point out, however, in this regard, that there clearly existed a perception, in the minds of some of the Directors, including that of the Chairman and of the Deputy-Chairman, that the risk of arousing the ire of the Managing Director was a factor to be taken into account in the deliberations of the Board.

While I accept the fact that Mr Simmons had chosen, on various occasions, not to exercise the authority vested in him as Chairman, and thus had not `instructed' Mr Clark to carry out certain actions on the basis that he was unsure of "the way to go" because of the time it took "to come to grips with what the situation was in certain areas" (), I find it unacceptable that the Bank Board should have been in such a relationship with its Chief Executive that it needed to tailor its approach to the management of its business, and to the nature or tone of its deliberations, in order to accommodate the views or opinions of one of its members, however influential.

On examination, I believe that the Board's approach was conditioned by three factors.

The first is the acknowledged absence of a ready successor to Mr Clark, whose departure would have left the Bank without a leader, and damaged its image in the community.() The specific issues associated with the failure by the Board and by the Chief Executive to develop or install an appropriate successor have been dealt with earlier in this Chapter.()

The second factor is the support which directors perceived Mr Clark enjoyed from the Government and the Treasurer's advisers in particular. Whether or not the support was actually given, and, if so, the precise nature of that support are issues which fall within the terms of reference of the Jacobs Royal Commission, rather than within my own.

In part of a submission to me entitled "Constraints on Change" the non-executive directors have submitted that, on becoming Chairman Mr Simmons, brought to the office a number of concerns, one of which, was how best to deal with Mr Clark who, he realised, might be difficult to control.

This was one of the matters which he raised with the Premier as early as June of 1989. Mr Simmons says that, through 1989, his unease grew as he began to identify particular problems with the Board and to observe Mr Clark's over- optimism.

By the first half of 1990 the Board began to become increasingly sceptical about Mr Clark's claims about profitability.

I am satisfied that the Board - and certainly the Chairman, Mr Simmons, as well as the Deputy Chairman, Mr Bakewell - took account of the opinions of the Treasurer expressed in relation to Mr Clark; interpreted those opinions as expressions of support for Mr Clark's management and the need for its continuance; and charted or modified their course accordingly, even to the extent of reversing an earlier decision regarding the need for the dismissal of Mr Clark.()

The third and last factor is the nature of the powers of the Board regarding the dismissal of the Managing Director, as understood by the non-executive directors.

Mr Clark held, as it were, a dual status. He operated as the Chief Executive Officer of the Bank on a day-to-day basis, accountable to the Board for his management of the Bank's affairs. Yet he was also a director of the Bank and of its subsidiaries, as reflected in his title of (Group) Managing Director.

The Board had (and has) under the Act (as amended) the power to dismiss any employee in the service of the Bank, of which the Chief Executive was one.() This power is the natural pendant to the power of appointment of the Chief Executive, under Section 16(3) of the State Bank of South Australia Act.

Members of the Board, however, are appointed by the Governor() and can only be removed under specific conditions set out in Section 9(2). It was Mr Simmons' view moreover, as expressed to this Investigation, that Mr Clark, as a director of the Bank:

"... could only be removed ... in accordance with the Act or in accordance with his contract. To do that would, in my view, involve the approval of the shareholder." ()

As indicated above, the Board did not believe it had this approval, and would not have it until the morning of 9 February 1991, following the call of the Treasurer to Mr Clark.

It must not however, be overlooked that - as reported in the statement tendered by Mr Clark to the Royal Commission - the Treasurer twice stated that the matter of dismissal was not for him to decide upon, as it was a matter between Mr Clark and the Bank Board.()

The decision taken by the Board on 3 September 1990() to remove Mr Clark from the day-to-day management of the affairs of the Bank, and to steer him towards an "ambassadorial role" as a quasi Executive Chairman, reflects the Board's quandary vis-a-vis Mr Clark in that it addressed the Directors' dissatisfaction with the Chief Executive, while maintaining him as a director.

The Board's decision did not resolve the problem because, less than two months later, the question of Mr Clark's poor performance arose again, as did the prospect of a confrontation.()

The new role assigned to Mr Clark was poorly defined, as were the specific division of responsibilities between himself and the three quasi deputy managing directors, and the attendant accountabilities of all parties.()

On the subject of the factors which, in my opinion, made the threat of Mr Clark's resignation effective, I have formed the following views.

Regarding the risk of the Managing Director's departure in the absence of an appropriate successor, this risk would not have arisen, had the Board, and, to the extent that he was directed to do so, the Chief Executive, discharged their respective responsibilities promptly.

Regarding the belief held by the Board regarding the limitations of its powers to deal, as it saw fit, with the continuance in office of a person they deemed unsuitable, I believe that the Board did not make sufficient efforts to clarify its position in the matter and provide appropriate advice to the Treasurer, so as to be able to act effectively and swiftly.

(e) Regarding the Influence of the Managing Director on the Board

Former Directors of the State Bank have referred, in one fashion or another, and on numerous occasions, to Mr Clark's perceived dominance of, or, at the very least, to his undue influence over, the Board.

That influence, it has been alleged, had furthermore been such as to frustrate, if not negate in certain instances, the more prudent or wiser initiatives of a group of eight other persons, many - if not most - of whom could draw upon years of personal and, in many instances, wider business and professional experience.

I have considered those views and observations carefully and sought to analyse them in order to identify the constituent elements of that influence, and the manner in which it would have been exercised.

It is clear that, in the first instance, while Mr Clark's experience in `operational' and `mainstream' banking was limited, he nevertheless enjoyed a level of banking expertise superior to that of the Board members, particularly in those areas in which the new State Bank was to venture and make major inroads, such as corporate lending.

Mr Simmons commented that Mr Clark had come "very well recommended".() Mr Bakewell referred to him as an "experienced banker".() Mr Hartley, in a number of instances, contrasted the experience and knowledge held by Mr Clark to the dearth of `counter-balancing' knowledge on the Board's side.() Ultimately, this perceived `monopoly' of banking knowledge on the part of Mr Clark, when combined with the forcefulness of his views, led Mr Hartley to call for a "strengthening" of the Board through the appointment of "at least two experienced bankers".()

In the second instance, Board members would have been distinctly aware of the achievements of Mr Clark as Managing Director of the Bank from 1984 to 1987. I have already spoken of the high esteem in which the Board held him for the manner in which he had orchestrated the successful merger of the two predecessor institutions, and laid the basis of the Bank's new commercial orientation.() Those achievements, when combined with his known marketing and business development skills(), had earned Mr Clark a solid reputation within the business and wider community.()

In the third instance, Mr Clark had, through his early exertions and the willingness of the Board to trust his abilities(), become the Board's effective `organisational hub'.

He was an active supporter of the Board who made numerous representations for increases in directors' fees(); he was moreover actively concerned in the nomination of directors to the boards of subsidiaries of the Bank, particularly under the chairmanship of Mr Barrett for which they received additional remuneration.()

The Board relied heavily, though not exclusively, on his judgement and opinion regarding the selection and development of the senior executive team, and the performance of that team.() And, while members of the senior executive team were called upon to present papers to the Board, speak to those papers, and answer questions regarding the functions they administered(), all papers that went to the Board were reviewed by Mr Clark() (or, in his absence, by Mr Paddison).()

The agenda for Board meetings was set by the Managing Director(); in the years of Mr Barrett's chairmanship, the proposed length of the discussion for each item on the agenda would also be set by the Managing Director; in my opinion, an encroachment on the Board's power and responsibility.() Mr Clark would equally, in those same years, take responsibility for the preparation of the agenda for the six-weekly meetings with the Treasurer(); file notes of Mr Simmons indicate, moreover, that Mr Clark, rather than the Chairman(), assumed the leading role in those meetings.

The risk posed by this information supply structure became clear to the directors from 1988 onwards, largely as the result of the emergence of an increasing number of substantial non-performing loans and acquisitions.()

Many of the directors then began to question the quality of the information supplied to them, and - as a result - the arrangements in place for the provision of that information to the Board.()

The matter was further complicated by what some directors saw as Mr Clark's inveterate optimism, maintained even in the face of the most daunting odds and contrary indications. Many directors have commented upon the perceived inability of Mr Clark to adjust that optimism to the particular circumstances of the day, and thus to make sound business judgments, particularly in adverse circumstances.() That same optimism, according to the evidence of Mr Simmons, prompted Mr Clark to put the best complexion on matters presented to the Board.() Mr Bakewell commented in this regard that:

"... all the important papers of the bank went to that font [ie Mr Clark], and it was only later that we came to realise that the board was getting, in my view, what the font wanted the board to get." ()

I have already referred earlier to Mr Hartley's comments to Mr Simmons, regarding the fact that, in his view, Mr Clark was dismissive of the views of the Board.()

These concerns were to have important effects for the manner in which the Board managed its relationship with the Managing Director, and with members of the senior executive team, from 1988 onwards.

They would be at the root of Mr Simmons seeking more frequent contact with the authors of papers presented to the Board, and of the Board's desire for a more `hands-on' approach to their involvement in the affairs of the Bank (eg representation on the Oceanic Capital Corporation Board; complaints regarding the Financial Services Group structure, and the manner in which it placed directors at one remove from the entities involved; commissioning of a task force to investigate the extent of non-performing loans; etc).

In the course of the Investigation, other matters of concern related to the Board's access to information have also been identified. I refer the reader to the Chapters dealing with Internal Audit; with the relationship between the Bank and the Reserve Bank of Australia; and with a number of case studies in credit management, such as REMM, and Adsteam.

On the matter of the influence of Mr Clark over the Board I believe that, as Managing Director, Mr Clark would naturally have seen his arguments carry great weight and would have received, by and large, a more than patient hearing, particularly in the early years of his term.

Beyond the existence of such a `circumstantial' advantage, I believe that the factors identified above, when allied to the strength of Mr Clark's personality, would have created a forceful presence on any board.

Yet I must point out that it is that very strength and forcefulness that, of their own admission, attracted the attention some members of the Recruitment Sub-Committee, and that ultimately won the endorsement of the full Merger Advisory Group.

That same Merger Advisory Group - and those members of it who would become directors of the new State Bank Board - had been appraised of the salient characteristics of Mr Clark's profile, and had recognised, as Mr Barrett and others have stated, the need to balance, restrain, monitor, and control, that strength and those attributes.

The Bank Board was, by all accounts, (as well as by the fact that it put in place no revised briefs or delegations beyond the first ones determined for the Chief Executive in February 1984), satisfied with the performance of Mr Clark throughout the years 1984 to 1987.

The Investigation has heard that the satisfaction of the Board was evidenced, moreover, by the fact that Mr Clark was re-appointed, and by the degree of leeway he was given, particularly from 1984 until 1988, in the direction-setting and management of the affairs of the State Bank.

I recognise furthermore that, as a result of its desire to assume a more active role in the governance and monitoring of the affairs of the Bank from 1989 onwards, the Board modified the manner in which it exercised its responsibilities.

In so doing, it called into question a modus operandi which had evolved over four to five years and `cut into' areas of activity which had formerly been the exclusive domain of the Managing Director: first-hand monitoring of subsidiary activities; first-hand monitoring of overseas activities; first-hand involvement in remuneration and bonus setting; first-hand involvement in the Audit Committee; first-hand monitoring of Bank and Group performance, through special projects regarding non-performing assets, etc.

The Board also effected other changes which, for their lesser importance when compared to the above, were, nevertheless, significant in terms of the division of powers between the Chief Executive and the Board.

I refer here to the different approach to Board meetings and to meetings with the Treasurer; to the quality of the papers submitted to the Board; the directors' increased involvement in their discussion on Board Papers; to the degree of contact and communication between the Chairman and the Deputy Chairman; the Chairman and the Directors; and the Directors and members of the senior executive team; and so on.

In this regard I accept that these initiatives were in large measure introduced at the instance of Mr Simmons who devoted many hours of his time to the Bank. I have no doubt that those changes were effected with a degree of difficulty, and against a degree of resistance, if only for the obvious reasons stated by Mr Simmons in his evidence, namely, that if one:

"... [has] been in a position where no-one challenges you and you can do what you like for a period of time, it's not a very pleasant situation all of a sudden being challenged or being told: look, you can't go in that direction." ()

That the Board, in effecting those changes, had to deal with someone of strong views and convictions - however well or poorly founded those views and convictions may have been - only added to the difficulty, particularly if the Board was sensitive (as it has demonstrated it was on numerous occasions) to the ultimate threat of a resignation on the part of the Managing Director. Indeed, Mr Bakewell has expressed the view to this Investigation, that it is with the accession of Mr Simmons to the chairmanship that the Board "... started to get on top ..." () of the Group Managing Director, a task which Mr Bakewell does not feel was completed until Mr Clark left.

In the course of the Investigation, certain views have been put to me regarding the level of control which it was appropriate for the directors to exercise over the activities of the Managing Director.

Of chief concern to me are those views which argue that the exercise of the Board's responsibility, vis-a-vis control, is dependent upon factors such as the performance of the organisation.

Mr Simmons, for example, has put forward the view that:

"... there [is] no reason to control somebody when things are going well ... but when the results aren't there, then it becomes a different ball game." ()

It is my opinion, with respect to these views so argued, that the responsibility for monitoring and control exists notwithstanding the variations in the particular fortunes of an organisation at a given point in time. One may, having regard to the circumstances of the day, vary the level of monitoring and control, but without calling into question the necessity of the task, the existence of the responsibility, or that of the authority to carry it out.

In the light of the evidence placed before me during this Investigation, I am of the opinion that the Board failed to exercise its authority and the appropriate degree of control over the activities of the Chief Executive whom it had appointed, and that, in so doing, it allowed the Bank to engage in operations which resulted in material losses, and the Bank and members of the Bank Group to hold significant assets which are non-performing.

In particular, I am of the opinion that, as indicated earlier:

(a) The Board did not put into place the performance monitoring mechanisms it knew would be needed to support the profile and experience of the first Chief Executive.

(b) The Board did not, adequately or properly supervise, direct, and control, in its instructions to the Chief Executive, the matter of the identification and development of potential successors to the Chief Executive. The absence of credible successors left the Board and the Bank in an exposed situation in the first instance in 1988, at the time of the second re-appointment of Mr Clark, and, in later years, when confronted with the risk or the threat of the loss of Mr Clark's services.

(c) Having re-appointed the Chief Executive on two occasions, the Board did not provide him with either briefs or objectives other than those which he might set for himself through the development of corporate or profit plans.

(d) The Board did not define any clear standards by which the performance of the Chief Executive could be judged in relation to that of the Bank.

(e) The Board did not establish, after the first and second re-appointments, any formal performance monitoring mechanisms through which it could guide, control, and re-direct or correct, if necessary, the activities of Mr Clark.

(f) In the face of growing concerns regarding the performance of the organisation and that of the Managing Director, the Board continued not to formally assess the activities of Mr Clark even though his performance was to be deemed so unsuitable as to cause his effective removal from the managing directorship to a new, poorly defined, role.

(g) Not only did the Board fail to attend to the formal monitoring of the Managing Director's performance, it also failed to control the activities of the Managing Director, by not confronting him at the right time, with these serious concerns.

I now turn to the examination of the manner in which the Board exercised its control over the management of the Bank's affairs by the Chief Executive through the process of rewarding and remunerating him.

 

21.5 THE REMUNERATION OF THE MANAGING DIRECTOR AS A FUNCTION OF HIS PERFORMANCE

 

The previous section of this Chapter dealt with the manner in which the Board monitored and controlled the performance of the Managing Director, as the day-to-day manager of the affairs of the Bank, for and on behalf of the Board.

In that section, comment was made on the relationship between the review of the performance of the Managing Director, such as it may have been, and the setting of his remuneration. This section of the Chapter explores that relationship in detail, so as to establish how the Board assessed and set the remuneration of the Managing Director, as a measure of its satisfaction with his activities.

In discussing the matter of the Managing Director's remuneration, it is necessary to consider the following elements: the make-up or composition of the Managing Director's remuneration; the mechanism for setting its level and the standards applied in so doing; the basis upon which the remuneration was to be reviewed; and the evolution of that remuneration over the period 1984 to 1991.

21.5.1 THE MAKE-UP OF THE MANAGING DIRECTOR'S REMUNERATION

The remuneration paid to the Managing Director, Mr Clark, as is often the practice for senior executive salaries, comprised two elements: a base salary and a range of benefits `packaged' in such a way as to make the total remuneration as `tax-effective' as possible.

The types of benefits paid to Mr Clark varied to a small extent over the years. Their value, however, altered substantially.

By way of example, the first service agreement entered into between Mr Clark and the Bank() provided for the following benefits in addition to the base salary(): a fully-maintained motor vehicle, with option to purchase same at book value at the end of his term of appointment; an interest-free housing loan(); a sum for expenses incurred in the performance of business duties; as well as a range of other lesser benefits (removal expenses, first class travel and accommodation whilst on business, annual leave entitlements, and so on). In addition, the contracts provided for the payment by the Bank of a sum initially equal to 24 per cent (but subsequently varied by agreement), of salary in a fully-vesting superannuation fund. In subsequent years, the range and structure of the benefits were modified or expanded: after the re-negotiation of Mr Clark's housing requirements in 1986 for example, a sum was allocated to cover the payment of rent to the Bank on the property it had acquired to house Mr Clark.()

From 1988 onward, Mr Clark also entered into a bonus scheme based on the achievement of budget and over-budget profits by the Bank. Under this scheme, bonuses were earned by Mr Clark, on two occasions, as a consequence of the results achieved by the Bank in the 1988 and 1989 financial years. These bonuses did not form part of the total remuneration package outlined above, and represent amounts paid above and beyond salary and other benefits.()

The last feature of Mr Clark's remuneration that deserves mention is that of director's fees, and this is in two respects. Firstly, as regards Mr Clark's Bank directorship; and, secondly, as regards to his directorship of entities which were not part of the Bank or the Bank Group.

21.5.2 DIRECTOR'S FEES AS A DIRECTOR OF THE STATE BANK AND OF SUBSIDIARIES OF THE STATE BANK GROUP

Section 7(3) of the State Bank Act stipulates that the Managing Director of the Bank:

"... is eligible for appointment as a Director of the Bank."

Mr Clark:

"... made it a condition of [his] appointment that [he] be appointed Managing Director ..." (),

thus availing himself of the relevant provision of the Act. This condition was duly reflected in his first contract with the Bank, signed on 1 February 1984. The relevant clause enjoined the "Amalgamating Banks" to:

"... use their best endeavours to have the Chief Executive Officer appointed first as Chief Executive Officer of the New Bank ... and secondly to the Board of the New Bank." ()

Mr Clark was duly confirmed as Managing Director of the new Bank, and as a member of its Board in June 1984, thus becoming Managing Director of the Bank.()

Section 10 of the State Bank Act stipulates that, in contrast to non-executive directors, the Managing Director is not entitled to receive Director's fees. The Investigation has established that, in accordance with the Act, the Managing Director of the Bank did not receive any fees for work carried out by him as a Director of the Bank, or of its subsidiary companies.

21.5.3 DIRECTOR'S FEES AS A DIRECTOR OF ENTITIES UNRELATED TO THE STATE BANK GROUP OF COMPANIES

As indicated earlier, the terms of appointment accepted by Mr Clark in February 1984 were framed as a three-year commitment, scheduled to end in September 1987.() At the time, Mr Clark had it in mind once his contract had been fulfilled, to become a professional director.()

Mindful of that aspiration, he caused to be introduced, in his first service agreement, a clause which authorised him to be:

"... a member of any organisations, councils, committees, boards of directors, or authorities which are either conducive to the performance of his duties hereunder or which otherwise do not detract from his ability to perform his duties hereunder."

He did so on the undertaking that:

"... any emoluments received by the Chief Executive Officer ... are to be for the account of the Savings Bank of South Australia or the New Bank ...".()

Over time, while he was Managing Director of the Bank, Mr Clark was thus able, with the Board's approval, to accept directorships with the Equiticorp group of companies, Parbury Henty Holdings Limited and United Australian Automotive Industries Limited, among others.()

Mr Clark's intentions regarding the acceptance of directorships, and the Board's agreement to those intentions, are recorded in a Board Minute dated 22 November 1984, as is Mr Clark's request for the Board's approval regarding his acceptance of directorships with Parbury Henty Holdings Limited and Equiticorp Limited.()

The Board Minute goes on to set out conditions upon which those appointments would be accepted by Mr Clark. It concludes with the statement that:

"... In both cases all costs associated with Mr Clark's attendance at the meetings would be borne by the respective companies and remuneration received would be for the benefit of the Bank." () [Emphasis Added]

As I shall report later in recording the evolution of Mr Clark's remuneration, the conditions regarding the receipt of directors' emoluments by Mr Clark were altered in 1986.

In his 15 May 1986 note to the Chairman regarding the review of his remuneration for that year, Mr Clark recorded the Chairman's agreement to his request that the Managing Director be entitled "... to retain Directors' Fees except for Bank subsidiary companies".()

This modified agreement was reflected in the second contract between the Bank and Mr Clark, signed a fortnight later. Under that agreement, the original wording of the clause dealing with non-Bank directorships was modified to the effect that:

"... any emoluments received by the Chief Executive Officer pursuant to any activity described above in respect of any company which is a subsidiary of the Bank or which otherwise in any way related to the ordinary business of the Bank are to be for the account of the Bank. Save as aforesaid the Chief Executive Officer shall be entitled to retain any such emoluments for his own benefit." ()[Emphasis added]

21.5.4 THE BASIS AND MECHANISM FOR THE REVIEW OF THE MANAGING DIRECTOR'S REMUNERATION

All three service agreements() entered into by the Bank and Mr Clark provided explicitly for the annual review and adjustment of the remuneration of the Managing Director.

The review and adjustment were to be made:

"... having regard inter alia to the performance of the Chief Executive Officer() as chief executive officer and any national wage increases." ()

In his evidence to this Investigation, Mr Simmons commented on one of these components when he indicated his belief that:

"... Clark's [sic] salary was based on a contract which in effect provided that his salary should be increased each year by CPI [Consumer Price Index]."

Mr Simmons' observation regarding the CPI component is accurate with regard to the first service agreement; the two subsequent service agreements were geared, however, to national wage increases rather than the CPI. All agreements, as indicated earlier, referred to performance as the other factor in assessing the appropriate level of remuneration. Given the quantum of the increases granted to Mr Clark by the Board, however, the reference to such increases being "governed" in any way by increases in either the CPI or national wage increases were irrelevant.

I have dealt in the previous section of this Chapter with the weakness of the mechanism used to assess the performance of the Managing Director. Evidence gathered during the Investigation shows that there also existed a degree of difficulty and contention regarding the setting of the Managing Director's remuneration.

A part of the difficulty arose from the divergent rates of remuneration which applied in the Eastern States and those, more conservative, which typically applied in South Australia.

Mr Clark brought the former perspective to the Bank. That perspective was further coloured by the seemingly boundless rises in remuneration experienced by an overheated banking and finance industry in the 1980's; by the promising performance of the Bank from 1985 to 1988; and, at least in the early years, by Mr Clark's belief that the short-term nature of his contract warranted additional consideration.()

The Board, by comparison and contrast, drew many of its points of reference from a South Australian perspective.

Mr Simmons observed to this Investigation:

"... There was an element in the bank of paying [salaries] which were considered, I believe by people in South Australia as being too high and out of touch with other salaries that were being paid".()

This impression which was echoed by Mr Barrett when he remarked that Mr Clark's salary "... was way and above anybody else in Adelaide at the time".()

Indeed, so marked was the difference - and that which would come to exist later in the remuneration paid to various other senior executives - that the discrepancy would become one of the main factors in justifying a decision to have all remuneration records of senior executives managed "off-site" entirely, through the services of Mr D Sharp of Touche Ross (later KPMG Peat Marwick), so as to ensure their complete confidentiality.()

It is sufficient for me to note, at this point that, to the very end, the setting of the Managing Director's remuneration remained a delicate matter, as evidenced by Mr Simmons comment to this Investigation that:

"... [he] realised were very high, but if you've got a managing director of an organisation which has got 21 million assets and 5,000 people, what is an appropriate salary ?" ()

In order to help it to overcome some of the uncertainty surrounding the issue, the Board called upon external advice from time to time. Mr Barrett recalled that, initially:

"... I consulted the firm of consultants who brought Mr Clark to us to see what the going rate should be, and from that we developed a package which was agreed to by Mr Clark and by the board." ()

The recourse to external sources of advice was a feature also commented upon by Mr Simmons, who stated that:

"... in general terms, the salaries were paid on the basis of recommendations by headhunters as to whether they were appropriate." ()

Responsibility for the initial process for setting the Managing Director's remuneration rested with the Managing Director and the Chairman, in the first instance. Mr Barrett described it as follows:

"... I would discuss [the level and composition of the remuneration] with Mr Clark, bearing in mind the Bank's growth and performance. We'd agree a package and go back to the Board with a recommendation." ()

That process, once set in place, would continue to apply throughout the years of Mr Barrett's chairmanship. It was modified slightly under Mr Simmons' chairmanship, from 1989 onwards, with the introduction of the Remuneration Sub-Committee.()

It is interesting to observe, however, the differing recollections of a number of directors as to the degree of actual consultation which took place among the directors regarding the remuneration of the Managing Director. The recollections of Mr W F Nankivell, Mr Searcy and Mr Hartley(), for instance, accord, by and large, with those of Mr Barrett. Mr Simmons, however, has indicated that he only became involved in the setting of the Managing Director's remuneration once he had become Chairman.() Mr Summers, for his part, did not recall having been made aware of the Managing Director's remuneration until 1989-1990.()

In the face of these differing accounts regarding the operation of the process, and after considering the evidence placed before me on the matter, I am satisfied that:

(a) In the days of Mr Barrett's chairmanship, the remuneration setting process, as it applied to the Managing Director,was undertaken primarily by the Chairman and the Managing Director, who together would shape a tentative package, on the basis of information on salary relativities gathered by both the Managing Director and by the Chairman independently.

(b) The result of their deliberations would be presented to the Board, whose approval would be sought.

(c) In the days of Mr Simmons' chairmanship, the remuneration setting process, as it applied to the Managing Director, involved primarily the Managing Director and the Chairman and Deputy-Chairman - as members of the Remuneration Sub-Committee.

(d) The result of their deliberations would be presented to the Board whose approval would be sought.

(e) In either case, no records were kept of any evaluation, assessment, or deliberations, of the Board on the matter. The only records maintained are the letters exchanged between Mr Barrett and Mr Clark, which form part of the Minute Book. Those letters set out, or confirm, the detail of the remuneration agreed. The documentation maintained under Mr Simmons' chairmanship is even scantier, represented as it is by a loose set of remuneration records for the senior executive team as a whole.

In the face of the differing accounts regarding the operation of the process, and after considering the evidence placed before me on the matter, I am satisfied that:

(a) The process did not provide a sufficient opportunity for meaningful input in the setting of the Managing Director's remuneration. The evidence leaves me unconvinced that the process did not present Board members with a situation close to a `fait accompli', which they would have found difficult to alter.

(b) The process did not provide a full disclosure of the package agreed to, as opposed to a discussion focused on overall remuneration figures.

In the face of the differing accounts regarding the operation of the process and after considering the evidence placed before me on the matter, I am satisfied that the Board did not have in place a reliable means of assessing and setting the remuneration of the Managing Director, in that:

(a) The process applied by the Board was an unduly informal one.

(b) The process did not provide a consistent basis for decision-making, given the weakness of the performance assessment mechanism described earlier; the poorly defined and applied performance indicators; and the lack of any form of records or documentation regarding deliberations carried out, and conditions set, by the Board.

21.5.5 THE EVOLUTION OF THE MANAGING DIRECTOR'S REMUNERATION FROM 1984 TO 1991

A review of the remuneration records of Mr Clark for the years 1984 to 1991 shows a steady and appreciable increase in total income derived from his activities as Managing Director of the Bank and, in later years, with the expansion of the Bank's subsidiary network, as Group Managing Director of the State Bank Group.

The following paragraphs trace the evolution of the Managing Director's remuneration over the period 1984-1991.

21.5.5.1 Setting The Initial Remuneration

On 21 September 1983, Mr King of Spencer Stuart & Associates wrote to Mr Barrett and Mr Hancock, in their capacity as members of the Recruitment Committee, to advise them of the names of three potential candidates to the position of Managing Director of the soon-to-be State Bank of South Australia.

In that letter, Mr King pointed out that "Tim Clark's [sic] present package, depending on how you might value it (), would be well in excess of $150,000." () He went on to add, however, that "... [he expects Mr T M Clark] would be prepared to consider substantially less than that, particularly if there was a house being provided for the successful candidate." ()

The remuneration initially offered by the Recruitment Sub-Committee on behalf of the Merger Advisory Group was insufficient to convince Mr Clark to accept the position. He therefore rejected the offer.()

The Recruitment Sub-Committee reconsidered the matter in the light of Mr Clark's response. According to Mr Clark,() one of its members, Mr M O'Loughlin then returned for further negotiations.

There clearly was a difficulty over remuneration, albeit, as it turned out, a temporary one.

I draw attention to the diverging recollections of three of the key participants in this debate.

Mr Clark has indicated to this Investigation that he accepted the position of Managing Director for a remuneration below what he was earning at Westpac,() on the basis of the challenge - and, as I have indicated earlier, of the opportunity - presented by the brief.()

Mr Hancock was unable to recollect whether or not Mr Clark, in accepting the position of Managing Director, had also accepted a lesser remuneration than at Westpac. He did recall that:

"... we ended up paying him more than we set out meaning to pay when the negotiations began ... and that issue was taken back to the Board for approval. I had a bit of a selling job to do with the board of the old State Bank because, as I remember, we'd gone in with an acceptance by the board that there could be a figure in the range of $60,000 to $80,000 and I had to go back and say that that was too low and would they authorise something higher - with a bit of reluctance I did." ()

Mr Barrett, however, in his evidence to the Investigation, indicated that, far from believing Mr Clark would have suffered a substantial decrease in remuneration:

"... [the Directors] expected to pay more than [Mr Clark] would be getting in a previous position ... We were expecting to pay half as much again ...".()

If one considers the information provided by Mr King of Spencer Stuart in his letter of 21 September 1983, regarding Mr Clark's package at Westpac, Mr Clark's statement, Mr Hancock's comment and finally the recollection of Mr Barrett, the situation seems singularly unclear, given the amount of detailed and careful negotiation which usually surrounds such a sensitive and material topic.

Be that as it may, Mr Clark accepted the position offered to him and arrived in Adelaide to take up his duties as Managing Director - Merger in February 1984.

The first of three service agreements between himself and the Bank was signed on 1 February 1984. Among other matters, it set out the details of the remuneration package finally agreed between the parties. According to the terms of the agreement, Mr Clark was to be paid a salary of $100,000 per annum, to which would be added other benefits and allowances() for a total remuneration package of $180,000.

21.5.5.2 In 1985

Mr Clark's remuneration was reviewed in January 1985, as per Clause 8 of his service agreement.() In a note dated 17 January 1985, and countersigned by the Chairman, Mr Barrett, on that day, Mr Clark advised the paymaster, Mr J Clarke, that the Board had increased his salary to $105,000 and his superannuation to $36,000 (from $24,000), to take effect from 1 February 1985.() Mr Clark's total remuneration package, including benefits, thus stood at $197,000.

On 30 June 1985, at the end of its first financial year, the new State Bank announced an operating profit, before taxes, of $28.098M.()

21.5.5.3 In 1986

The remuneration of the Managing Director was next reviewed in May 1986.

The details of the package agreed to by the Board in favour of the Managing Director are set out by the latter in a hand-written note(), approved and countersigned by the Chairman, Mr Barrett, on 15 May 1986.

According to the note, the salary component of Mr Clark's total remuneration remained unchanged at $105,000. The benefits component of the package, however, was increased in value by $28,000, from $197,000 to $225,000, an overall increase of 14 per cent on the 1985 package.

The increase was retrospective to 1 February 1985.

The remuneration increase was enhanced by three other factors, the first being "... the provision of a house costing up to $650,000, at a rental of $20,000 per annum"(), while the second dealt with Mr Clark's fees as a director of entities unrelated to the Bank.

I have referred earlier to the conditions under which Mr Clark accepted directorships of companies such as Parbury Henty Holdings Ltd and Equiticorp Ltd. One of the undertakings was that the fees earned as a director of such entities "... would be for the benefit of the Bank".()

As a result of the May 1986 remuneration review, that condition was removed, in that from this point on:

"... [the] Managing Director [was] to retain all Directors' Fees except for Bank subsidiary companies [sic]."

The last of the "enhancing factors" I referred to above was the introduction, on 28 May 1986, of a new service agreement which extended Mr Clark's original term of office to 30 June 1989.

For the financial year ended 30 June 1986, the Bank reported an increase in operating profit, before taxes, of $5.527M (from $28.098M to $33.625M) or 19.6 per cent over its 1985 results.

The increase in Mr Clark's total remuneration (25 per cent on his 1985 package) agreed to by the Board, on this occasion, was thus in excess of the growth of the Bank's operating profit (19.6 per cent).

21.5.5.4 In 1987

On 22 January 1987, Mr Clark wrote to Mr Barrett in reference to a discussion, earlier that week concerning the annual review of his remuneration. The manuscript note sets out what was to be Mr Clark's revised package, as of 1 February 1987. In addition, the note deals with issues related to expenditure on the house occupied by Mr Clark, and the amount of fringe benefits tax payable by the Bank on his package.

According to that note, as of 1 February 1987, Mr Clark's salary is increased by $5,000 to $110,000, while the benefits and allowances component of his remuneration rose by $35,000. The total remuneration of the Managing Director is now set at $260,000 per annum, an increase of 16 per cent over the 1986 remuneration package.()

For the financial year ended 30 June 1987, the State Bank reported an increase in operating profit, before taxes, of $7.194M or 21.4 per cent over its 1986 results.()

The increase in Mr Clark's total remuneration (16 per cent on his 1986 package), agreed to by the Board on this occasion, was thus slightly less (-5.3 per cent) than the growth in the Bank's operating profit.

21.5.5.5 In 1988

In February 1988, Mr Clark renegotiated his remuneration package.

On 15 February 1988, Mr Clark confirmed, in a manuscript note to the Chairman, Mr Barrett:

"... Mr Barrett's advise [sic] that [Mr T M Clark's] remuneration package is to be $400,000 for the year commencing February 1, 1988." ()

The package outlined in the note shows an increase in salary of $70,000 or 64 per cent, and an increase in benefits and allowances of $70,000 or 47 per cent, for a total increase in remuneration of $140,000 or 54 per cent.()

In addition, the same note indicates that, in conformity with the Board's wishes, a results-based bonus plan would be implemented for the Managing Director. According to this plan and "assuming distribution for a half-year only" (as it is introduced mid-way through the year at the time the agreement is reached between Mr Clark and Mr Barrett), the Managing Director would be entitled to a bonus of $30,000, $45,000 or $60,000, should the State Bank Group meet its budgeted profit target of $60.0M, exceed it by $5.0M (group profit of $65.0M) or exceed it by $10.0M (Group profit of $70.0M) respectively.

For the financial year ended 30 June 1988, the State Bank reported an increase in operating profit, before taxes, of $14.655M or 35.9 per cent over its 1987 results.

Excluding any consideration of the bonus plan, the increase in Mr Clark's total remuneration (54 per cent on his 1987 package) agreed to by the Board on this occasion was well in excess of the growth in the Bank's operating profit.

I have commented further upon the issues associated with the deliberation process adopted by the Board, and on how the Board came to agree to such a level of remuneration and extension as a result of active and forceful representations by Mr Clark and of the absence of any alternative successors.

I have, finally, also recorded the fact that, in the third service agreement, signed in August 1988 between Mr Clark and the Bank, the terms on which the performance of Mr Clark would be reviewed, were modified in such a way as to ensure that:

"... in effecting such a review the remuneration and benefits payable to the Chief Executive Officer (but disregarding benefits payable by way of bonus) shall not result in the Chief Executive Officer receiving less than he received prior to the review being effected." () [Emphasis added]

21.5.5.6 In 1989

With the change in chairmanship from Mr Barrett to Mr Simmons in June 1989, the usual exchange of letters between the Chairman and the Managing Director on the topic of remuneration appears to have ceased, in that notes and letters on the topic no longer are to be found in the Chairman's Minute Book, as had been the case to that point. In fact, as it has been shown to the Investigation, the Chairman's Minute Book became an increasingly loose collection of various documents and notes related either to senior executive remuneration, or human resources management issues, some of which are untitled and most not page numbered.

To monitor remuneration issues, and, in particular, that of the Managing Director, one has to turn to the financial year-end records printed out, presumably by Mr Sharp, Director of Touche Ross - later KPMG Peat Marwick, in his capacity of salary administrator for senior executives of the Bank.

Thus, in plotting the evolution of Mr Clark's remuneration for the remaining years of his association with the Bank, the remuneration increase granted in 1989 must be measured against the actual figure quoted for year end 1988, ie $318,334 and not the $400,000 figure agreed in February 1988.

On that basis, ie from financial year-end 1988 to financial year-end 1989, Mr Clark's salary increased by $55,934 or 40 per cent. The benefits and allowances component of his package was increased by $46,565 or 26 per cent, for a total remuneration increase, excluding bonus, of $102,499 or 32 per cent.()

For the financial year ended 30 June 1989, the Bank reported an increase in operating profit, before taxes, of $23.053M or 41.6 per cent over its 1988 results.

But the Bank also reported a $56.566M item for "net bad debts written off and charge to provision for doubtful debts".() This represents a 290 per cent increase over the provision made in 1988. Expressed as a percentage of operating profit, the $56.566M is equal to 72 per cent, compared to 26 per cent in 1988 and 18.8 per cent in 1987. The trend so displayed is an indicator of consistently worsening profitability over three financial years.

When considering the results of the Bank for 1989, it must also be borne in mind that the soundness of these results has been questioned. Mr Hartley, for example, put to this Investigation that:

"... in mid 89 ... or late 89 the Bank had just declared a reasonable so called profit ... one knows that it was almost certain that the profit for 88 was probably not even there, certainly it wasn't for 89." ()

In addition to the increase in remuneration described above, and in accordance with the bonus plan described earlier, Mr Clark received a bonus of $48,750 for his performance in the year ended 30 June 1988, based on the Bank Group having achieved a $69.518M operating profit in that financial year.

Regarding the bonus granted to Mr Clark by the Board, evidence placed before this Investigation indicates that the sum paid had, in fact, been reduced:

"... because [the directors] were concerned with the accounts of REMM and also the accounts of Equiticorp and [the National Safety Council of Australia] while blame had to be attached some of that blame also had to be attached to Tim." ()

21.5.5.7 In 1990

By financial year end 1990, Mr Clark's salary had increased by $16,232 or 8 per cent. The benefits and allowances component of his package had been raised by $33,768 or 15 per cent, for a total remuneration increase of 12 per cent.

I refer the reader to the section of this Chapter which reviewed the opinions of directors regarding the performance of the Managing Director, and in particular, to the part of it that shows that, in 1989, many directors had been critical of the Managing Director's behaviour and, indeed, of his management, in the face of the growing number of non-performing assets. I draw attention to the two file notes of Mr Simmons, dated 24 and 28 August 1989, which indicated that the Managing Director's bonus had been limited to $50,000 in recognition of his shared responsibility for some of the key non-performing accounts on the Bank's books.

I have referred earlier to the issue of remuneration relativities between the Eastern States and South Australia and between banking institutions. I have also referred to the reliance by the Chairman and by the Managing Director on information provided by outside experts. I quote below from two external surveys and one internal one.

Information obtained from the files of the Bank shows the results of two remuneration surveys carried out by Cullen Egan Dell and KPMG Peat Marwick Hungerfords, and published in August 1989 and October 1989, respectively.

The extracts on file of Cullen Egan Dell Survey show that Mr Clark's total package, then valued at $470,833 (excluding bonus) places him in the upper quartile of the remuneration scale. The Cullen Egan Dell survey indicates a mean of $247,069 and a third quartile figure of $310,273.()

The extracts on file of the KPMG Peat Marwick Hungerfords show that Mr Clark's total package, again excluding bonus, places him a little under the seventy-fifth percentile, but significantly higher than the fiftieth percentile ($231,323).

On 15 February 1990, the General Manager, Group Human Resources of the Bank, Mr Abbott, wrote a confidential memorandum to Mr Clark on senior executive remuneration. One section of that memorandum deals with the remuneration of Managing Directors. Quoting from the "Business Review Weekly" remuneration survey published on 29 September 1989, Mr Abbott indicates that the total package awarded to managing directors from the top fifty Australian companies averages $473,500 (compared to Mr Clark's $470,333 at 30 June 1990).

Moreover, Mr Abbott cites the estimated packages granted to the managing directors of the major Australian banks. The figures quoted show that Mr Clark's package, while lesser than that of the managing directors of the ANZ ($600,000), Westpac ($550,000) and National Australia Bank ($550,000), stood substantially above those of the heads of the Commonwealth Bank, the Reserve Bank, the State Bank of Victoria and the State Bank of New South Wales (all at $250,000, except for the last one at $200,000).()

In addition to the remuneration package described above, and in accordance with the bonus plan agreed in 1988, the Managing Director received a bonus of $50,000, based on the Bank Group profit for 1989, for a total income of $501,279 for the year ended 30 June 1990.

For the financial year ended 30 June 1990, the Bank reported a fall in operating profit, from $78.527M in 1989 to $35.879M, representing a 54.3 per cent drop.() In addition, the "charge for provision for doubtful debts" increased by $111.8M (or 197.8 per cent), from $56.566M in 1989 to $168.446M in 1990. Expressed as a proportion of operating profits, the provision for doubtful debts had sky-rocketed to 469 per cent.

21.5.5.8 In 1991

Arrangements set in place for the 1990-1991 financial year had Mr Clark's total remuneration package raised to $500,000 from $470,333 at 30 June 1990.

While the salary component had dropped by $25,333 or 12 per cent, the benefit and allowances component had increased by 21 per cent to $314,000M, thus ensuring an overall increase of $29,167 or 6 per cent in the total remuneration package.

Mr Clark resigned from the Bank and the Board on 9 February 1991. The manuscript note defining the arrangements entered into at that time confirm that Mr Clark's remuneration of $500,000 would be paid until 28 February 1991, including superannuation.()

Upon being informed by the Premier and Treasurer, on 9 February 1991, that his resignation would be "politically" desirable, Mr Clark raised the issue of his being on contract until 30 June 1992. Mr Bannon rejected the possibility of a termination payment.()

Mr Clark again raised the matter of his contract with Mr Simmons, moments after the conversation with Mr Bannon. Mr Simmons, like the Treasurer before him, rejected the notion of a termination payment.()

21.5.6 OBSERVATIONS AND CONCLUSIONS ON THE REMUNERATION OF THE MANAGING DIRECTOR

In light of the evidence gathered in the course of this Investigation, I make the observations and report the conclusions noted below.

(a) Regarding the Level of Remuneration Set for the Managing Director from 1984 to 1988

I note that there are conflicting recollections regarding the remuneration of Mr Clark immediately prior to his joining the Bank. The discrepancies are such as to suggest that either the details were never ascertained prior to negotiating a revised offer with Mr Clark, or that some of the key parties involved were not aware of those details. In either case, I believe this to be unsatisfactory.

In 1986, the percentage increase in total remuneration granted to Mr Clark was greater than the percentage increase in the Bank's overall profitability.

In 1988, the percentage increase in total remuneration granted to Mr Clark again exceeded the percentage increase in the Bank's overall profitability by a substantial margin. I have examined in a previous section of this Chapter the particular circumstances surrounding the Board's approval of this increase.() I observe that this increase was approved at a time when at least Mr Bakewell had expressed concerns about the desirability of reappointing Mr Clark.

(b) Regarding the Level of Remuneration Set for the Managing Director from 1989 Onwards

During the chairmanship of Mr Simmons, no evaluations of the performance of Mr Clark took place. A discussion held over the bonus to be granted to the Managing Director, in August 1989, was the only debate of any substance the Board engaged in in that regard.

The Board increased Mr Clark's total remuneration by 32 per cent for that financial year. This increase, in percentile terms, is lesser than the reported increase of the Bank's operating profits at 41.6 per cent. In addition to this, however, the Board granted Mr Clark a `reduced' bonus of $50,000. The "reduction" purportedly recognised the emergence of substantial non-performing loans during the year.

As a matter of plain commonsense and business principles, it is impossible to reconcile statements by Board members regarding their mounting concerns towards the performance of the Managing Director, a rise in key non-performing assets measured in tens of millions of dollars, and a 290 per cent increase in the level of provisioning, on the one hand, with the granting of a 32 per cent increase and a bonus - however "trimmed" - of $50,000, on the other hand.

That impossibility is confirmed when it is remembered that surveys of the remuneration of chief executives show that the overall package offered to Mr Clark was generous on a national corporate scale.

As for the remuneration agreed to from 1990 onwards, I find it bears no relation whatsoever to the performance of the Bank and the Bank Group,although it must be acknowledged that, with respect to the salary (as opposed to the bonus) component, the Bank was constrained by the terms of its service agreement with Mr Clark.

I am satisfied, therefore, that the Board failed to establish a system and a process which would enable it to monitor, control, and review the performance of the Managing Director; that it failed to establish a consistent and effective process for the review of the Managing Director's remuneration; that it thus deprived itself of one of the key means of controlling the thrust of the activities of the Managing Director; and that it rewarded the Managing Director beyond reasonable expectations and requirements in 1988, 1989 and 1990.

 

21.6 FINDINGS AND CONCLUSIONS

 

In this Chapter, I have investigated the relationship between the Board and the Chief Executive, and, in that regard, I have examined:

(a) the appointment (or re-appointment) of the Chief Executive Officer and the planning of his succession;

(b) the Board's monitoring and control of his performance; and

(c) the remuneration of Mr T M Clark as a function of his performance.

Having regard to the evidence to which I have referred in this Chapter, and for the reasons set out in this Chapter, I am of the opinion that:

(a) As far as concerns the selection and the appointment of a Chief Executive:

(i) The brief given to the first Chief Executive focused on three objectives:

. to carry out a successful merger;

. to develop in the new Bank a commercial stance such as to ensure the ongoing growth of the organisation; and

. to put in place the management team required for the Bank's operations.

(ii) The brief given to the first Chief Executive was a time limited one in that the three objectives stated above were to be met within three years, after which a new long term Chief Executive would be appointed.

(b) As far as the selection of Mr T M Clark as the first Chief Executive is concerned:

(i) Mr Clark had direct and relevant experience in the negotiation and management of mergers in a banking environment.

(ii) Although he did not have experience as a chief executive of a large organisation, he did have experience in the management of senior executives within a large organisation.

(iii) He had limited experience in mainstream banking operations, that experience being associated with the management of a group of affiliates and subsidiaries of a large bank; the major part of his management experience was acquired in retail management.

(iv) He had, by many accounts, a strong driving personality and a desire to lead.

(v) Mr Clark's attributes of experience and personality made for a profile that needed "balancing", "controlling", or "restraining", both at Board level, and through such organisational mechanisms as might be deemed appropriate within the management structure of the Bank.

(vi) That by reason of the above, the Merger Advisory Group, and in particular those of its members who were subsequently appointed directors of the Bank, were on notice that:

. there was an ongoing need to address matters of succession planning throughout the Chief Executive's first term;

. for succession planning to be effective there was a need to reconsider and reshape the brief given to the second Chief Executive; and

. there was a need on the part of the Board to support Mr Clark's lack of experience both as the chief executive of a large organisation, and in mainstream banking.

(c) As far as concerns the reappointment of Mr Clark in 1986:

(i) The reappointment was based on the Board's expressed satisfaction that the Managing Director had achieved the objectives set out in the brief entrusted to him in February 1984.

(ii) The Board did not put in place any revised or substitute brief agreed with the Managing director on his reappointment. As a result it failed to give Mr Clark adequate guidance regarding its intentions, priorities and requirements.

(iii) The Board failed to periodically monitor its instructions to Mr Clark and therefore put itself in a position whereby the setting of Mr Clark's objectives and directions was left to him.

(iv) I regard the stance of the Board in this regard as incompatible with its responsibilities under Section 16(2) of the State Bank Act particularly in the light of later comments made by one Director that Mr Clark was "running riot" on the Board and by another that Mr Clark was taking the Bank on a "destructive path" and in so doing the Board failed in its duties as the governing body of the Bank to adequately or properly supervise, direct and control the operations, affairs and transactions of the Bank.

(d) As far as concerns the second reappointment of Mr Clark in 1988:

(i) Mr Clark failed to develop, as he was required to do under the brief he accepted in 1984, a credible and qualified successor from within the ranks of his senior executive team.

(ii) For its part, prior to 1988, the Board paid scant attention to the issue of succession planning, and was ill prepared to discharge its responsibilities in the matter in any structured manner when in February 1988, the issue of the future extension of Mr Clark's contract was raised for consideration.

(iii) Mr Clark was an active and forceful agent in his negotiations with the Board over his remuneration, and, because the Board was itself ill-prepared in the matter of succession planning Mr Clark was able to exercise considerable influence regarding the conditions for his continuing employment with the Bank.

(e) As far as concerns the management of the performance of the Chief Executive:

(i) It was incumbent upon the Board in exercising its control over the affairs of the Bank to monitor the performance of Mr Clark.

(ii) The Board failed during the period under investigation, to establish, supervise, and enforce a structured review process with the Chief Executive, independent of, and distinct from, the remuneration review process. The process that existed was at best an informal one which could not provide a sound basis for any objective evaluation of his performance let alone a basis for the review and adjustment of his remuneration.

(iii) Whilst both Chairmen of the Bank acknowledged that they perceived a relationship to exist between the performance of the Chief Executive and "growth", "profitability" and "performance" of the Bank, nonetheless, the Board failed to effectively apply those indicators to a review of his performance and thus rendered the process largely futile.

(iv) In failing to recognise the need for a structured performance review process, the Board effectively deprived itself of one of the few means of regular and formal monitoring of the activities and initiatives of the Chief Executive.

(v) In the face of growing concerns regarding the performance of the Bank in general, and that of the Managing Director in particular, the Board failed to formally assess Mr Clark's performance even though it was such as to cause the Board to bring about his effective removal from the managing directorship.

(vi) The Board did not maintain, during critical years of growth in the Bank's history, useful or effective control and supervision over the Chief Executive; conversely, by express grant or simple default, it enabled the Chief Executive to exercise a disproportionate degree of influence in the Bank's decision-making process.

(vii) The Board failed to exercise its authority and the appropriate degree of control over the activities of the Chief Executive whom it had appointed, and that, in so doing, it allowed the Bank to engage in operations which resulted in material losses, and the Bank and members of the Bank Group to hold significant assets which are non-performing.

(f) As far as concerns the specific actions of the Managing Director in 1989 and 1990:

(i) The file notes of Mr Simmons record adverse criticisms of Mr Clark's handling of the provisioning for the Hooker account; of the expected level of profits for 1989; of the foreseen difficulties with Beneficial Finance; of the Remm, Equiticorp and National Safety Council of Australia accounts; of the acquisition and subsequent management of the Oceanic Capital Corporation; of the establishment of an Audit Committee; of the appointment of staff with suitable financial management skills; of the acquisition and subsequent management of the United Building Society of New Zealand to name but some of the more significant matters.

(ii) With regard to his management style, the notes of Mr Simmons record trenchant criticism of Mr Clark on issues such as information provided to the Board; his dismissive stance towards the Board which reduced that body to the role of a "rubber stamp" or "plaything" over which he could "run riot "; his failure to accept questioning from the Board, or act upon its requests.

(iii) In the face of such concerns the Board failed:

. to monitor and control the performance of the Chief Executive;

. to confront him at the right time with their serious concerns with a view to having them rectified in a forthright and expeditious manner; and

. to properly exercise its authority and control over the activities of the Managing Director and thus allowed a disruptive and damaging relationship to develop and prevail from 1988 onwards.

(iv) Whilst I accept that the Board and, particularly, Mr Simmons may have chosen not to directly exercise authority and thus did not instruct Mr Clark to carry out certain actions upon the basis that Mr Simmons was unsure of "the way to go", or because of the time it took "to come to grips" with what the situation was in certain areas, I find it unacceptable that the Board should have been in such a relationship with its Chief Executive that it needed to tailor its approach to the management of its business and to the nature and tone of its deliberations in order to accommodate the views or opinions of one of its members however influential.

(g) As far as concerns the remuneration review process for Mr Clark:

(i) In the period of Mr Barrett's Chairmanship, the process involved primarily the Chairman and the Managing Director together shaping a tentative package on the basis of information on salary relativities gathered by each of them independently, with the result of their deliberations then being presented to the Board for its approval.

(ii) In the period of Mr Simmons' Chairmanship, the process involved the Chairman, Deputy Chairman and Managing Director (as a Remuneration Sub Committee) with the result of their deliberations being presented to the Board for its approval.

In each case (apart from letters between Mr Barrett and Mr Clark) no records were kept of any evaluations, assessments or deliberations of the Board.

(iii) In my opinion the process of remuneration setting did not provide an adequate or proper opportunity for the Board to have effective or useful input in the setting of the Managing Director's remuneration. On the contrary it presented Board members with a situation close to a "fait accompli" which they would have found difficult to alter.

As a result the procedure actually adopted by the Board was an informal one and moreover one which failed to ensure that the Board effectively contributed to the task. Furthermore, it did not provide a consistent basis for decision making given the weakness of the performance assessment procedures described above.

(h) As far as concerns the actual remuneration paid to Mr Clark:

(i) In 1988 the percentage increase in total remuneration to Mr Clark exceeded the increase percentage in the Bank's overall profitability, on this occasion, by a substantial margin, at a time when at least Mr Bakewell had expressed concerns about the desirability of reappointing Mr Clark.

(ii) In 1989 the Board increased Mr Clark's total remuneration by 32 per cent, and, in addition, granted him a "reduced bonus" of $50,000 at a time when statements attributed to various Board members demonstrated their mounting concerns regarding Mr Clark, and when there was a rise in non-performing assets measured in tens of millions of dollars and a 290 per cent increase in the level of provisioning.

(iii) In 1990 the remuneration was increased by nearly $30,000 to $500,000 and from 1990 onwards bore no relation whatsoever to the performance of the Bank.

(iv) That for the years 1988, 1989, and 1990 the Board rewarded the Managing Director beyond reasonable expectations and requirements.

 

21.7 REPORT IN ACCORDANCE WITH TERMS OF APPOINTMENT

 

I have investigated and inquired into matters relating to the relationship between the Board and the Chief Executive in accordance with Terms of Appointment A and C. Having regard to the evidence to which I have referred in this Chapter, and for the reasons set out in this Chapter, I hereby report that in my opinion:

21.7.1 TERMS OF APPOINTMENT A

As far as concerns Term of Appointment A(a):

The matters and events which caused the financial position of the Bank as reported by the Bank and the Treasurer in public statements on 10 February 1991 and in a Ministerial Statement by the Treasurer on 12 February 1991 included the manner of the discharge by the Chief Executive of his role; the relationship of the Chief Executive Officer to the Board; and the division of powers between the two parties over the period 1984-1990. More specifically:

(a) the Board failed to exercise effective control and supervision of the Chief Executive between 1984 and 1989, these being critical years of growth in the Bank's history; and

(b) whilst the Board endeavoured to exercise a closer degree of control from 1989 onwards, that endeavour was not, in practical terms, effective, or timely, in that, once it was alert to shortcomings in the Bank's management by the increase in non-performing assets, and other matters, the Board's efforts to resume control were of limited effect and it was beyond the ability of the Board to reverse the trend in the Bank's performance to the extent necessary to stave off the financial position reported in February 1991.

As far as concerns Terms of Appointment A(b) and A(c):

That the processes which led the Bank or a member of the Bank Group to engage in operations which have resulted in material losses, or in the Bank, or a member of the Bank Group, holding significant assets which are non-performing included the monitoring and review by the Board of the performance of the Chief Executive.

The processes applied to the monitoring and review by the Board of the performance of the Chief Executive were neither appropriate nor adequate to ensure the effective guidance and control of the Chief Executive in the exercise of his duties.

21.7.2 TERM OF APPOINTMENT C

That the operations and affairs of the Bank were in the respects identified in this Chapter not adequately or appropriately supervised, directed and controlled by:

(a) the Board of Directors of the Bank; and

(b) the Chief Executive Officer of the Bank.