On the ANZ affair

I’m no great fan of David Hisco, perhaps even less of John Key, and hold no particular brief for the ANZ either. I don’t now, and never have, worked for commercial banks.   I’m an ANZ customer, although largely by inertia rather than enthusiastic loyalty –  I was a happy National Bank customer, uneasy about the ANZ takeover, but actually I’ve not had any bad experiences so never went to the effort of changing banks.   But even with all that, and a couple of days on from my initial one-paragraph comment, I’m still at a loss to understand (substantively) why the Hisco expenses issue is exciting so many people and generating so much coverage from so many (ok, yes I’m now adding to it).

As a reminder, the ANZ New Zealand operation is a subsidiary (there is a branch as well, but ignore that) of a large Australian bank that has been operating in New Zealand since 1840.   There aren’t many post-settlement entities that have been operating here continuously for longer than that (Anglican, Catholic, and Methodist churches, and ……?). In that time, ANZ hasn’t failed, hasn’t been bailed out by the Crown, and has provided bank services to New Zealand well enough to, these day, be the largest player in the New Zealand banking market.

As customers, I’d have thought the main two things we’d want from our banks were that (a) they didn’t lose our money (or through some TBTF mechanism get the government to bail them out, and (b) that they provided the transactions and recordkeeping services tolerably well enough.  People can moan about banks all they like, and it can be a hassle to change banks in the shorter-term, but here we are talking about a bank operating in New Zealand for 179 years and counting.   Plenty of banks and quasi-banks have come and gone from the market in that time, as customers (new generations thereof) have preferred one institution over another.    Even the fact that today’s ANZ has grown partly by takeovers (Rural Bank, Postbank, Countrywide, National Bank) doesn’t change that story very much –  the most recent of those takeovers was 15 years ago, and ANZ must have offered the best deal to the vendors (presumably believing they could add most value through the purchases).   People can badly misjudge takeovers but, decades on, ANZ is still here, strongly capitalised and profitable (it isn’t, for example, akin to RBS taking over ABN-AMRO at the end of a frenzied boom).

What else might bother people?  Well, there is always the issue as to whether banks are “excessively” profitable.  I suppose my instinctive bias here is that of an old-fashioned central banker, preferring a profitable bank to the alternative.  But even setting that to one side, I’ve always been rather sceptical of the “excessively profitable” story, partly because the balance sheets of the New Zealand subsidiaries don’t tell the full story: the profits are not just a return on balance sheet equity, but also on the implied support of the parent banks in Australia.  I’ve also tended to emphasise the relatively open regulatory regime we have here, allowing new entrants to set up and take advantage of any (allegedly) excess returns.  But even if there is less to those stories than I have allowed, the merits of such arguments –  which might argue for a more active Commerce Commission involvement –  really shouldn’t be materially affected by the question of a (now-departed) CEO’s expenses, legitimate or otherwise, properly documented and reported internally or not.

I also get that some people are bothered by the level of senior executive salaries.  To be honest, at times I’m inclined to share those concerns (at least a little), perhaps especially around people who are really only second-tier employees in big Australian banking groups.  But what of it?  It is a private business, in a market where customers have alternatives.  If I really don’t like the fact that ANZ remunerates its top managers so well, I could shift my banking to, say, TSB.  They won’t be paying their CEO and top management anything like as much as ANZ is.

And then, of course, there is a scale of this particular issue.  We are told that the amounts involved are mid tens of thousands of dollars, spread over 10 years, so perhaps $5000 a year.   In respect of a person whose total remuneration over that ten years probably averaged $2million a year.  It seems quite appropriate for the ANZ’s group chief executive to want to tidy things up, and to be uneasy about how these expenses may hav been reported internally (details of which the public haven’t been told), but why is it a matter of any public – or legitimate political –  concern.  It is a private company.   Perhaps some people might be puzzled as to quite why ANZ pushed Hisco out over what looks like quite a small matter –  the question has been asked, is there something more to it –  but again, it is a private company, and Hisco is well-equipped to look out for his own interests, including ensuring that he has had good legal advice etc.    Perhaps one might expect the Reserve Bank, as prudential regulator (and that is all), to ask the ANZ a few questions, to ensure that the expenses issue isn’t a cover for more serious problems on Hisco’s watch but assuming it isn’t –  an ANZ would be in serious trouble, including with the ASX, if they were misrepresenting that  – that is about all the legitimate regulatory/political interest I can see.

The story has been used by people on the left, including trade unions, to run a “a bank teller would never get away with it” sort of line. But even if that has some rhetorical force, it shouldn’t.  For better or worse, a bank teller –  one of thousands doing similar jobs, on standard contracts –  would simply not have found themselves in the sort of situation where there was ambiguity about what was acceptable, or what had been subject to an oral agreement.  And had they somehow done so, and been fired, they’d have had recourse to their union and to the protections of employment law.

In various articles in the last few days, I’ve seen references to the idea that the banks somehow owe New Zealand for its support (as if to justify public involvement in the Hisco-Key affair).  There have been silly references –  no doubt channelling flawed lines from our bombastic populist Governor –  that somehow the banks were bailed out by the governmment in 2008/09.  They simply weren’t.  There was no risk of any significant bank failing in New Zealand at that time, whether from the funding/liquidity side or from credit losses and insufficient capital.  It is certainly true that there were various Reserve Bank and government direct interventions during that period, but those interventions were not about “saving the banks”, as about limiting the potential damage to the economy that might have arisen otherwise (extremely risk-averse banks – in the middle of a global crisis – would have pulled in lending more aggressively etc).  And cutting the OCR was no “favour” – in downturns, market interest rates tend to fall, and the Reserve Bank’s hand on the OCR is really just meant to mimic that.   I don’t want to take this line too far –  there is some interdependence, and banks operate in a system governed by parameters the political system has set up (eg having our own currency etc) –  but the robustness of the banks in 2008/09 was a credit primarily to them, their owners/managers etc, not to the New Zealand authorities.

We’ve also heard people talking about about the case for a Royal Commission into something around banking, the call we heard last year in the context of the Australian Royal Commission.    And here there is the suggestion –  I saw it in the Herald this morning –  that somehow again the banks owe the Reserve Bank and the authorities, because the latter “went out on a limb”, or “stuck their necks out” to protect the banks.  That is simply rubbish.  Rather, the Governor of the Reserve Bank (and to a lesser extent the FMA) were playing a populist political card when they launched their inquiry last year  – in an area where, as even they acknowledged, they had no statutory powers.  After all the hullabaloo, they found basically nothing (not that surprising, given that different context in which banks operate here and in Australia, especially as regards superannuation), but it hasn’t stopped them using the issue to claim some sort of moral authority over these private banks, operating in markets where customers have choice.

But even if there had been something to the conduct/culture issues, surely those were supposed to be about public facing issues, things directly affecting customers.  Whether some small portion of David Hisco’s large expenses bill was questionable, seems –  to say it again –  like a matter for the Board and management of the ANZ, perhaps even for the staff (confidence in the integrity of your leader) but simply not a matter for government agencies at all.

I guess that among the sound and fury on this issue, there will be a range of interests and motivations.  Some will even be quite genuine and public spirited.  But it is hard not to read the coverage of the last few days and think that at least some people are playing distraction.  Banks are never likely to be that popular, perhaps especially not Australian ones (despite the fact that New Zealand benefits from having its bank part of bigger offsore groups) and they make a convenient scapegoat. Perhaps that is especially so when the old enemy of the left –  John Key –  is chair of the bank’s local board (as I’ve written here before, I happen to think it is unfortunate –  at best –  to have former politicians so quickly on such boards).    It shouldn’t have been a great week for the government –  what with the GJ Thompson affair, meningitis injections, and so on –  and it hasn’t been a great time for the Reserve Bank (all that pushback against their unsupported radical bank capital proposals) , and one is left   –  perhaps unduly cynically – thinking that in some quarters there will have been quite an interest in playing distraction by feeding a beat-up on the ANZ, for what really looks to be a rather small, albeit untidy, mostly internal affair.  For me, if they keep my money safe, do my transactions competently, and don’t rort others on any sort of systematic basis, I’ll be pretty content.

Throughout this note, I have stressed that bank customers have choices and alternatives.  Faced with overly powerful, weakly accountable, government agencies, citizens really don’t.     When Peter Hughes gives gushy speeches about Gabs Makhlouf –  the man he is supposedly investigating –  we are stuck with the clubby system.  When a Supreme Court judge thinks it is just fine to go on holiday with a senior lawyer in a case before the Supreme Court, we have few effective protections.  And when the Governor of the (monopoly) Reserve Bank never gives substantive speeches about things he is actually responsible for, plays fast and loose with the Official Information Act, claims he has no resources to properly oversee the bank capital system (internal models and all) that the Bank itself put in place, all while spending a million dollars on a Maori strategy (for a body with little or no public-facing role), devoting his time and professional energies to personal passions, be it climate change, infrastructure, or whatever, there is also nothing we can do about it.  The amounts involved –  money diverted from core functions (under budgetary pressure) to finance the Goveror’s personal causes and whims –  is probably already at least as much as the Hisco case over 10 years.  But we can’t change central banks, can’t dump our shares in the Reserve Bank.  Perhaps these issues (for some reason) excite fewer people, but when the abuses and slippages are by high government officials, they need to be taken much more seriously, precisely because exit isn’t (for us, citizens) an options.  The small(ish) stuff needs to be sweated.

On which note, I saw a piece on the ANZ affair by Auckland lawyer Catriona MacLennan, I very rarely agree with anything she writes, but her final paragraph did strike a nerve.

I have been on the board of a non-governmental organisation for three years. We are not paid a cent for our work, but I and the other board members would consider we had completely failed in our responsibilities if we let unauthorised expenditure go unchecked for nine years.

The Governor, the Bank’s Head of Financial Stability, and the (outgoing) chair of the Bank’s Board Audit Committee, might like to reflect on questions around unauthorised (operational) expenditure over at least as long a time.

17 thoughts on “On the ANZ affair

  1. Michael did you have anything in mind when you mentioned that maybe Comcom could play a more activist role in the banking sector? Maybe a market study now they are allowed to do that?

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  2. I think the public interest in Hisco’s “expensing” is partly that the public wants to know that ANZ is a good steward of their money. If the board is lax about controlling the pennies (Hisco’s chauffeur-driven cars etc) as well as the pounds (oversight of risk-weighting), how confident can we be that everything else is tied down securely?

    Liked by 1 person

    • you might be right, and this is something people can latch onto and more or less understand, but it would be interesting to see a hypothetical poll to see the differences in attitudes among (a) the gen public, (b) ANZ customers, and (c) the commentariat. At present, i’m (genuinely) not sure how much the public does care.

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  3. I’d argue that A 418k per annum in increasingly unaccounted for expenses is excessive. It may be a private matter for the ANZ Board but to me it sends all the wrong signals.

    The timing of this is unfortunate because it undermines the Banks quite valid arguments about other issues, notably bank capital. In the public mind, Hisco has pulled bankers down to a new low (if that’s conceivable).

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    • Aren’t there two issues. His overall expenses look high, but in a sense it is all part of his total remuneration so – IRD aside – who really cares if it is labelled “salaries” or “allowances”. And then there is the small portion of those expenses that seems to be in dispute.

      Agree the timing is dreadful. If the OIA worked,it would be interesting to know what pressure was put on ANZ by the RB. Perhaps none, but the timing is really rather convenient for them.

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    • Peter, its not $418k a month. It is more like $418 a month or around $50k over 10 years. For a expat on $2 to $3 million a year salary plus $6 million options that is peanuts but as an expatriate I think he expects to be treated the same way that all other expatriates are treated by ANZ. I am pretty sure the CEO of ANZ China would definitely get a driver, an apartment plus other living and storage costs plus internationa private schooling for the kids.

      I am pretty sure he would have negotiated these costs as part of his Expatriate package. I was the Controller for Rockwell in NZ and I was offered a position in Hong Kong as the Regional Controller. Part of my package was the provision of a car and a driver. Storage costs for my stuff in NZ was also a part of the package offered. I did not take up the offer because they failed to offer me a large enough apartment suitable for my family and to pay for an international school for my kids.

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  4. Interesting.

    Nearly, totally off-topic: I recently received the updated terms&conditions for my Australian ANZ bank accounts. It includes a clause giving an example of why the ANZ might withdraw my electronic access … “ANZ suspects you of being fraudulent or ENGAGING IN INAPPROPRIATE BEHAVIOUR …” (my capitalization). In the light of much poorly-explained removal of social media accounts around the world – I’ve been wondering if ever the bank might pull such a stunt. Paypal and others have.

    The ease with which corporations can damage smaller entities, and especially individuals, versus the difficulty in seeking redress of grievance in the other direction, is concerning.

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    • Interesting. I guess the only real test is how, if at all, they use it. Despite having views on many issues far too conservative for the woke corporate ANZ, my accounts should probably be safe for a few weeks after this post!

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  5. I’d have thought it would be comforting only if your salary and consumption expenditure were also denominated in Libra, otherwise whatever small amount you gain on credit risk you will give up in the form of exchange rate risk (back into NZD).

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  6. Excellent post. Readership should recognise you for mentioning that a prudential banking philosophy that relies on disclosures and markets is so arms-length that it should rule out the supervisor taking credits for what banks do, be it bad or good.

    It reminds me of this quote from Harvard’s Michael Jensen: “…. any activity whose performance can be perfectly measured objectively does not belong inside the firm. If its performance can be adequately measured objectively, it can be spun out of the firm and contracted for in a market transaction. Thus, one of the most important jobs of managers [or bank supervisors], complementing objective measures of performance with managerial subjective evaluation of subtle interdependencies and other factors, is exactly what most managers would like to avoid. Indeed, it is this factor along with efficient risk bearing that is at the heart of what gives managers and firms [banks and their supervisors] an advantage over markets [depositors and retail investors].” (Michael Jensen, Paying People to Lie: The Truth About the Budgeting Process, 2001).

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  7. First off I have been and are an ANZ customer, ex National, ex Countrywide,(Best bank I ever had way back then.)
    Now I think that I really don’t care what Hisco got in the way of remuneration or perks because.;
    When Hisco took over ANZ they were arguing with IRD and had to front up with around $500 million in tax, a legacy of the previous regimes. Hisco fronted that and then added a change of attitude and culture to the place. They finally realized that the customer should be their focus. It took some time for many to absorb that message and I will say I had an argument or two with them. Fortunately the District boss I dealt with at the time was focused that way. They have become very customer focused, the staff Ideal with are customer focused, unlike Westpac who are constantly pissing off the customers. I hear it all the time and ask any Property Investor.
    Hisco took ANZNational from a disparate bunch to a highly successful organization. Eliot on the other hand ?
    I am of the opinion that ANZ will now go back especially as I note that they are to have an academic as their new Chairperson bolstered by a pollie and Eliot and a couple of others.
    It seems there is a race to entrench women in bank leadership. Few women are daring and in this day when business moves and transforms fast, that’s a negative.

    Fortunately, there are new places to get funds.

    Luxton has seen the writing and the wall at Keys place.
    Which CEO is next?

    More to this than meets the eye.
    Sell your ANZ shares while they are worth something.
    From memory 2 billion of ANZ’s 3.1 billion profit came from Hisco’s dept.
    Kinda shames the Aussie branch.

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  8. My understanding is that this is a question of dishonesty, or to put it uncharitably, fraud/theft as a servant. The size of his existing salary should be completely irrelevant in determining the morality of what he did.. John Key actually hit the nail on the head when he acknowledged that if a more junior staff member had been caught in such a situation – deliberately and dishonestly claiming private expenses as business expenses over a long period of time – they would have lost their jobs. Your suggestion (if that is what you are suggesting) that the size of his salary makes this behaviour somehow less significant or more tolerable is somewhat demeaning to those honestly earning considerably less than $4m a year, who would without question be instantly dismissed for helping themselves to 5000 a year.

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    • I guess the issue is whether you are accurately characterising this as a case of dishonesty, let alone theft as a servant. ANZ has not characterised it that way, indeed Key has gone so far as to accept that Hisco’s understanding of what he was enttled to was probably a good faith one. That is the context for my relative indifference. Had ANZ had good evidence it was theft they could have summarily dismissed him (or put pressure on him to go, paying out no entitelements at all and with an NDA in exchange for not prosecuting).

      I haven’t experienced anything like this personally on the financial side, but I’m sure I’m not the only one who has had a conversation with a boss, told him/her about something planned and either been met with no comment (implicitly “noted”) or an ok, only to have the same boss some months later deny that ever happened or was relevant.

      So to me, the ANZ situation still looks untidy, and Hisco seems to have acted with quite a sense of entitlement, but the latter doesn’t seem to have marked him out from many of his peers at the time. Which brings me back to my point: as customers we have choices and few/any of us have to bank with ANZ.

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      • I rather think Hisco is the victim in this case. I encountered a situation like this when I was a Accountant with Fletcher Building. We had a Malaysian chap who was resident in NZ and was sent back to Malaysia to run the Project accounting for a Fletcher Building project. HR paid him an Expatriate package for 2 years with accomodation provided until they found out that he was actually a Malaysian by birth. They argued that he was not an expatriate being Malaysian born and decided to drop him onto a local wage without accomodation but he argued successfully with the backing of legal advice that he should be treated the same as any other NZ resident.

        Hisco is a New Zealander and as such ANZ Australia probably think that he should not have expatriate perks which he likely must have got some agreement to shift back from Australia to NZ in the first place. He has therefore been unfairly treated.

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      • I guess as the years pass and Hisco being a New Zealander it becomes increasing difficult to continue to treat him as an expatriate. But that is unfair as an Australian in his job would still likely be treated as a expatriate in a foreign country.

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