Not one rotten apple, it's the whole barrel: Crunchtime for banks
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Not one rotten apple, it's the whole barrel: Crunchtime for banks

Where to now for the big four banks, AMP and some other big businesses? They’ve abused the trust of their customers and the public, and it will be a long time before any side of politics wants to be seen as going easy on them.

Of course, the banking royal commission isn’t over. We’ve yet to see what punishments it recommends be imposed and what tightening of regulation, and then what the next government decides to do in response.

Illustration: Glen Le Lievre

Illustration: Glen Le LievreCredit:

But if the nation’s chief executives have any gumption, they won’t wait for all that before turning their minds to why their customers’ trust was lost, and how they can go about getting it back.

This week the  Academy of the Social Sciences in Australia held a symposium in Canberra on regenerating integrity and trust in Australian institutions. Professor Leon Mann, a psychologist from the University of Melbourne, and Associate Professor Nicole Gillespie, a management expert from the business school at the University of Queensland, spoke about trust from a business perspective.

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Gillespie drew on a major study she conducted with three other academics, Designing Trustworthy Organisations, published by the MIT Sloan Management Review.

Although companies that suffer a loss of trust often blame “rogue employees” or “a few bad apples,” Gillespie and her colleagues’ research shows that major violations of trust are almost never the result of rogue actors.

Rather, they are predictable in organisations that allow dysfunctional, conflicting or incongruent elements of their system to take root. It’s the barrel that’s rotten.

Often the incongruence that led to the loss of trust was the development of a company strategy that favoured the interests of one stakeholder group while betraying those of others.

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“This problem has often been defined as letting shareholder profits take precedence over core responsibilities to other stakeholders (such as employees, customers, suppliers or communities),” the study says.

And it’s not just favouring one stakeholder over the others, it’s doing so at the expense of the others, and even causing harm to them.

Bang on. How did those guys know about our banks?

They note that a US Senate committee investigating the global financial crisis was very critical of Goldman Sachs, whose stated values of client focus and integrity were at times overshadowed by a less formal culture that emphasised getting deals done with less than full disclosure (to the mugs on the other end of the deal).

Good point. Trustworthiness has to be embedded into every aspect of the business’s strategy, structure, processes and systems. But there are formal ideals and rules, and then there’s always an informal culture. The two must be “congruent” – they must fit together.

Banks blame one bad apple but often the whole culture is rotten.

Banks blame one bad apple but often the whole culture is rotten.

When the rules say one thing, but the pressure from your supervisor says something different, most employees soon realise what the boss, and the boss’s bosses, really want.

“Our research suggests that the key differentiator between companies that violate trust and those that sustain it is integrity and consistency within and across the organisation,” the study says.

So how can a company that’s lost its customers’ trust get it back? The good news is that when years of untrustworthy behaviour reach crisis point, this can create the impetus to really turn things around.

You need to start with a credible, rigorous and independent investigation of the weaknesses in the system that caused the problem.

“Companies are often so concerned with appearance and damage control that they are unwilling to engage in the degree of examination required to root out the entrenched causes of trust violations,” the study says.

For instance, BP allowed its Texas refinery explosion in 2005 to be followed by the oil spill in the Gulf of Mexico in 2010. News Corp had an employee jailed for phone hacking in 2007, but endured another phone-hacking scandal in 2011.

Rupert Murdoch's wife Wendi Deng (C) looks on as BSkyB Chairman James Murdoch and News Corp Chief Executive and Chairman Rupert Murdoch (R) appear before a parliamentary committee on the phone hacking scandal.

Rupert Murdoch's wife Wendi Deng (C) looks on as BSkyB Chairman James Murdoch and News Corp Chief Executive and Chairman Rupert Murdoch (R) appear before a parliamentary committee on the phone hacking scandal. Credit:Fairfax Media

Next, since trust failures are typically systemic, the organisational reforms need to be systemic as well. Structures, systems and processes should be the first point of intervention because they’re relatively easy to design and change.

However, such interventions by themselves are unlikely to produce sustainable change. “The more difficult challenges involve making changes to the organisation’s culture, strategy and leadership and management practice.

“Indeed, adding training in ethical conduct probably won’t effect organisational behaviour in any meaningful way if supervisors, workplace norms and performance management objectives continue to encourage questionable activities,” the study says.

Finally, evaluation. Even when a trust crisis recedes, old habits have a way of returning. Reforms must be evaluated to ensure they are working as intended, and any shortfalls are addressed.

The price bank shareholders are paying for the mistreatment of bank customers is now apparent.

“Because it takes time to change systems and deep change is hard to realise, in some respects the most important part of trust repair is the ongoing assessment, learning and course correction required to build authentic, sustained trustworthiness.”

Wow. How easily Australia’s story fits into the academics’ generalised framework.

I think the main reason our banks ran off the rails is that they got locked into an utterly inward-looking game in which each of the four players competed to see who could raise their profits the most.

To this end, they gave their senior people incentive schemes and their junior people key performance indicators aimed solely at increasing profits. The targets set were so demanding they implicitly encouraged staff to ignore the company’s stated values and bend rules that stood in the way of achieving the target and pleasing the boss.

Bosses can’t have failed to notice the questionable practices this gave rise to, but they looked the other way for fear of falling back in the profits comp.

They attempted to justify this by claiming company law required them to put shareholders’ interests first. They failed to mention that, by exploiting and using up the trust of their customers, they were putting shareholders’ short-term interests ahead of their long-term interests – a short-sightedness company law never required of them.

The price bank shareholders are paying for the mistreatment of bank customers is now apparent.

Ross Gittins is the Herald’s economic editor.

Ross Gittins is economics editor of the SMH and an economic columnist for The Age. His books include Gittins' Guide to Economics, The Happy Economist and Gittins: A life among budgets, bulldust and bastardry.

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