The following report discusses the management accounting systems that are used by Westpac. The report outlines company structure, Westpac’s strategy and performance measurement systems that Westpac uses. The chosen theme in the report for critical analysis is Environmental. From research it was concluded that Westpac uses a decentralised organisational structure to provide its divisions autonomy. Westpac ensures that their goals and vision are fulfilled with the help of set principles which support their strategy. In the end some recommendations have been provided that will increase Westpac’s efficiency and effectiveness in trying to accomplish their business mission.
Accounting Systems that are used by Westpac are discussed in this report. By using rigorous research from various sources, this report assesses how Westpac tries to achieve their divisional and organisational goals by using its organisational structure, their strategy and the remuneration policy for the top management to their benefit. Moving further, the report goes on to describe and analyse the steps Westpac take to ensure that they take care of the environment that they operate in.
Background and HistoryEstablished in 1817, under the incorporation provided by Governor Lachlan Macquarie, The bank of New South Wales was Australia’s first and the oldest bank. Beginning with a serious loss in 1821, it was discovered that the Chief Cashier had stolen half of its subscribed capital. The bank started to expand exponentially in the 1850’s, this was a response to the gold rush as an opportunity to set up gold buying agents emerged. From just 1 single office in Sydney the bank grew up to open a web of 37 branches by 1861.
In 1929 Westpac, as most other institutions was deeply affected by the crash of New York stock market. The then general manager Davidson encouraged for an initiative to soften the impact of financial depression in 1931; this sent the surging economy into recovery.In 2002, Westpac expanded their wealth management business by acquisition of the following:
Rothschild Australia Asset Management
Parts of BT Financial Group
51% of Hastings Funds Management Limited
Going ahead, in 2005 Westpac successfully acquired 100% of Hastings Funds Management. Soon after, 2008 turned out to be fruitful for Westpac as the institution came up now as a multi brand group after the merger with St. George Bank Limited. On July 25, 2011, Westpac launched the Bank of Melbourne.
Westpac operates a unique portfolio of brands through which they serve more than 13 million customers. The group operates in 5 customer division, which are:
- Consumer Bank
- Business Bank
- BT Financial Group Australia
- Westpac Institutional Bank
- Westpac New Zealand (REF)
According to Brian Hartzer, there are many assertions about competition in the banking industry but it is highly competitive.With most of its major competition coming from the top banks of Australia including Commonwealth Bank, ANZ Bank and Nab; there are other competitors as well for Westpac. Some of them are AMP, Bank of Queensland, Suncorp and Bankwest. Though in terms of revenue, Commonwealth and NAB are the two major banks that surpass Westpac.
With deep and enduring customer relationships, Westpac seeks to be one of the world’s great service companies, helping their customers, communities and people to prosper and grow.By the help of a comprehensive range of services their strategy focuses on the core markets of Australia and New Zealand, in order to assist them in meeting the financial needs of their customers.They aim to strengthen their relationships with customers by focussing on organic growth in their own chosen segments. This particular approach of theirs is supported by the portfolio of financial services brands, that makes them appealing to a broader range of customers and provides them with strategic flexibility in turn enabling them to better serve individual needs of customers.
Competitive advantage for Westpac would be their unique strategic priorities that they implement side by side with their values. The use of 5 strategic priorities Westpac guide their activities to achieve their strategy. These are :
- Service Leadership
- Digital Transformation
- Performance Discipline
- Growth Highways
- Workforce Revolution
The above 5 along with Westpac’s values of service, integrity, one team, courage and achievement make Westpac different and better than others in the market.
Westpac recently underwent a makeover in their organisational structure, prior to this change the whole corporation had a sticky product and promotion structure. With the previous centralized structure most of the marketing decisions were made by the headquarters. After the changes in 2015, Westpac’s structure is much more efficient and sleeker. It is no more a single bank, but they have divided the corporation into a consumer bank and a commercial and business bank. By this Westpac aim to allow each division to design and create their own banking products.
This will increase efficiency for the administration by eliminating delays and promoting quick action. Different divisions in Westpac are now allowed to develop their own digital capacities in ways they could not before which enables them to customise the whole customer service experience. Decentralisation makes an organisations department inclined towards new initiatives by encouraging change that increases responsiveness. Westpac believes the change in their organisational structure will make them more agile when meeting the needs of their customers whether it’s individuals or business. It will also enable them to adapt quickly to the changing market dynamics.
A functional unit in a business that has its own set and defined goals to be achieved, policies and procedures is a responsibility centre. They tie specific responsibilities in terms of revenues, costs and investments to be made. After the 2015 changes in Westpac, investment centres are the types of responsibility centres in place. This means that different divisions of the corporation are not just responsible for sales and costs but also the returns on investments made in operation. For example; Director of Bank of Melbourne would not just be responsible for profit made by the bank but also the return they get on their investments; at the same time, he/she won’t be responsible for the Westpac consumer bank, but the CEO and Director of consumer bank would be.
Ecologists who take part in policy making or management are often advised to learn to deal with unpredictable situations; just like management there are a quite a few changes going on in the world and are certain to continue with time: Global Warming being one of them. The Australian Banker’s Association agrees with the scientific consensus that due to emissions of greenhouse gases, the climate is changing all around the world and leading to Global Warming. The association further believes that failure to reduce these emissions will become a threat not just to the environment but also the general public, security and the economy as well.
Just in line with ABA, Westpac has recognised climate change to be a vital issue impacting the long-term prosperity of the economy and the country. Westpac realises that being an iconic financial institution, they have a responsibility towards the environment. In order to curb the global warming effects, Westpac set up their first action plan almost 10 years ago and since then they have been helping customers and communities to reduce carbon footprint.
Currently, Westpac has a “Climate Change- Position Statement and 2020 Action Plan” in place. Under this action plan, 5 Core principles have been established in order to guide Westpac’s approach and actions towards a sustainable environment. These core principles are:
- A transition to a net zero emissions is required.
- Economic growth and emissions reduction are complementary goals.
- Addressing climate change creates financial opportunities.
- Climate related risk is a financial risk.
- Transparency and disclosure matters.After ensuring these principles to be set and definitive, Westpac has an action plan aligned to ensure they do their part in saving the environment.
They plan to:
- Provide finance to back climate change solutions- (By increasing their target lending from $6 billion to $10 billion in 2020 and further up to $25 billion in 2030)
- Support businesses that manage their climate related risks- (By helping businesses assess their financial implications of climate related risks and their strategies)
- Help individuals to respond to climate change- (By improving energy efficiency, making homes climate resilient etc.)
- Improving and Disclosing their climate change performance
- Advocating for policies that stimulate investment in climate change solutions.
Performance. Measurement. System and Rewards
The Board and the Remuneration Committee is responsible for the remuneration of Key Management Personnel (KMP) that includes CEO, Non-executive directors and the group executives. (Directors’ Report, 2017) Westpac has a remuneration framework designed for the above that is strategically formed to retain and attract talent.
The framework ensures:
- Remuneration is aligned with customer and shareholder interests
- Different pay for an inline behaviour with company strategy and vision
- A fair and market competitive remuneration
- The ability to risk adjust remuneration
- Flexibility, simplicity and transparency
The remuneration framework for Westpac is comprised of 3 vital components that make every KMP’s yearly remuneration. These components are fixed remuneration, short term incentive and long-term incentive. The latter two components of the remuneration are the variable rewards for KMP’s and are solely dependent on their performance. Short term incentives are provided when the financial and non-financial performance of the executives is in line with the company’s short to medium term strategy while on the other hand the long term incentives ensure that the executives focus on performance and act in the interests of shareholders.Each of the above components are delivered in a different way that have been explained in the table below.
Short Term Incentive Long Term Incentive
Salary Sacrificed Items
Restricted Ordinary Shares or Share Rights-50%
Performance share rights (These are vested at varying degrees depending on hurdles achieved.)Just like varying delivery methods, the performance measures for both, STI as well as LTI are different.
For an accurate measure of STI Westpac uses both qualitative and quantitative measures that ensure focus among the key areas. These measures include economic profits, risks, earnings, sustainability, people etc.
Measurement for LTI is distributed into two equal parts comprising of:
Total Shareholder Return- Westpac measures TSR in comparison to their performance with their peers (ANZ, NAB, CommBank etc)
Return on Equity (ROE)- measures cash return on average equity.The above remuneration framework for Westpac seems to be in line with their vision and strategy as the CEO as well as all the group executives surpassed their desired targets. This is evident from their statutory net profit which went up to $7990 million and was up by 7% as compared to the preceding year.
Westpac as a large company has a decentralised organisational structure. Although this gives managers and department heads independence in this dynamic and competitive environment, but it can often lead to development of silo mentality as well. To make sure that it does not impact the company, there should be more meetings amongst the board of directors and various committees.
Also, Westpac being an important financial institution realises how important it is to conserve and protect the environment from global warming, but it does not reflect the same in its management remuneration framework. Westpac should include some measures that can help map out the efforts and steps taken by the KMP’s towards a better environment. Apart from cost savings this will align with Westpac’s sustainability statement as well.