Reserve Bank of Australia Annual Report – 2005 The Reserve Bank Board and Governance

The Role of the Reserve Bank Board

The Reserve Bank Act 1959, the enabling legislation, gives the Reserve Bank Board responsibility for monetary and banking policy, and the Reserve Bank's policy on all other matters, except for its payments system policy. The relationship of the Board and the government of the day is set out in Section 11 of the Act. Routinely, the ‘Government is to be informed, from time to time, of the Bank's monetary and banking policy’. In practice this is done in the regular monthly meetings of the Governor, Deputy Governor and senior officers with the Treasurer shortly after each Board meeting.

The Act itself has not been changed with respect to the mandate for monetary policy, but procedures and practices have evolved over time, in order to keep the Reserve Bank's policy-making process relevant to the changing environment and in parallel with developments abroad. In 1996, the responsible Minister, the Treasurer, and the Governor jointly signed the Statement on the Conduct of Monetary Policy, which confirmed the Reserve Bank's independence in making monetary policy and endorsed the Bank's inflation target. The Governor's twice-yearly appearances before the House of Representatives Standing Committee on Economics, Finance and Public Administration, and the quarterly Statement on Monetary Policy, have reinforced this process. An updated, though essentially unchanged, second Statement on the Conduct of Monetary Policy was released at the time of the announcement by the Treasurer in July 2003 of the appointment of the Governor for a term of a further three years.

When APRA was established in 1998, it took on the prudential supervision of banks but the Reserve Bank retained responsibility for overall financial system stability. Twice a year, in March and September, the Reserve Bank publishes a separate Financial Stability Review, which contains its assessment of the state of the financial system.

The Reserve Bank Act 1959 was amended in 1998 to establish the Payments System Board, which is responsible for payments system policy and reports separately in its own annual report.

Composition of the Reserve Bank Board

The Board comprises the Governor, who is Chairman, the Deputy Governor, Secretary to the Treasury and six external members, appointed by the Treasurer – a total of nine. Details of the current members are set out on pages 94 and 95. Five members form a quorum for a meeting of the Board.

During the year, the Australian Government released its response to the report of the review of corporate governance arrangements of statutory authorities conducted by John Uhrig AC. Among the matters considered was the appropriate governance template for statutory authorities. The review concluded that the current structure of the Board and the nature of its responsibilities meet the expectations of the international financial community with respect to effective governance arrangements for central banks.

Meetings of the Reserve Bank Board

The Reserve Bank Act 1959 does not stipulate the frequency of Board meetings. For many years the Board's practice has been to meet 11 times each year, on the first Tuesday of each month, except January. Most meetings are held at the Head Office in Sydney. By custom, one meeting each year is held in Melbourne and from time to time the Board also meets in other State capitals.

Number of meetings attended by each member in 2004/05^(a)

IJ Macfarlane	11	(11)
GR Stevens	11	(11)
KR Henry	11	(11)
JR Broadbent	10	(11)
RG Gerard	7	(11)
FP Lowy	8	(11)
DG McGauchie	11	(11)
WJ McKibbin	11	(11)
HM Morgan	11	(11)
(a) Figures in brackets show the number of meetings each member was eligible to attend.

Conduct of Reserve Bank Board Members

On appointment to the Board, each member is required under the Reserve Bank Act 1959 to sign a declaration to maintain secrecy in relation to the affairs of the Board and the Reserve Bank. Further, members must by law meet the general obligations of directors of statutory authorities, as set out in the Commonwealth Authorities and Companies Act 1997 (CAC Act). The CAC Act sets standards of conduct for directors and officers of Commonwealth authorities, with many of these requirements being modelled on comparable areas of the Corporations Law. As such, directors must:

• discharge their duties with care and diligence;
• act in good faith, and in the best interests of the Reserve Bank;
• not use their position to benefit themselves or any other person, or to cause detriment to the Reserve Bank or any person;
• not use any information obtained by virtue of their position to benefit themselves or any other person, or to cause detriment to the Reserve Bank or any person; and
• declare any material personal interest where a conflict arises with the interests of the Reserve Bank.

Over and above these legislated requirements, members recognise their responsibility for maintaining a reputation for integrity and propriety on the part of the Board and the Reserve Bank in all respects. Hence, they have adopted a Code of Conduct, which provides a number of general principles as a guide for the conduct of individual members in fulfilling their duties and responsibilities as members of the Board; a copy of the Code is on the Reserve Bank's website.

Audit Committee

The primary objectives of the Audit Committee are to:

• ensure a high-quality, independent and effective audit process;
• assist the Governor and the Board in fulfilling their obligations relating to financial reporting, compliance with laws and regulations, internal control, employee conflicts of interest, business ethics and prevention of fraud; and
• enhance contact between management and Audit Department.

The Committee also acts, at the request of the NPA Board, as NPA's Audit Committee.

The Audit Committee is made up of the Deputy Governor, who is Chairman, a non – executive member of the Reserve Bank Board, Jillian Broadbent, and an external appointed member, George Bennett, company director and former National Executive Chairman of KPMG Peat Marwick. During 2004/05, the Committee met on four occasions; all members attended each of these meetings. At its July 2005 meeting, the Committee considered the draft financial statements for the year ended 30 June 2005 and agreed that the statements be presented to the Board with its endorsement.

The two external members of the Audit Committee also meet with the external auditor in the absence of management from time to time.

Minutes of Audit Committee meetings are circulated to the Reserve Bank Board for information and discussion, as appropriate, and a report on the Committee's activities for the year is prepared for the Board at the time of the presentation of the annual accounts.

Reporting Obligations under the CAC Act

The Reserve Bank is a Commonwealth authority for the purposes of the CAC Act and, for these purposes, the members of the Board are the directors of the Reserve Bank. As such, they are responsible for the preparation of the Annual Report and, at the meeting of the Board on 2 August 2005, they resolved that the Chairman sign the Report and the Financial Statements as at 30 June 2005, transmit them in accordance with the requirements of the CAC Act and arrange publication.

The House of Representatives Standing Committee on Economics, Finance and Public Administration has, in its Standing Orders, an obligation to review the Annual Report of the Reserve Bank and the Annual Report of the Payments System Board.

Remuneration

Fees of the non-executive members of the Reserve Bank Board are determined by the Remuneration Tribunal.

A committee of the non-executive Board members, currently chaired by Donald McGauchie, reviews annually the remuneration of the Governor and Deputy Governor in terms of Section 24A of the Reserve Bank Act 1959.

Indemnities

Under the provisions of Section 27 of the CAC Act and pursuant to a Board resolution on 3 November 1998, members of the Reserve Bank Board have been indemnified against liabilities incurred arising out of the proper discharge of their responsibilities, provided that any such liability does not arise from conduct involving a lack of good faith. This indemnity does not extend to claims by the Reserve Bank itself or any subsidiary of the Bank. A similar indemnity was extended to the members of the Payments System Board, pursuant to a resolution by the Reserve Bank Board on 3 November 1998.

Reserve Bank Board