Case Analysis of Commonwealth Bank of Australia

This report analyzes the relationship between corporate governance and corporate performance in the case of Commonwealth Bank of Australia (CBA). It discusses the failures in corporate governance and ethics at CBA and provides recommendations for improvement. The report also explores the ethical issues faced by CBA using Kantian deontology and Utilitarian perspective.

Student name
INSTITUTIONAL AFFILIATION(S) |
Corporate
Governance & Ethics
CASE ANALYSIS OF COMMONWEALTH BANK OF AUSTRALIA

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Table of Contents
Executive summary....................................................................................................................2
Introduction................................................................................................................................3
Critical analysis of corporate governance and ethics failure in CBA........................................3
Corporate governance failure.................................................................................................5
Ethical Failures.......................................................................................................................7
Stakeholder’s consideration....................................................................................................8
Utilitarianism..............................................................................................................................9
Kantian deontology..................................................................................................................10
Recommendations/Conclusions...............................................................................................11
References................................................................................................................................12

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Executive summary
Many practical studies have been made in past few decades that investigates
relationship between corporate governance and corporate performance globally. However,
similar study in case of Commonwealth Bank of Australia (CBA) is very rare. In Australia,
study made on such topics are more based upon qualitative research after being referenced
from history concerning corporate governance and ethics using legal documents (Australian
Prudential Regulation Authority, 2018). As this report aims to address the relationship
between corporate governance and corporate performance, literature review and empirical
study have been conducted after analysing issues in corporate governance at CBA. This
report will develop a research analysis related to corporate governance and corporate
performance along with identifying how corporate governance principles and ethics failed in
the case of CBA. This report will use Kantian deontology and Utilitarian perspective to
discuss ethical issues faced by CBA along with making recommendations through which the
corporate issues faced by CBA could have minimised.

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Introduction
Research claims that good governance leads financial institutions to high
performances. A study made by Grace, Vincent, & Evans (2018) claims that there is a close
and positive relationship between firm’s performance and corporate governance. The authors
find that adaptation to corporate governance can significantly influence financial institution’s
performance level and profit ratio, arguing that they interplay between country level
governance and firm mechanisms that enriches the understanding of national systems and
comparative corporate governance. Moreover, Islam, Sathye, & Hu (2015) finds that in
literature, corporate governance practices within banks differ from non-banking firms and
therefore suggest that separate analysis shall be made for banks’ corporate governance
analysis since asymmetry of information has become a serious issue in banking sector more
than other industries. Given financial institutions plays an intermediary role in country’s
economy, researchers assert that corporate governance is more important for banks
performance than other cooperation’s. Second, strand of literature states that how good
governance practices can establish strong economic condition and financial development of
the country. For example, investments made in financial sector are regarded more secure and
productive that adds value to stakeholders’ funds as well as banks value. Hence, it can be
summarised that there is a significant relationship between economic outcomes and
disclosure regimes in banking sector (Aktan, Turen, Tvaronaviciene, & Celik, 2018).
Critical analysis of corporate governance and ethics failure in CBA
Australia has been historically following British common law and framework while
continuing this tradition for corporate governance also. This itself provides a framework for

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overall development of its own corporate laws and code of conduct since last few decades.
Australia’s corporate governance evolved from various developments made after identifying
various corporate scandals including collapse of Enron, Pyramid and WorldCom. All the
collapses have been the result of improper management and insufficient regulatory practices
and while CBA has not been included in corporate collapses, its management have been seen
involved in bad governance and performance that have led billions of moneys from
stakeholder’s fund almost written off (Lane, 2016). The CBA has always acquired statuses of
financial icon as per its historical foundations and continued financial successes along with
showcasing keen interest in innovation for facing customers through technology. Being a part
of Australian biggest financial institution, CBA holds high expectations also from citizens
and thus CBA is required to consider corporate governance and performance more critically.
However, in past few years, CBA has faced various ethical and compliance related issues and
thus have “fallen from grace” (Australian Prudential Regulation Authority, 2018, p. 3). The
following points were observed by the investigation panel after identifying CBA’s scandal:
 Incapable oversight and capability to undertake challenges by CBA board of directors
and its committee gatekeeper that resulted in emergence of non-financial risks.
 Improper management of company accountability, including lack of ownership for
key risks observed at CBA’s Executive Committee levels.
 Weaknesses seen in know how about issues facing the company, risks being involved
and unethical incidents taking place that escalated throughout the financial institution.
 Lack of urgency seen from the management side thereby resulted in delayed
resolutions.
 Bureaucratic and complex decision made that favoured collaboration of slowed
detection and over timely outcomes, resulting in risks and failures.

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 Operational risk management models and frameworks worked more on papers rather
than in practice which were further supported by under-resourced and immature
compliance function.
 Poor remuneration plan of CBA that led very little motivation over its managers until
recently when proper incentives were provided to the staff members which did not
essentially provided CBA with enhanced customer outcomes.
Corporate governance failure
Figure: Board of Directors and Standing Board of Committee of CBA (Australian
Prudential Regulation Authority, 2018)
According to Salim, Arjomandi, & Seufert (2016), “Board size can have either a
positive or negative effect on corporation performance” (p. 5). Though, larger board makes
communication and coordination difficult, it allows CEO to assess control over it, thereby
triggering agency issue along with reducing chances of company performances. Resource
dependency theory, on the other hand suggest that bigger board allows organisations with

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more talent and experts from diversified fields which can potentially enhance decision
making quality. CBA case analysis can be compared to the former theory of agency issue
although the firm shows superior sense of management running from top down level. Earlier,
CBA had been many times given first rank while measuring its credit for collective belief and
that the institution was run very well and inherited conservative risk management, however,
with time this bred into over-confidence and lack of appreciation due to recognition of
various financial and non-financial risks alongside focussing more upon process instead of
ultimate outcomes. Slowly, the corporate performance of CBA got desensitised to failings
from its customers, faced delays in risk management or premature closure of audit issues
along with delivering projects in delayed manner that became intolerable. Due to the
consequences, CBA employees got limited remuneration and allowances that generated anger
in them.
According to Pande (2011), “a steward protects and maximizes shareholders wealth
through firm performance, because by so doing, the steward’s utility functions are
maximized” (p.5). Stewardship theory ascertains alternative point in which managers or
board of directors are characterised as pro-organisational, trustworthy and collectivistic risk-
takers who follows every stakeholders’ objectives. Under this theory, organisational costs and
variances in corporate performances caused due to structural failures are placed in front of the
top executives for taking immediate and effective actions (Pande, 2011). On the contrary,
instead of being proactive, CBA has always shown being reactive while dealing with risks.
Even, operational and compliance related issues started receiving attention once they
emerged clearly that made corporate reputation begin to rear. This slow and reactive culture
has been associated with CBA dealings with its regulators also that led the company face
many criticisms from other industries even. CBA showed insular behaviour and did not
reflected from what it had learnt through past experiences and failures, including mistakes

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made by senior executives and board members. In fact, when demanded transparency from
Reserve bank governor, Philip Lowe along with ASIC chairman, Greg Medcraft, all that
CBA released was a long list of issues saying, "putting right for our customers and
employees" (Letts, 2017). The list of issues included selling of insurance that could not be
paid out, underpayment of superannuation payments to its employees and over insurance for
customers home loans. The bank claims that it needs to verify how many estates got deceased
due to the corporate performance failure, but expects not more than 1000 (Letts, 2017).
Ethical Failures in CBA
The basic aim behind application of ethics in the realm of businesses is to monitor and
set guidelines that can provide individuals with appropriate basis in decision making. In the
context of financial institutions, ethic places both intrinsic and instrumental value that helps
organisations while building strategies and policies to avoid major scandals and fraudulent
activities (Gordon, 2018). Furthermore, ethical decisions made after considering stakeholders
and societal interest provides organisations with a comprehensive overview to understand the
reason behind formation of its businesses (Singh & Mishra, 2018). The ethical analysis of
CBA reveals various allegations imposed against this financial institution. The allegations
included disregard to certain laws that are associated with banks transactions monitoring so
that criminals do not get assess to the bank’s systems for making ill-gotten benefits.
Australian financial institutions are expected that stakeholder’s money flow through
its system in uninterrupted and monitored way, free from any suspicious activity or any
fraudulent act is reported to the regulatory bodies immediately. Federal Court of Australia
(2017) alleges that fraudulent associations using cash machines anonymously deposited
money in their CBA accounts and as these machines could not recognise the person identity

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like who was depositing the money, made possibilities of suing various combination of
duplicate names. Unfortunately, due to several issues recognised that were never actually
resolved within expected time period that made regulators claim internal enquiries until the
complete scandal was put in front of the public. The money laundering issue of CBA eroded
many times due to which its stakeholders, majorly customers suffered terribly even though no
one actually took their responsibility (Himbrechits, 2019). Though the CEO, Ian Narev
admitted his mistakes while handling his mistakes, the firm enacted regarding his resignation.
Stakeholder’s consideration
Stakeholders are “constituents who have a legitimate claim on the firm” (Benn,
Abratt, & O’Leary, 2016, p. 2). In common, there is a mutual agreement in literature
concerning who qualifies as actual or potential stakeholder of a company. They may include
institutions, society, neighbourhood, environment, customers and groups that are affected by
organisational performances. The stakeholders are the ones who are most affected whenever
ethical scandals take place in the firms just as in case of CBA. The business executives of
CBA tried and avoided the scandal thereby influencing stakeholders trust and emotions
severely. The customers as well the employees of CBA got affected by negative publicity of
the firm since they indirectly got involved in the scandal and got their savings under the risk
although they seek to keep their money save with financial institutions to make proper use of
it. Shareholders were deeply affected due to corporate governance and ethical failure in CBA
as this scandal projected negative affects on overall Australian market share prices and
people’s earnings. Law and policies also got affected due to the scandal as CBA was filed
against suspicious and fraudulent transactions reporting though, if managed properly, the
bank officials could have traced it before handed. The CBA was supposed to collect any
misleading information and apprehend every criminal synergy for safeguarding their

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stakeholders’ interest (Australian Prudential Regulation Authority, 2018). In fact, a huge
portion of Australian citizens got affected due to CBA scandal since they were exposed to
bank scandals and money-laundering risks although law and enforcement from CBA could
have reduced exposure to it. Janda (2017) reveals that CBA holds “'Very large claim' as
shareholder losses neared $8b”. Moreover, the stakeholders were treated as disregards
carelessly by CBA officials and thus many people suspected that CBA no longer served legal
proceedings.
Utilitarianism
The utilitarianism perspective while making business decisions do not considers itself
what is correct or wrong as per the ideas which is defined as correct or wrong. Rather, it
focusses more upon happiness in spite whatever action is taken. According to Singh &
Mishra (2018), the utilitarianism can be defined as a course of development in philosophical
action that emphasise on important preferences and rules that can accomplish greater
happiness in good volumes. The main significance is given to consequences and not the
business rules and preferences and thus overall distinction in rules, preferences and act seems
useless while applying it to practical execution of tasks and goal satisfaction.
In CBA case, it can be seen that the overall money-laundering situation caused
unhappiness among company executives due to bad publicity for which the CEO planned to
resign from his post while he could have continued with the bank operations for more
upcoming years (DeRoma, 2018). The happiness of CBA employees and stakeholders were
also decreased due to which they feel less proud of their financial institution that previously
used to be the foundations of mutual trust. Shareholders seemed to be the unhappiest since
they estimated a loss of millions of dollars’ worth savings due to negative publicity of the

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company and reduced stock exchange prices. Law and enforcement again seemed unhappy
due to delayed action taken and for filing suspicious transaction reports amounting worth
millions of dollars. The happiness of other financial institutions also got reduced because now
AUSTRAC will be eyeing them also suspiciously that may prove unfair for them who
operates after complying with country laws.
Kantian deontology
The Kantian ethics perspectives reflects whether the action taken by businesses are
appropriate or not based upon formulations that can potentially define whether the action
performed entails goodwill or not. Kant provides with more practical, rationalistic and
autonomous moral procedure that can explain that humans cannot casually determine their
physical being, however must look upon themselves more as an autonomous moral agent. To
decide upon any action’s goodwill, it must be confirmed whether the action taken is correct
or not and whether it motivates moral decisions that can lead towards goodwill.
From Kantian perspective, the allegations made upon CBA reflects that the bank did
not show any concern towards its transactions and law monitoring rather made people deposit
their money into their respective bank accounts. The only concern the bank showed was
making more money without knowing whether the money was handled securely or not that
led the company fall under suspicion and investigation from AUSTRAC (Federal Court of
Australia, 2017). Clearly, the CBA actions did not show an act of goodwill and thus the
actions taken by them were impermissible. The Kantian deontology formula reveals that
because CBA actions led the firm fall under universal inconsistency, if other banks too
evades transaction and violates banking operations, then the overall financial institutions
crime can become more extensive.

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Recommendations/Conclusions
Corporate governance is regarded as a systematic approach that are used by
organisations for performing and managing organisations to meet desired objectives and
goals. They assist financial institutions in monitoring risk and assessing performance that can
optimise firm’s reputation. As such, ethical governance needs to be established by CBA
through structural formation and practice that can potentially identify distribution of
responsibilities and rights among organisation’s stakeholders. If CBA’s board operations gets
involved in governance related practice like appointments, compensation, functioning and
conflict management, it can recognise best corporate governance processes that includes
formation of governance policies, guidelines and code of conduct, effective functioning of
board of directors, enhanced relationship management, stakeholders support strengthening
and distribution of rights, controlled and improved management, disclosure and transparency
along with following sustainability development practices (Habib, 2016).
The ethical failures occurred in CBA provided with stimulus for making critical
changes into its legislation and core principles that can not only lead the company with
ethical framework, built also with appropriate corporate governance comprised of every
suitable norms and strong guidelines. According to current literature, the business
environment for corporate performance in various countries is been described as co-
regulatory that comprises of mandatory requirements and mix of ethical principles (Allen,
2013). Similarly, CBA requires to show strong incentives for continuing in this competitive
world to increase its share in capital market and increased recognition that can be achieved
only by utilising uniformed and harmonised self-auditing and maintenance of good corporate
governance in its business functions.

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References
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performance of the financial firms in Bahrain. Polish Journal of Management Studies,
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from https://scholarship.law.upenn.edu/cgi/viewcontent.cgi?
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Australian Prudential Regulation Authority. (2018). Prudential Inquiry into the
Commonwealth Bank of Australia (CBA) Final Report . Retrieved from
https://www.apra.gov.au/sites/default/files/CBA-Prudential-Inquiry_Final-
Report_30042018.pdf
Benn, S., Abratt, R., & O’Leary, B. (2016). Defining and identifying stakeholders: Views
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DeRoma, P. (2018). Commonwealth Bank of Australia Money Laundering Case. Retrieved
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Federal Court of Australia. (2017). Australian Transaction Reports & Analysis v
Commonwealth Bank of Australia. Retrieved from
http://www.fedcourt.gov.au/services/access-to-files-and-transcripts/online-files/atr-v-
cba

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Gordon, N. (2018). Ethics, Leadership and Decision Making: A Case Study on CBA.
Retrieved from http://thinkspace.csu.edu.au/bamr/2018/03/06/ethics-leadership-and-
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with-clients-and-employees/8805872

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