Updated December 19, 2018 16:51:10

Photo: NAB chairman Ken Henry and his board were called "failed capitalists" by one investor. (ABC News: Michael Barnett)

National Australia Bank chairman Ken Henry has admitted the bank got it wrong on executive pay this year and says it will revamp its pay structure as the bank faced an unprecedented investor revolt, with the highest ever vote against a remuneration report in corporate history.

More than 88 per cent of shareholders opposed the report at NAB's annual general meeting in Melbourne, following earlier signals from shareholders with proxy voting powers including the Australian Council of Superannuation Investors (ACSI), Australian Shareholders Association (ASA), Ownership Matters and Institutional Shareholder Services that they would be voting against NAB's remuneration report.

"To put it bluntly, in the capitalist system, the board and senior management are failed capitalists," investor Chris Schacht told NAB's AGM in Melbourne.

"You have destroyed billions and billions of dollars [of shareholder] value. ...You are the unacceptable face of capitalism."

The investor, a former Labor Senator, told the meeting if NAB executives had broken the law, they should be punished; the shareholders should not pay the cost. And it should not take 10 years for the issues to be resolved.

Dr Henry said it would not take 10 years to repay customers, but changing the bank culture was a longer-term issue.

He told reporters after the meeting, "I'm certainly very disappointed. Embarrassed? Yes I am embarrassed."

The protest vote was not just about pay, but related to the revelations at the royal commission.

"What we heard loud and clear .. was that we need to be much much better in the way we provide services to customers," Dr Henry said.

The board was considering a variable reward scheme that delivers zero bonus outcomes for non-performance.

ANZ to face a 'first strike'

Meanwhile at ANZ's AGM in Perth, the company's chairman David Gonski said at this stage, 34 per cent of shareholders have voted against the company's remuneration report, meaning it will face a first strike at its meeting.

It follows Westpac facing a first strike at its AGM last week, with 64.2 per cent voting against its remuneration report. The Commonwealth Bank survived a strike after reducing its short-term bonuses for senior executives to zero.

Mr Gonski said the board knows there is "heightened community concern about how we reward our executives".

"In the past we were at times too focussed on the short-term profit of the group, rather than the long-term sustainability of our relationships and our obligations to all our stakeholders," he told the AGM.

ANZ had made more than $300 million in provisions for repayments and compensation this year for past mistakes.

ANZ chief executive Shayne Elliott said 2018 had been "a pivotal year" for the bank allowing it to "sow the seeds of change and long-term improvement".

ACSI chief executive Louise Davidson said investors had taken issue with executive bonuses in a year when the royal commission highlighted systemic breaches.

"Reducing short-term bonuses, rather than zeroing them, was a hollow gesture and failed to meet investor and community expectations about accountability," she said.

She said Australia could look to overseas policies on remuneration. For example, companies in the UK must give shareholders a binding vote on pay policy, and may not make any payments that are outside of that policy."

Alleged fraud at NAB under investigation

Dr Henry's comments came following media reports that he was questioned about a first-class trip to the US booked by the former NAB employee at the centre of a fraud investigation - an issue he had raised with the board himself. He said he was unaware of breaking any rules at the time.

With respect to charges being laid against people at the bank, Dr Henry said: "We will see; we will await as we should, the outcome of the royal commission."

Some of Australia's top chief executives might be receiving bonuses they don't necessarily deserve.

He also said that alleged fraud within the bank was being investigated by the police and the reason the fraud was able to be perpetrated was because the bank had "placed too much trust in somebody".

The alleged fraud does not involve CEO Andrew Thorburn. But Mr Thorburn's former chief of staff - who has since left the bank - and external events company, the Human Group, are subject to the police investigation.

Dr Henry said the bank would inform shareholders about the results of the investigation when they were able to, but could not at the moment as the police had asked them not to.

Earlier, during his opening statement at the meeting, Dr Henry apologised for bank misconduct highlighted during the banking royal commission.

"There can be no business as usual," he said.

Dr Henry reiterated NAB had let its customers down, and said the bank had commenced a customer remediation program.

"We have completed refunds of Plan Service Fees, closing the issue for just over 304,000 affected members," he said.

"We have also agreed on a remediation methodology with ASIC that will see NAB Financial Planning refund adviser service fees to those customers who didn't get the services they paid for. That is starting this week, and is to be completed in 2019."

He said he had been "appalled by some of the instances of poor regulatory compliance and poor outcomes for our customers".

"It's not good enough. I understand that many of you are upset by what you have seen and heard — and I understand why you are upset. The board accepts accountability for these things. We are sorry."

Board making changes to executive pay

The board was also making further changes to how it remunerates senior executives, as its current scheme was "not right". And the previous scheme that was replaced in September also had issues.

"It didn't put enough focus on the management of non-financial risks and conduct matters," Dr Henry said.

"And, there was a risk that our so-called long-term incentive scheme might even be encouraging short-term thinking and value-destroying behaviours."

There are big rewards for bankers to take risks but weak punishments when those risks don't pay off.

He said "the quantum of remuneration" was still a factor in the shareholder revolt and that it should better measure and reflect customer outcomes and bring greater transparency.

"We tried, but we got it wrong. We are listening to you. We will try again."

Mr Thorburn said the royal commission had "challenged the entire financial services sector".

Mr Thorburn, who will go on leave after Wednesday's annual general meeting, was paid $4.375 million, down from $6.448 million in the previous financial year, but still the biggest pay cheque among the big four banks.

He said the move from base pay to greater incentive compensation had not been managed carefully enough, "and has, at times, rewarded the wrong behaviours and focused on product sales and short-term growth".

Mr Thorburn will return from annual leave by February 1 to lead NAB's response to the royal commission's final report, and will then take long service leave.

Mr Thorburn told reporters after the meeting, the bank operated in a global enviroment and needed to pay competitive rates, but he had no problem with zero bonuses if that's what the board wanted to do.

Business Council of Australia CEO Jennifer Westacott said bank boards needed to reconsider what was important to their shareholders.

"There is a line in the sand now," she said.

"… They're going have to double down, laser focus on their customers, laser focus on their shareholders, laser focus on making sure their processes, their products, actually work for their customer."

Topics: banking, royal-commissions, fraud-and-corporate-crime, australia

First posted December 19, 2018 12:26:04