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 reflects 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 the well-being of the corporation. The Board has adopted a comprehensive framework of Corporate Governance Guidelines which are designed to properly balance performance and conformance and thereby allow 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’ published in August 2007 by the Australian Securities Exchange (ASX) Limited’s 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;
  • Establishing 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; 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 and having regard to the interests of the Group’s customers, staff, shareholders and the broader community in which the Group operates.

The Board delegates to the Chief Executive Officer the authority to achieve the Group's objective of creating long term shareholder value for its shareholders through providing financial services to its customers and providing sustained best-in-industry performance in safety, community reputation and environmental impact.

The Chief Executive Officer is responsible for the day to day management of the Group and maintaining a comprehensive set of management delegations under the Group’s Delegation of Authorities framework. These delegations cover commitments around project investment, operational expenditure and non-financial activities or processes. They are designed to accelerate decision-making processes and improve efficiency and customer service.

View Board Charter.

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Composition

There are currently 11 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 Chief Executive Officer 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 13 (or such lower number as the Board may from time to time determine). The Board has determined that the number of directors shall be 10; and
• At each Annual General Meeting one third of Directors (other than the Chief Executive Officer) 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 12 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.

In addition to being required to conduct themselves in accordance with the ethical policies of the Group, Directors are required to be meticulous in their disclosure of any material contract or relationship in accordance with the Corporations Act and this disclosure extends to the interests of family companies and spouses. Directors are 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 and the Group's policies.

Each Director may from time to time have personal dealings with the Group. Each Director is 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' Report and on the Group's website. Full details of related party dealings are set out in 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, noting that those dealings are not material under accounting standards;
• 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 personally carries on any role for the Group other than as a Director of the Bank.

The Group does not consider that term of service on the Board is a factor affecting a Director's ability to act in the best interests of the Group. Independence is judged against the ability, integrity and willingness of the Director to act. The Board has established a policy limiting Directors' tenures to ensure that skill sets remain appropriate in a dynamic industry.

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Education

Directors participate in an induction program upon appointment and in a refresher program on a regular basis. The Board has established a program of continuing education to ensure that it is kept up to date with developments in the industry both locally and globally. This 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 in place a process for annually reviewing its performance, policies and practices. These reviews seek to identify where improvements can be made and also assess the quality and effectiveness of information made available to Directors. Every two years, this process is facilitated by an external consultant, with an internal review conducted in the intervening years. The review process includes an assessment of the performance of the Board Committees and each Director.

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 Annual General Meeting.

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 Chief Executive Officer’s performance and remuneration which is conducted by the Board in the absence of the Chief Executive Officer.

Performance evaluations in accordance with the above processes have been undertaken during the 2010 financial year.

Details on Management performance evaluations are contained in the Remuneration Report section of the Annual 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. The criteria are aimed at creating a Board capable of challenging, stretching and motivating management to achieve sustained outstanding company 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 and:

• 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 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 and experience 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.

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, stand for election, in accordance with the Constitution, at the next general meeting of shareholders.
 
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 including time commitment, code of ethics and continuing education. All current Directors have been provided with a letter confirming the terms of their appointment. A copy of the form of letter of appointment appears on the Group’s website.

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Policies

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

• The Board will consist of a majority of independent Non-Executive Directors and the membership of 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 Board Chairman;
• The Board will meet regularly with an agenda designed to provide adequate information about the affairs of the Group, allow the Board to guide and monitor management and assist in involvement in discussions and decisions on strategy. Matters having strategic implications are given priority on the agenda for regular Board meetings. In addition, ongoing strategy is the major focus of at least two of the Board meetings annually;
• The Board has an agreed policy on the basis on which Directors are entitled to obtain access to Company 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 of Directors 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 between three and 30 days after the announcement of half yearly and final results and from the date of the Annual General Meeting until 14 days after the Annual General Meeting. Further, the guidelines require that Directors 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 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 Chief Executive Officer are also prohibited from:

• Any hedging of publicly disclosed shareholdings 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 and 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 & Remuneration Committee

The People & Remuneration Committee of the Board consists entirely of independent Non-Executive Directors.

It is this independence which allows the Committee to ensure that the Group’s remuneration framework can reflect the guiding principles of its remuneration philosophy.

The Committee has an active and ongoing role in evaluating any proposed enhancements to the framework, and seeks advice and information from independent sources in order to satisfy itself that the Group’s remuneration practices remain competitive.

The Committee oversees all executive remuneration arrangements.

The Committee’s activities are governed by its terms of reference, which are:

• To recommend to the Board executive appointments for Executive Directors and the Head of business/service unit.
• To recommend to the Board remuneration and remuneration reviews for the Chief Executive Officer and Executive Directors.
• To approve individual and aggregate remuneration reviews for the Head of business/service unit (Group Executives).
• To approve appointments and associated remuneration where the appointee has a potential total remuneration (including long term incentives) higher than the potential total remuneration of the Head of their business/service unit.
• To recommend to the Board-
  • changes in remuneration policy, including superannuation, other benefits and remuneration structure, likely to have a significant impact on the Group.
  • changes to employee equity plans.
• To monitor and provide input to management regarding:
  • leadership performance including talent pool and safety management.
  • legislative developments likely to have a significant impact on the Group and legislative compliance in employment issues.
  • industrial agreements likely to have a significant impact on the Group.
  • the risk/reward tradeoff in incentive plans operating across the Group.
  • diversity and female development talent plans operating across the Group.
  • succession planning and management development plans operating across the Group.

View People and Remuneration Committee Charter.

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Audit Arrangements

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

• The Audit Committee consists entirely of independent Non-Executive Directors, all of whom are financially literate and at least one member should have relevant qualifications and experience as referred to in the ASX Corporate Governance Principles and Recommendations;
• The Audit Committee Chairman 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;
• The Audit Committee will meet at least quarterly, and as required. The Audit Committee will invite the external auditor to all meetings of the Committee;
• The Audit Committee will meet from time to time with the Group Auditor and external auditor without management or others being present;
• The Audit Committee has the power to call attendees as required, including open access to management, auditors (external and internal) 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;
• The Audit Committee 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.

Non-Audit Services
The Board has in place an External Auditor Services Policy which requires the Audit Committee (or its delegate) to approve all audit and non-audit services before engaging the Auditors.  The policy also prohibits the Auditors from providing certain services to the Group or its affiliates.  The objective of this policy is to avoid prejudicing the independence of the Auditors.

The policy is designed to ensure that the Auditors do not:

• Assume the role of management or act as an employee;
• Become an advocate for the Bank;
• Audit their own work;
• Create a mutual or conflicting interest between the Auditor and the Bank;
• Require an indemnification from the Bank to the Auditor;
• Seek contingency fees; or
• Have a direct financial or business interest or a material indirect financial or business interest in the Bank or any of its affiliates, or an employment relationship with the Bank or any of its affiliates.

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

• Bookkeeping or other services relating to accounting records or Financial Statements of the Bank;
• Financial information systems design and implementation;
• Appraisal or valuation services (other than certain tax only valuation services) and fairness opinions;
• Actuarial services;
• 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; or
• Expert services for the purposes of advocating the interests of the Group.

In general terms, the permitted services are:

• Audit services to the Bank or an affiliate;
• Related services connected with the lodgment of statements or documents with the ASX, ASIC, APRA, SEC 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 Auditor to third parties in connection with the Bank's financing or related activities; and
• Other services pre-approved by the Audit Committee.

View Audit Committee Charter.

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Auditor

PricewaterhouseCoopers was appointed as the Auditor of the Bank at the 2007 Annual General Meeting, effective from the beginning of the 2008 financial year.

The audit partner from PricewaterhouseCoopers will attend the 2010 Annual General Meetings of the Bank and will be available to respond to shareholder audit-related questions.

The Group currently requires that the partner managing the audit for the external Auditor be changed after a period of no longer than five years.

The Chief Executive Officer is authorised to appoint and remove the chief internal audit executive only after consultation with the Audit Committee.

Due to SEC rules that apply to various activities that the Group continues to undertake in the United States, notwithstanding the Bank's de-registration under the Exchange Act, the Group and its Auditors must continue to comply with U.S. Auditor independence requirements. 

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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 Group Audit.

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”.

As part of the process whereby the Board reviews the annual financial statements, the Chief Executive Officer and the Chief Financial Officer have given the Board their declaration in accordance with section 259A(2) of the Corporations Act 2001 (Cth), as well as the assurance that the declaration is founded on a sound system of risk management and internal control and 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, including the credit, market (including traded, IRRBB, lease residual values, non-traded equity and structural foreign exchange), liquidity and funding, operational, insurance, compliance and regulatory risks assumed by the Group in the course of carrying on its business. It reviews regulator 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 full Board with input from the various Board sub-committees. Tax and accounting risks are governed by the Board 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 also makes recommendations on the key policies relating to capital, liquidity and funding that underpin the Internal Capital Adequacy Assessment Process, which is overseen and reviewed by the Board on at least an annual basis.

In overseeing the risk framework, and through its dialogues with the risk leadership team and executive management, 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 with the Group’s 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 Committee meets, at least seven times each year and at least annually with the Group Chief Risk Officer, in the absence of other management to allow the Committee to form a view on the independence of the risk management function.

Framework
The Group has in place an integrated risk management framework to identify, assess, manage and report risks and risk adjusted returns on a consistent and reliable basis.

A full description of the functions of the framework and the nature of the risks is set out in the section of the Annual Report entitled Risk Management and in Notes 38 and 41 to the Financial Statements.

View Risk Committee Charter.

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Board Performance and Renewal Committee

The Board Performance and Renewal Committee critically reviews, at least annually, the corporate governance procedures of the Group and the composition and effectiveness of the Commonwealth Bank of Australia Board and 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. The Chief Executive Officer attends the meeting by invitation.

In addition to its role in proposing candidates for Director appointment for consideration by the Board, the Committee reviews fees payable to Non-Executive Directors and reviews, and advises the Board in relation to Chief Executive Officer succession planning and Board renewal.

View Board Performance and Renewal Committee Charter.

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Continuous Disclosure

The Corporations Act 2001 and the ASX Listing Rules require that a Company discloses to the market matters which could be expected to have a material effect on the price or value of the Company’s securities. The Group’s “Guidelines for Communication between the Bank and shareholders”, sets 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.  Management procedures are in place throughout the Commonwealth Bank Group to ensure that all material matters which may potentially require disclosure are promptly reported to the Chief Executive Officer, 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 Listing Rules, advised to the market. A Disclosure Committee has 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 Group’s objective is to create long term value for its shareholders through providing financial services to its customers and producing sustained best-in-industry performance in safety, community, reputation and environmental impact.

The Group’s vision is to be Australia’s finest financial services organisation through excelling in customer service.

The values of the Group are trust, honesty and integrity. The Board carries out the legal duties of its role in accordance with the values and having appropriate regard to the interests of the Group’s customers, shareholders, staff 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, which 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 programs;
• To maintain confidentiality in the affairs of the Group and its customers; and
• To be absolutely honest in all professional activities.

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Our People

The Group is committed to providing fair, safe, challenging and rewarding work, recognising the importance of attracting and retaining high quality staff and consequently, being in a position to excel in customer service.

There are various policies and systems in place to enable achievement of these goals, including:

• 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 Sustainability section.

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Behaviour Issues

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

The policy has been extended to include reporting of auditing and accounting issues, which will be 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.

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Code of Conduct

In carrying out its role, 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 application regulations.

The Board operates 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 communications 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 situations of conflict of interest 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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Company Secretaries

The details of the Bank’s Company Secretaries, including their experience and qualifications are set out below.

John Hatton has been Company Secretary of the Commonwealth Bank of Australia since 1994.

From 1985-1994, he was a solicitor with the Bank’s Legal Department.

He has a Bachelor of Laws degree from Sydney University and was admitted as a solicitor in New South Wales. He is a Fellow of Chartered Secretaries Australia and a Member of the Australian Institute of Company Directors.

Carla Collingwood was appointed a Company Secretary to the Bank in July 2005

From 1994 until 2005, she was a solicitor with the Bank’s Legal Services Department, before being appointed to the position of General Manager, Secretariat. She holds a Bachelor of Laws degree (Hons.) and a Graduate Diploma in Company Secretary Practice from Chartered Secretaries Australia.  She is a Graduate of the Australian Institute of Company Directors.

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