Corporate governance

1. Introduction
2. Charter
3. Composition
4. Constitution
5. Independence
6. Education
7. Review
8. Selection of Directors
9. Policies
10. Ethical Standards
11. Remuneration Arrangements
12. Audit Arrangements
13. Auditor
14. Risk Management
15. Board Performance and Renewal Committee
16. Continuous Disclosure
17. Ethical Policies
18. Our People
19. Behaviour Issues
20. Code of Conduct
21. Company Secretaries
22. Board Charter
23. Form of letter of Non-Executive Director's appointment

Introduction

This statement outlines the key aspects of the Commonwealth Bank’s corporate governance framework. The Board has consistently placed great importance on the governance of the Group, which it believes is vital to its well-being. The Board has adopted a comprehensive framework of Corporate Governance Guidelines, designed to properly balance performance and conformance. This enables the Group to undertake, in an effective manner, the prudent risk-taking activities which are the basis of its business. The Guidelines and the practices of the Group comply with the revised “Corporate Governance Principles and Recommendations”, dated 30 June 2010, released by the ASX Corporate Governance Council.

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Charter

The role and responsibilities of the Board of Directors are set out in the Board Charter. The responsibilities include:

• The corporate governance of the Group, including the establishment of Committees;
• Oversight of the business and affairs of the Group by:
  • Establishing with management and approving the strategies and financial objectives;
  • Approving major corporate and capital initiatives and approving capital expenditure in excess of limits delegated to management;
  • Overseeing the establishment of appropriate systems of risk management including defining the Group’s risk appetite and establishing appropriate financial policies such as target capital and liquidity ratios; and
  • Monitoring the performance of management and the environment in which the Group operates
• Approving documents (including reports and statements to shareholders) required by the Bank’s Constitution and relevant regulation;
• Employment of the Chief Executive Officer (CEO); and
• Approval of the Group’s major HR policies and overseeing the development strategies for senior and high performing executives.
  

The Board carries out the legal duties of its role in accordance with the Group’s values of trust, honesty and integrity. It has regard to the interests of the Group’s customers, people, shareholders and the broader community in which the Group operates at all times.


View Board Charter.

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Composition

There are currently eleven Directors of the Bank and details of their experience, qualifications, special responsibilities and attendance at meetings are set out in the Directors’ Report.

Membership of the Board and Committees is set out below:

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Constitution

The Constitution of the Bank specifies that:

• The CEO and any other Executive Director shall not be eligible to stand for election as Chairman of the Bank;
• The number of Directors shall not be less than nine nor more than thirteen (or such lower number as the Board may from time to time determine). The Board has determined that the number of directors shall be eleven; and
• At each Annual General Meeting (AGM) one third of Directors (other than the CEO) shall retire from office and may stand for re-election.

The Board has established a policy that the term of Directors’ appointments would be limited to twelve years (except where succession planning for Chairman and appointment of Chairman requires an extended term. On appointment, the Chairman will be expected to be available for that position for five years). 

View Commonwealth Bank Constitution, incorporating amendments up to and including all amendments passed at the Annual General Meeting on 13 November 2008.

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Independence

The Board regularly assesses the independence of each Director. For this purpose an independent Director is a Non-Executive Director whom the board considers to be independent of management and free of any business or other relationship that could materially interfere with the exercise of unfettered and independent judgment.

Directors are required to conduct themselves in accordance with the ethical policies of the Group. They are required to be meticulous in their disclosure of any material contract or relationship in accordance with the Corporations Act 2001. This disclosure extends to the interests of family companies and spouses. Directors are also required to strictly adhere to the constraints on their participation and voting in relation to matters in which they may have an interest in accordance with the Corporations Act 2001 and the Group’s policies. Each Director may from time to time have personal dealings with the Group. Each Director could be involved with other companies or professional firms which may from time to time have dealings with the Group. Details of offices held by Directors with other organisations are set out in the Directors’ biography. Full details of related party dealings are set out in the notes to the Financial Statements as required by law.

All the current Non-Executive Directors of the Bank have been assessed as independent Directors. In reaching that determination, the Board has taken into account (in addition to the matters set out above):

• The specific disclosures made by each Director as referred to above;
• Where applicable, the related party dealings referrable to each Director;
• That no Director is, or has been associated directly with, a substantial shareholder of the Bank;
• That no Non-Executive Director has ever been employed by the Bank or any of its subsidiaries;
• That no Director is, or has been associated with, a supplier, professional adviser, consultant to or customer of the Group which is material under accounting standards; and
• That no Non-Executive Director has a material contractual relationship with the Group other than as a Director of the Bank.

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Education

Directors participate in an induction program upon appointment and in a refresher program on a regular basis. This programme of continuing education ensures that the Board is kept up to date with developments in the industry both locally and globally. It also includes sessions with local and overseas experts in the particular fields relevant to the Group's operations.

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Review

The Board has an annual process for reviewing its own performance, policies and practices. These reviews seek to identify where improvements can be made. They also assess the quality and effectiveness of information made available to Directors. The review process includes an assessment of the performance of the Board Committees and each Director. Every two years, this process is facilitated by an external consultant, with an internal review conducted in the intervening years.

After consideration of the results of the performance assessment, the Board will determine its endorsement of the Directors to stand for re-election at the next AGM.

The Non-Executive Directors meet at least annually without management, in a forum intended to allow for an open discussion on Board and management performance. This is in addition to the consideration of the CEO’s performance and remuneration which is conducted by the Board in the absence of the CEO.

Performance evaluations in accordance with the above processes have been undertaken during the year. Details on management performance evaluations are contained in the Remuneration Report section of the Directors’ Report.

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Selection of Directors

The Board Performance and Renewal Committee has developed a set of criteria for Director appointments which has been adopted by the Board. These are aimed at creating a Board capable of challenging, stretching and motivating management to achieve sustained, outstanding performance in all respects. These criteria, which are reviewed annually, aim to ensure that any new appointee is able to contribute to the Board constituting a competitive advantage for the Group. Each Director should:

• Be capable of operating as part of an exceptional team;
• Contribute outstanding performance and exhibit impeccable values;
• Be capable of inputting strongly to risk management, strategy and policy;
• Provide appropriate mix of skills, diversity and experience required currently and for the future strategy of the Group;
• Be excellently prepared and receive all necessary education;
• Provide important and significant insights, input and questions to management from their experience and skill; and
• Vigorously debate and challenge management.

Professional intermediaries are engaged to identify a diverse range of potential candidates for appointment as Directors based on the identified criteria.

The Board Performance and Renewal Committee will assess the skills, experience and personal qualities of these candidates as well as take into consideration other attributes including diversity to ensure that any appointment decisions are made in line with the objectives of the Board and the Group’s Diversity Policy. A copy of the Policy and information on the Group’s diversity strategy can also be found in the Diversity section.

Candidates who are considered suitable for appointment as Directors by the Board Performance and Renewal Committee are then recommended for decision by the Board and, if appointed, will stand for election at the next AGM, in accordance with the Constitution.

The Group has adopted a policy whereby, on appointment, a letter is provided from the Chairman to the new Director setting out the terms of appointment and relevant Board policies. These include time commitment, code of ethics and continuing education. All current Directors have been provided with a letter confirming the terms of their appointment.


View form of letter of appointment.

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Policies

Board policies relevant to the composition of Committees and functions of Directors include:

• The Board will consist of a majority of independent Non-Executive Directors;
• The Board Performance and Renewal, People & Remuneration and Audit Committees should consist solely of independent Non-Executive Directors. The Risk Committee should consist of a majority of independent Non-Executive Directors;
• The Chairman will be an independent Non-Executive Director;
• The Audit Committee will be chaired by an independent Non-Executive Director other than the Chairman;
• The Board will meet on a regular and timely basis. The agenda will provide adequate information about the affairs of the Group. It also enables the Board to guide and monitor management, and assist in its involvement in discussions and decisions on strategy. Strategic matters are given priority on the agenda for regular Board meetings. In addition, ongoing strategy is the major focus of at least one Board meeting annually;
• The Board has an agreed policy on the basis on which Directors are entitled to obtain access to Group documents and information, and to meet with management; and
• The Group has in place a procedure whereby, after appropriate consultation, Directors are entitled to seek independent professional advice, at the expense of the Group, to assist them to carry out their duties as Directors. The policy of the Group provides that any such advice is generally made available to all Directors.

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Ethical Standards

Conflicts of Interest
In accordance with the Constitution and the Corporations Act 2001, Directors are required to disclose to the Board any material contract in which they may have an interest. In compliance with section 195 of the Corporations Act 2001 any Director with a material personal interest in a matter being considered by the Board will not be present when the matter is being considered and will not vote on the matter.  In addition, any director who has a conflict of interest in connection with any matter being considered by the Board or a Committee does not receive a copy of any paper dealing with the matter.

Share Trading
The restrictions imposed by law on dealings by Directors in the securities of the Group have been supplemented by the Board adopting guidelines which further limit any such dealings by Directors, their spouses, any dependent child, family company or family trust.

The guidelines provide, that in addition to the requirement that Directors not deal in the securities of the Group or any related company when they have or may be perceived as having relevant unpublished price-sensitive information, Directors are only permitted to deal within certain periods. 

These periods include 30 days commencing the day after the announcement of half yearly and final results and 14 days commencing the day after quarterly trading updates are released. The guidelines also require that Directors do not deal on the basis of considerations of a short term nature or to the extent of trading in those securities. Similar restrictions apply to Executives of the Group, which is in addition to the prohibition of any trading (including hedging) in positions prior to vesting of shares or options.

Directors and Executives who report to the CEO are also prohibited from:

• Any hedging of publicly disclosed shareholding positions; and
• Entering into or maintaining arrangements for margin borrowing, short selling or stock lending, in connection with the securities of the Group.

In June 2010 the Board approved a revised Group Securities Trading Policy, which replaces the guidelines.  This policy applies to all Directors, employees & contractors of the Group from 21 September 2010.


View Group Securities Trading Policy.

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Remuneration Arrangements

People and Remuneration Committee

The Group adheres to high standards of corporate governance. The People & Remuneration Committee (the Committee) is responsible for developing the Group’s remuneration philosophy, framework and policies for approval by the Board.

The Committee is made up of independent Non-Executive Directors and meets at least four times per year. The CEO attends meetings by invitation, but is absent when matters affect him personally.

The role and responsibilities of the Committee are set out in their Charter, which is reviewed by the Board each year. In general, the Committee is responsible for recommending to the Board for approval of:

• Senior executive appointments, and appointments where the remuneration target of the individual exceeds that of the head of their business/service unit;
• Remuneration arrangements and all reward outcomes for the CEO, senior direct reports to the CEO and other individuals whose roles may affect the financial soundness of the Group;
• Remuneration arrangements for finance, risk & internal control personnel;
• Remuneration arrangement for employees who have a significant portion of their total remuneration based on performance; and
• Significant changes in remuneration policy and structure, including superannuation, employee equity plans and benefits.

The Committee is also responsible for reviewing and approving Group remuneration policies that apply to subsidiaries of the Group that do not have their own remuneration committees.


View People and Remuneration Committee Charter.

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Audit Arrangements

Audit Committee

The purpose of the Audit Committee is to assist the Board in fulfilling its statutory and fiduciary responsibilities. It provides an objective and independent review of the effectiveness of the external reporting of financial information and the internal control environment of the Group, as well as obtaining an understanding of the tax and accounting risks which face the Group. The Audit Committee is responsible for the oversight of accounting policies, professional accounting requirements, internal audit (GAA), external audit, APRA statutory and regulatory reporting requirements, and the appointment of the external auditor.

The Charter of the Audit Committee incorporates a number of policies and practices to ensure that the Committee is independent and effective.

These include:

• The Audit Committee shall comprise at least three members. All members must be Non-Executive, Independent Directors and be financially literate. At least one member should have relevant qualifications and experience as referred to in the ASX Corporate Governance Principles and Recommendations;
• The chairman of the Audit Committee may not be the Chairman of the Board. The term of each member will be determined by the Board through annual review. The Risk Committee chairman will be a member of the Audit Committee and vice-versa to ensure the flow of relevant information between the two committees;
• Meetings will be at least quarterly and as required. The external auditor will be invited to all meetings;
• Meetings will be held from time to time with GAA and the external auditor without management or others being present;
• The Committee has the power to call attendees as required, including open access to management, GAA, external audit and the right to seek explanations and additional information;
• Senior management and the internal and external auditor have free and unfettered access to the Audit Committee with the Group Auditor having a direct reporting line, whilst maintaining a management reporting line to the Chief Financial Officer; and

It has the option, with the concurrence of the Chairman of the Board, to retain independent legal, accounting or other advisors to the extent the Committee considers necessary at the Group’s expense.


View Audit Committee Charter.

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Auditor

PricewaterhouseCoopers (PwC) was appointed as the external auditor of the Bank at the 2007 AGM, effective from the beginning of the 2008 financial year.

The PwC audit partner will attend the 2011 AGM and be available to respond to shareholder questions relating to the external audit.

The Group requires that the partner managing the external audit be changed after a period of no longer than five years, in line with current regulations.

The Group and its external auditor must continue to comply with U.S Auditor independence requirements. U.S. Securities and Exchange Commission (SEC) rules still apply to various activities that the Group continues to undertake in the United States, notwithstanding the Bank’s de-registration under the Exchange Act.

Non-Audit Services
The External Auditor Services Policy requires the Audit Committee (or its delegate) to approve all audit and non-audit services before engaging the external auditors to perform the work. The policy also prohibits the external auditors from providing certain services to the Group or its affiliates. The objective of this policy is to avoid prejudicing the independence of the external auditors.

The policy is designed to ensure that the external auditors do not:

• Assume the role of management or act as an employee;
• Become an advocate for the Group;
• Audit their own work;
• Create a mutual or conflicting interest between themselves and the Group;
• Require an indemnification from the Group to themselves;
• Seek contingency fees; nor
• Have a direct financial or business interest or a material indirect financial or business interest in the Group or any of its affiliates, or an employment relationship with the Group or any of its affiliates.

Under the policy, the external auditor shall not provide certain services including the following services:

• Bookkeeping or other services relating to accounting records or Financial Statements of the Group;
• Financial information systems design and implementation;
• Appraisal or valuation services (other than certain tax only valuation services) and fairness opinions or contribution-in-kind reports;
• Actuarial services unless approved in accordance with independence guidelines;
• Internal audit outsourcing services;
• Management functions, including acting as an employee and secondment arrangements;
• Human resources;
• Broker-dealer, investment adviser or investment banking services;
• Legal services;
• Expert services for the purpose of advocating the interests of the Group;
• Services relating to marketing, planning or opining in favour of the tax treatment of certain transactions;
• Tax services in connection with certain types of tax transactions;
• Tax services to individuals, and any immediate family members of any individuals, in a Financial Reporting Oversight Role; and
• Certain corporate recovery and similar services.

In general terms, the permitted services are:

• Audit services to the Group or an affiliate;
• Related services connected with the lodgement of statements or documents with the ASX, ASIC, APRA or other regulatory or supervisory bodies;
• Services reasonably related to the performance of the audit services;
• Agreed-upon procedures or comfort letters provided by the external auditor to third parties in connection with the Group’s financing or related activities; and
• Other services pre-approved by the Audit Committee.

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Risk Management

Risk Management governance originates at Board level, and cascades through to the CEO and businesses, via policies and delegated authorities. This ensures Board level oversight and a clear segregation of duties between those who originate and those who approve risk exposures. Independent review of the risk management framework is carried out through GAA.

The Board and its Risk Committee operate under the direction of their respective charters. The Board Charter stipulates, amongst other things that:

• The Board is responsible for “overseeing the establishment of systems of risk management by approving accounting policies, financial statements and reports, credit policies and standards, risk management policies and procedures and operational risk policies and systems of internal controls”; and
• The CEO is responsible for “implementing a system, including a system of internal controls and audits, to identify and manage risks that are material to the business of the Group”.

The CEO and the Chief Financial Officer have given the Board their declaration in accordance with section 295A of the Corporations Act 2001 and confirmation that the declaration is founded on a sound system of risk management and internal control and also that the system is operating effectively in all material respects in relation to financial risks.

Risk Committee
The Risk Committee oversees the Group’s risk management framework. This includes credit, market (including traded interest rate risk in the banking book, lease residual values, non-traded equity and structural foreign exchange), liquidity, funding, operational, insurance, compliance and regulatory risks assumed by the Group in the course of carrying on its business. It reviews regular reports from management on the measurement of risk and the adequacy and effectiveness of the Group’s risk management and internal controls systems.

Strategic risks are governed by the Board, with input from the various Board sub-committees. Tax and accounting risks are governed by the Audit Committee.

A key purpose is to help formulate the Group’s risk appetite for consideration by the Board, and agreeing and recommending a risk management framework to the Board that is consistent with the approved risk appetite.

This framework, which is designed to achieve portfolio outcomes consistent with the Group’s risk-return expectations, includes:

• High-level risk management policies for each of the risk areas it is responsible for overseeing; and
• A set of risk limits to manage exposures and risk concentrations.

The Committee monitors management’s compliance with the Group risk framework (high-level policies and limits). It also makes recommendations on the key policies relating to capital (that underpin the Internal Capital Adequacy Assessment Process), liquidity and funding. These are overseen and reviewed by the Board on at least an annual basis.

The Committee also monitors the health of the Group’s risk culture, and reports any significant issues to the Board.

As part of the remuneration policy, the Risk Committee provides written input to the People & Remuneration Committee to assist in the alignment of executive remuneration with appropriate risk behaviours.

The Committee reviews significant correspondence between the Group and its regulators, receives reports from management on the Group’s regulatory relations and reports any significant regulatory issues to the Board.

Levels of insurance cover on insurance policies maintained by the Group to mitigate some operational risks are disclosed to the Risk Committee for comment.

The Risk Committee charter states that the Committee will meet at least quarterly, and as required. In practice this is at least six times a year. To allow it to form a view on the independence of the function, the Risk Committee meets with the Group Chief Risk Officer (CRO) in the absence of other management at least annually or at the will of the Committee or the CRO. The chairman of the Risk Committee provides a report to the Board following each Committee meeting.

View Risk Committee Charter.

Framework
The Group has an integrated risk management framework in place to identify, assess, manage and report risks and risk adjusted returns on a consistent and reliable basis.
A description of the functions of the framework and the nature of the risks is set out in the Risk Management section of the Annual Report and in Notes 38 to 41 to the Financial Statements.


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Board Performance and Renewal Committee
The Board Performance and Renewal Committee reviews annually the corporate governance procedures of the Group. It considers the composition and effectiveness of the Commonwealth Bank of Australia Board and also the boards of the major wholly owned subsidiaries. The policy of the Board is that the Committee shall consist solely of independent Non-Executive Directors, with the CEO attending the meeting by invitation.


View Board Performance and Renewal Committee Charter.

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Continuous Disclosure

Market matters which could be expected to have a material effect on the price or value of the Company’s securities must be disclosed under the Corporations Act 2001 and the ASX Listing Rules. These set out the processes to ensure that shareholders and the market are provided with full and timely information about the Group’s activities in compliance with continuous disclosure requirements.

Continuous Disclosure policy and processes are in place throughout the Group to ensure that all material matters which may potentially require disclosure are promptly reported to the CEO, through established reporting lines or as a part of the deliberations of the Group’s Executive Committee. Matters reported are assessed and, where required by the ASX Listing Rules, advised to the market. A Disclosure Committee has also been formed to provide advice on the requirements for disclosure of information to the market. The Company Secretary is responsible for communications with the ASX and for ensuring that such information is not released to any person until the ASX has confirmed its release to the market.


View Group’s guidelines for Communication between the Bank and Shareholders. 

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Ethical Policies

The values of the Group are trust, honesty and integrity. The Board carries out its legal duties in accordance with these values and having appropriate regard to the interests of the Group’s customers, shareholders, people and the broader community in which the Group operates.

Policies and codes of conduct have been established by the Board and the Group Executive team to support the Group’s objectives, vision and values.

Statement of Professional Practice
The Group has adopted a code of ethics, known as a Statement of Professional Practice. This sets standards of behaviour required of all employees and directors including:

• To act properly and efficiently in pursuing the objectives of the Group;
• To avoid situations which may give rise to a conflict of interest;
• To know and adhere to the Group’s Equal Employment Opportunity policy and programmes;
• To maintain confidentiality in the affairs of the Group and its customers; and
• To be absolutely honest in all professional activities.

These standards are regularly communicated to our people. The Group has also established insider trading guidelines for our people to ensure that unpublished price-sensitive information about the Group or any other company is not used in an illegal manner or so that inside information could be used for personal advantage.

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Our People

There are various policies and systems in place to enable our people to carry out their duties in accordance with the values of the Group. These include:

• Fair Treatment Review;
• Equal Employment Opportunity;
• Occupational Health and Safety;
• Recruitment and selection;
• Performance management;
• Talent management and succession planning;
• Remuneration and recognition;
• Employee share plans; and
• Supporting Professional Development.

Information on the Group’s diversity strategy can be found in the Diversity section.

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Behaviour Issues

The Group is strongly committed to maintaining an ethical workplace and to complying with legal and ethical responsibilities. Policy requires our people to report fraud, corrupt conduct, mal-administration or serious and substantial waste by others. A system has been established which allows our people to remain anonymous, if they wish, for reporting of these matters.

The policy has been extended to include reporting of auditing and accounting issues. These are reported to the Chief Compliance Officer by the Chief Security Officer, who administers the reporting and investigation system. The Chief Security Officer reports any such matters to the Audit Committee, noting the status of resolution and actions to be taken.

Code of Conduct

The Board will operate in a manner reflecting the Group’s values and in accordance with its agreed corporate governance guidelines, the Bank’s Constitution, the Corporations Act and all other applicable regulations.

The Board employs and requires at all levels, impeccable values, honesty and openness. Through its processes, it achieves transparent, open governance and communications under all circumstances, with both performance and conformance addressed.

The Board’s policies and codes include detailed provisions dealing with:

• The interface between the Board and management to ensure there is effective communication of the Board’s views and decisions, resulting in motivation and focus towards long term shareholder value behaviours and outcomes;
• Disclosure of relevant personal interests so that potential conflict of interest situations can be identified and appropriate action undertaken to avoid compromising the independence of the Board; and
• Securities dealings in compliance with the Group’s strict guidelines and in accordance with the values of honesty and integrity.

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