“The environment in Australia is stronger economically than it is in Europe because you’ve got negative or zero rates in a lot of places. Australia is heading in that direction which will create new challenges but it is quite different, it feels quite different, it feels more buoyant here.”
Mr McFarlane’s appointment to replace chairman Lindsay Maxsted was first reported in The Australian Financial Review on Wednesday. Mr Maxsted fell on his sword and brought his retirement forward following the AUSTRAC scandal and its 23 million alleged money-laundering breaches.
If something is not working, then you say it’s not working because they’ll know anyway.
— John McFarlane
Federal Treasurer Josh Frydenberg congratulated the bank on the appointment, acknowledging Mr McFarlane’s vast banking experience.
“It’s a challenging time for the financial sector and Westpac, like a number of other major institutions, has an important role in helping to rebuild the community’s trust,” he said.
Mr McFarlane, a former CEO of ANZ and chairman of British bank Barclays, will start on April 2 but work on his four-pronged plan to restore the bank’s reputation and turn around its financial performance will start immediately.
“Westpac has a set of needs that is consistent with what I do,” he said.
His review of the bank will begin with its strategic position before moving on to its goal-setting process, leadership and its risk and compliance function.
“But the first thing is: is the company appropriately strategically positioned?” he asked.
“Because if you don’t get that right, then nothing else is right after that … in general, things are good but there might be some things in there that are not consistent with that, and we need to work out what they are.”
Westpac had “sustained a bit of damage” but “is in better shape than most of the companies I have inherited,” Mr McFarlane said.
In addition to the roles he held at ANZ and Barclays, Mr McFarlane has been on the board at RBS, the executive chairman at Aviva and was the group executive director for Standard Chartered out of London and Hong Kong.
He challenged the view that Australian regulators had been heavy-handed with the banks, saying the price-to-earnings and price-to-book ratios of the big four did not indicate overly restrictive regulatory settings.
“I don’t believe that Australia’s regulatory environment is unusually harsh,” he said.
“In Europe for example, most of the banks are still in recovery from the GFC and are still trading at a discount whereas the Australian banks are trading at a premium.”
Mr McFarlane addressed the issue of “short-termism” that had led many banks to chase profit at the expense of customer outcomes to meet quarterly or annual targets.
“The danger of focusing on maximising current earnings is you systematically underinvest. You really need to make sure you are focused on the long term,” he said.
It was critical, he said, that the bank’s leadership team adjusted to this new reality. His preliminary findings gave him confidence in the Westpac executives, but there was considerable room for improvement.
“My sense is that the leadership’s always been good … but perhaps the execution hasn’t been as strong as we really need it to be.”
A lack of follow-up had contributed to the situation Westpac found itself in, Mr McFarlane said, adding that this characteristic raised “an important question in my mind” and would be “an area to look at quite deeply”.
The appointment of an external candidate as chairman has bolstered the prospect of an internal candidate replacing Mr Hartzer as CEO, according to outgoing chairman Mr Maxsted.
“If the chairman had been internal, it would have been really hard to appoint an internal CEO. John will attract a lot of people to the bank, which is great because there are a lot of acting roles to fill,” he said.
Following the departure of Brian Hartzer, the bank appointed retiring chief financial officer Peter King as acting CEO. Retail bank boss David Lindberg is thought to be another strong internal candidate for the role.
The bank also needs a permanent business banking head – the role is currently occupied by Alastair Welsh, who has been with Westpac since 1996.
The final prong of McFarlane’s turnaround blueprint is concerned with risk and compliance – ensuring the bank is culturally sound, compliant and well capitalised for the future.
Mr McFarlane said his approach when dealing with the regulators had to be as transparent as possible while remaining objective.
“If something is not working, then you say it’s not working because they’ll know anyway. I’ve always believed that is the best way in the long run … if they’ve got you, they’ve got you.”
He emphasised the importance of individual accountability at the bank while accepting that it often came at the price of teamwork and collaboration.
He said the model needed “safety valves” but his preference was for personal accountability.
The preference is at odds with the bank’s bureaucratic tendencies. Its self-assessment performed for APRA revealed an “organisational tendency to cultivate complexity” and an eagerness to delegate responsibility to committees.
Mr McFarlane said cultural change would take time and cited his experience at ANZ.
He said it took seven years before he was able to effectively introduce cross-selling under his “breakout” strategy because bank employees were tribal and didn’t trust other divisions to look after the customer.