For corporate Australia, the words “annus horribilis” might be the best way to describe the year that was. The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry uncovered multiple cases of lying to the corporate regulator, fraud, privacy breaches, theft, overcharging and governance failures.
In May the prudential regulator slammed Commonwealth Bank’s board, senior management and culture in a scathing 110-page report that lambasted the bank for widespread complacency, overconfidence, excessive complexity and insularity. Energy retailers came under constant attack from the federal government over high energy prices, and the #MeToo campaign extended its reach to Australian business.
“Corporate Australia is reeling from the public scrutiny and from the loss of trust,” says Walter Jarvis, course director for UTS’ master of management degree and associate fellow of the Australian Institute of Management.
Not that the trust deficit is limited to Australian companies. “This is a global problem,” says Jennifer Westacott, chief executive of the Business Council of Australia. “It is always tempting to bash business [but] business is still more trusted than government. Business is not on its own in terms of trust,” she says, pointing to the horrendous findings of the royal commission into child abuse and the decline in union membership. Westacott adds that Australian companies are innovative, competitive and “very well run”.
Can the trust problem be fixed?
Still, the lack of trust in certain corners of the business community is a big problem, and public anger is palpable. But do companies, and banks in particular, understand the extent of the problem and do they have the wherewithal to fix it?
The answers depend on who you talk to.
“You cannot go through an excoriating experience like a royal commission and not come out the other side of it a lot wiser, about the organisation as a whole and the way different parts of it might have fallen into problems,” says Anna Bligh, chief executive of the Australian Banking Association.
“As unpleasant as the experience has been, it actually gives CEOs and leaders an unprecedented glimpse into every nook and cranny of their organisation. And you can’t help but get enlightened by that.”
Westacott agrees that companies understand the need to “double down” on oversight of their products and services and the need for a “laser-like” focus on customers and staff as well as shareholders.
The confidence expressed by Bligh and Westacott that companies at least understand the problem appears to be backed by a November survey of directors by law firm King & Wood Mallesons. Protecting brand and reputation was the number-one issue, with 86 per cent of respondents saying it was a “material concern”, up from 82.8 per cent in March. Half of the respondents said their organisations had undertaken a review of compliance and non-financial risks following the release of the Australian Prudential Regulation Authority’s report on CBA.
Others are less confident that companies, and the major banks in particular, have a clear understanding of all the issues. The concerns range from inappropriate remuneration models to boardroom behaviour, purpose, lack of individual courage and the tendency to pander to shareholders.
“[Companies] think they serve shareholders and executives. That’s a simplistic model,” says UTS’ Jarvis, who argues they need to move to serving society as a whole. “The usual response is to put in a code of ethics. But if you are expecting change from a code of ethics, you are kidding yourselves unless you question the foundation of business.”
In other words, the neoliberal view of shareholder primacy hasn’t been challenged.
Elizabeth Sheedy, professor of finance at Macquarie University’s applied finance centre, points to the link between variable pay and poor culture. In November she published research showing that incentive-based pay, common across the business landscape, led to a drop in compliance rates, with no significant rise in productivity. Further, she suggests that variable pay is often inconsistent with professional work methods.
Sheedy also questions balanced scorecards, which use a mix of financial and non-financial measures to determine total pay and were a key recommendation of last year’s Sedgwick review into retail banking remuneration. She notes they were implemented with “zero research support” and are subject to a range of biases.
Bligh, notably, supports some form of incentive-based pay. “[The banks] are not going to eliminate financial metrics all together,” she says. “These are big commercial organisations and I think Australians want their banks to be commercially strong and profitable. But they also want to know that, as customers, they will get a fair deal and be treated well.”
Boardroom culture remains a problem, says Rosemary Sainty, who is also from UTS Business School.
In August, Sainty gave a speech at The Ethics Centre’s roundtable of directors and regulators, many of whom raised serious obstacles to oversight of staff and understanding their customers. Directors pointed to instances where there was a controlling chairman who had a close relationship with the CEO and did not invite board members to raise concerns. Complacency and a “culture of comfort” were prevalent. Said one roundtable participant, who asked not to be named: “Most boards [I have been on] have some inherent element of status quo, and you need courage to challenge.”
Paul Kofman, dean of the faculty of business and economics at the University of Melbourne, is also in the sceptics’ league, at least partly.
He argues the banks are aware of the need to change their culture, but they don’t know what to do. This is mainly because culture is a nebulous concept. There are no tools to measure it. “It’s a catch-all phrase,” he says. “There is no research globally.”
The best hope that the banks might be able to overhaul themselves from the ground up might come from competition. Kofman notes that as fintechs cherry pick the most profitable parts of the banks’ activities and find cheaper delivery models, the banks will be forced to change their behaviour.
Bligh agrees, pointing to the moves already made by the banks to simplify their businesses by offloading divisions such as life insurance, financial advice and funds management. “Technology, competition, political scrutiny [and] the threat of further regulation if real and permanent change doesn’t happen [will drive change], and consumer empowerment.”
Sheedy also sees a glimmer of hope. “I like to think that people are starting to look away from variable remuneration or at least remove profit- and sales-based targets.”
The prospect of much harsher penalties for senior executives under the Banking Executive Accountability Regime will also drive an improvement in behaviour, she predicts.