37

The role and responsibilities of the Board of

Directors are set out in the Board Charter. The

responsibilities include:

establishment of Committees;

and financial objectives;

management; and

community, results of, and developments in, the

operations of the Bank;

overseeing the development strategies for senior

and high performing executives.

There is in place a comprehensive set of

management delegations to allow management to carry

on the business of the Bank.

There are currently 12 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:

J T Ralph, AC Non-executive,

Independent

Chairman Chairman Chairman Chairman

J M Schubert Non-executive,

Independent

Deputy Chairman Member Chairman

D V Murray Executive Chief Executive Officer Member

N R Adler, AO Non-executive,

Independent

Member

R J Clairs, AO Non-executive,

Independent

Member

A B Daniels, OAM Non-executive,

Independent

Member

C R Galbraith, AM Non-executive,

Independent

Member

S C Kay Non-executive,

Independent

Member

W G Kent, AO Non-executive,

Independent

Member

F D Ryan Non-executive,

Independent

Member

F J Swan Non-executive,

Independent

Member Member

B K Ward Non-executive,

Independent

Member

Ms S C Kay was appointed as a non-executive

Director on 5 March 2003. In accordance with the Bank’s

Constitution and the ASX Listing Rules, she will stand for

election at the Annual General Meeting to be held on 31

October 2003.

The Constitution of the Bank specifies that –

director shall not be eligible to stand for election as

Chairman of the Bank;

more than 13 (or such lower number as the Board

may from time to time determine). The Board have

determined that for the time being, the number of

directors shall be 12; and

Directors (other than the chief executive officer) shall

retire from office and may stand for re-election.

The Board have established a policy that, with a

phasing in provision for existing Directors, 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). Directors do not

stand for re-election after attaining the age of 70

38

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 Bank,

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 Bank's policies.

Each Director may from time to time have personal

dealings with the Bank. Each Director is involved with

other companies or professional firms which may from

time to time have dealings with the Bank. Details of

offices held by Directors with other organisations are set

out in the Directors' Report and on the Bank's website.

Full details of related party dealings are set out in notes to

the Company's accounts 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 have taken into

account (in addition to the matters set out above):

referred to above;

referrable to each Director, noting that those

dealings are not material under accounting

standards;

with, a substantial shareholder of the Bank;

employed by the Bank or any of its subsidiaries;

supplier, professional adviser, consultant to or

customer of the Bank which is material under

accounting standards; and

any role for the Bank otherwise than as a Director of

the Bank.

The Bank 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 Bank. Independence is judged

against the ability, integrity and willingness of the Director

to act. The Board have established a policy limiting

Directors' tenures to ensure that skill sets remain

appropriate in a dynamic industry.

Directors participate in an induction programme

upon appointment and in a refresher programme on a

regular basis. The Board have established a programme

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 Bank’s

operations.

The Board have 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 2 years,

this process is facilitated by an external consultant, with

an internal review conducted in the intervening years. The

review includes an assessment of the performance of

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.

The Chairman meets annually with the senior

executive team to discuss with them the Board’s

performance and level of involvement from their

perspective.

The Nominations Committee have developed a set

of criteria for director appointments which have been

adopted by the Board. The criteria set the objective of the

Board as being as effective, and preferably more effective

than the best boards in the comparable peer group. These

criteria, which are reviewed annually, ensure that any new

appointee is able to contribute to the ongoing

effectiveness of the Board, have the ability to exercise

sound business judgment, to think strategically and have

demonstrated leadership experience, high levels of

professional skill and appropriate personal qualities.

The Committee regularly reviews the skill base and

experience of existing Directors to enable identification of

attributes required in new Directors.

An executive search firm is engaged to identify

potential candidates based on the identified criteria.

Candidates for appointment as Directors are

considered by the Nominations Committee, recommended

for decision by the Board and, if appointed, stand for

election, in accordance with the Constitution, at the next

general meeting of shareholders.

On appointment, a letter is provided from the

Chairman to the new Director setting out the terms of

appointment.

Board policies relevant to the composition and

functions of Directors include:

non-executive Directors and the membership of the

Nominations, 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.

Director who should also chair the Nominations,

Remuneration and Risk Committees. The Audit

Committee will be chaired by an independent nonexecutive

Director other than the Board Chairman.

agenda designed to provide adequate information

about the affairs of the Bank, allow the Board to

guide and monitor management and assist

involvement in discussions and decisions on

strategy. Matters having strategic implications are

given priority on the agenda for regular Board

40

reinforce the Group’s leadership and succession

planning systems; and

employment will be specified in an individual

contract of employment and signed by the executive

and the Bank. The relationship of remuneration,

potential short term incentive and long term

incentive payments is established for each level of

executive management by the Remuneration

Committee. For managers within the Bank potential

incentive payments as a proportion of total potential

remuneration increases with level in the

organisation. The structure for some specialists

differs from that which applies generally to executive

management.

Incentive payments for executives, including the

Chief Executive Officer, are related to performance. Short

term incentives actually paid depend on the extent to

which operating targets set at the beginning of the

financial year are achieved. Half of the short term

incentive earned is paid in cash and the balance in two

instalments at yearly intervals in shares. These

instalments are only paid if the Executive is still in the

employ of the Bank on the relevant dates.

Vesting of options and shares allocated under the

long term incentive plan is directly related to shareholder

value, measured by Total Shareholder Return over a

minimum 3 year period, which requires the return to be

equal to or higher than the average return of peer

institutions for vesting to occur.

As approved by the shareholders at the 2000 Annual

General Meeting, vesting of options and restricted shares

allocated to executives is dependent on the Bank meeting

the performance hurdles in the plan.

The Bank has restructured its long-term executive

incentive plan, effective from the beginning of the 2003

financial year. Previously half the value of long term

incentive benefits under the shareholder approved Bank’s

Equity Reward Plan were paid in options, valued on the

Black-Scholes method, and the other half in Performance

shares valued at market price at the date of allocation.

These options and shares only vest to the executive

provided the prescribed performance hurdles are met.

From the beginning of the 2003 financial year options

have been eliminated from the remuneration package of

executives and the total value of the long term incentives

allocated under the Equity Reward Plan from that date is

in the form of Reward shares.

A further change introduced is that whereas

previously allocated options and shares vested upon the

average Total Shareholder Return of peer institutions

being exceeded, a sliding scale has been introduced so

that 50% of allocated shares vest if the Bank’s TSR is

equal to the average return, 75% vest at the 67th

percentile in the index and 100% when the return exceeds

the 75th percentile, ie. when the Bank’s return is in the top

quartile.

Options and shares previously allocated under the

Equity Reward Plan will continue until they vest upon the

prescribed performance hurdles being met or they lapse.

Currently, restricted shares purchased on market to

satisfy incentives earned by executives are charged

against profit and loss as are incentives paid in cash and

in deferred shares. As from the beginning of the 2003

financial year, total remuneration, which includes the full

cost of the plan and also the distribution of shares to

employees under the ESAP, have been expensed against

profits.

Details of the remuneration paid to the Chief

Executive Officer and the five highest paid other members

of the senior executive team who were officers of the Bank

at 30 June 2003 are set out in Note 46.

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:

independent non-executive Directors, all of whom

have familiarity with financial management and at

least one has expertise in financial accounting and

reporting. The Chairman of the Bank is not

permitted to be the Chairman of the Audit

Committee.

external auditors and the chief internal audit

executive and also separately with the external

Auditors independently of management.

the external auditor to the Board for appointment by

shareholders. The Audit Committee approves the

terms of the contract with the external auditor,

agrees the annual audit plan and approves

payments to the Auditor.

assurances from the external auditors on the quality

of the Bank’s systems, its accounting processes and

its financial results. It also receives a report from the

Auditors on any significant matters raised by the

Auditors with management.

judgement by management are specifically reviewed

by the Audit Committee and reported on by the

Committee to the Board.

Committee and the Board that the Auditors meet the

independence requirements as recommended by

the Blue Ribbon Committee of the SEC of the USA.

In carrying out these functions, the Committee:

Group;

with current laws, relevant regulations and

accounting standards;

matters, records, accounts and reports which it

considers appropriate; and

judgment by management and reports those matters

to the Board.

In addition, the Committee ratifies the Group’s

operational risk policies for approval by the Board and

reviews and informs the Board of the measurement and

management of operational risk. Operational risk is a

basic line management responsibility within the Group

consistent with the policies established by the Committee.

A range of insurance policies maintained by the Group

mitigates some operational risks.

The Committee regularly considers, in the absence

of management and the external auditor, the quality of the

information received by the Committee and, in considering

the financial statements, discusses with management and

the external auditor:

The financial statements and their conformity with

The quality of the accounting policies applied and

The Board have in place policies and procedures

governing the nature of non-audit services which can and

cannot be undertaken by the Bank’s Auditors for the Bank

or its subsidiaries. These policies and procedures

incorporate approval by the Audit Committee of all nonaudit

services. The objective of this policy is to avoid

prejudicing the independence of the Auditors and to

prevent their developing undue reliance on revenue from

the Bank.

The policy ensures that the Auditor does not:

Assume the role of management;

Become an advocate for their client; or

Audit their own professional expertise.

Bookkeeping or services relating to accounting

Appraisal or valuation and fairness opinions;

Advice on deal structuring and related

Tax planning and strategic advice;

Actuarial advisory services;

Executive recruitment or extensive human resource

Acting as a broker-dealer, promoter or underwriter;

Provision of legal services.

Pre-approved - the Audit Committee have preapproved

Specific approval - all other services, including preapproved

Ernst & Young was appointed as the Auditor of the

Bank at the 1996 Annual General Meeting and continues

in that office.

The Chief Executive Officer is authorised to appoint

and remove the chief internal audit executive in

consultation with the Audit Committee.

The Risk Committee oversees credit and market

risks assumed by the Bank in the course of carrying on its

business.

The Committee considers the Group’s credit policies

and ensures that management maintains a set of credit

underwriting standards designed to achieve portfolio

outcomes consistent with the Group’s risk/return

expectations. In addition, the Committee reviews the

Group’s credit portfolios and recommendations by

management for provisioning for bad and doubtful debts.

The Committee approves risk management policies

and procedures for market, funding and liquidity risks

incurred or likely to be incurred in the Group’s business.

The Committee reviews progress in implementing

management procedures and identifying new areas of

exposure relating to market, funding and liquidity risk.

The Bank 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 Integrated Risk Management and

in Notes 14 and 39 to the Financial Statements.

The Nominations Committee of the Board critically

reviews, at least annually, the corporate governance

procedures of the Bank and the composition and

effectiveness of the Commonwealth Bank 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 and that the

Chairman of the Bank shall be Chairman of the

Committee. 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.

The Corporations Act 2001 and the ASX Listing

Rules require that a company disclose to the market

matters which could be expected to have a material effect

on the price or value of the company’s securities.

Management processes 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 Bank’s Executive Committee. Matters

reported are assessed and, where required by the Listing

Rules, advised 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 have confirmed its release to the

market.

The Bank demands the highest standards of honesty

and loyalty from all its people and strong governance

within the Bank.

Our values statement – “trust, honesty and integrity”

- reflects this standard.

The Bank have adopted a code of ethics, known as

a Statement of Professional Practice, which sets

standards of behaviour required of all employees

including:

To act properly and efficiently in pursuing the

To avoid situations which may give rise to a conflict