By the time the Royal Commission into banks has completed its rounds, it may well be that banks are not the primary “victims”. Sure, they will be confirmed as bastards, as if that was ever in any serious doubt. But the big political and economic effect may well be on business, particularly big business generally, made to seem as if it is guilty of the same contempt for the public and the public interest, the same capacity to treat the interests of senior management as if it were the interest of the shareholders, and the same ruthlessness in making a dollar.
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It will not be entirely the fault of big business, and it may even be unfair, given that the commission will not be allowing representation for the collateral casualties of the severe, and probably lasting, reputational damage brought on ordinary old, and by modern standards, not necessarily particularly rapacious, business practices. But it will prove a signal lesson for those who have argued that business has no particular duties of public citizenship, and that the highest duty of the managers of capital is to maximise the return to shareholders. Perhaps that’s true, in fact as well as principle, so long as one understands that one is in business for the long as much as the short term, and continuing success in business depends on the trust and support of customers, suppliers and staff, a reputation for respect for the spirit as much as the letter of the law, involvement in the community and the confidence and respect of regulatory institutions. Those who treat any of this with contempt, particularly by way of having the company or a high executive misappropriating a dollar that rightfully belongs to someone else, will see that the long term value and profitability of a corporation can collapse.
Australian banks remain solid and well run, and, even without the government guarantees and support that reinforce the idea that they owe more to society than being profitable for the shareholders, there is no risk of collapse or ruin. But the reputations of their managements has taken an awful beating, and it will take more than slogans, or payouts, or perhaps a few signal sackings, or criminal prosecutions, for trust to be restored.
It may well be the same trust and confidence in the major regulatory authorities, and not only in the Securities and Investment Commission, whose reputation has taken the biggest battering so far. Only a few months ago, the prime minister and the treasurer were claiming that among the reasons why a royal commission was unnecessary was that there was a tough cop on the block, one whose powers and resources has recently been strengthened (even if that was only after a significant reduction in its capacity to enforce its will in the early days of the Abbott government.
Beyond ASIC are bodies such as the Australian Prudential Regulatory Authority and the Australian Competition and Consumer Commission, but also other bodies such as the Australian Federal Police and the office of the Director of Public Prosecutions – agencies also involved in the development of the idea of “light touch” regulation, eschewing the use of criminal powers for civil penalties, undertakings, and voluntary, but essentially painless, disclosures of any slip in service.
ASIC’s lack of will for action, even, until its humiliations, under present management has been strongly criticised, even by government. It can now be expected to be far more suspicious, and far more inclined to reach for the heavy artillery. But it is worth remembering that at least a part of its pusillanimous approach was a result of early failures in criminal prosecutions (primarily because of weaknesses in enforcement provisions of the law) and an historical want of appetite for prosecution by the DPP’s office unless the case is signed, sealed and delivered, with a virtual guarantee of success. A few spectacular defeats in early criminal proceedings originally entered confidently saw a sharp decline in enthusiasm for higher standards of proof, criminal penalties, and perhaps the odd jailing of directors or general managers.
Behind the softly-softly approach have been fervent ideological beliefs in the idea of a maximum of self-regulation rather than strict controls, optimism about the essential decency of companies and their managers, as well as in their intention to do the right thing. And a belief that too much, or too searching regulation, serves only to restrain initiative and efficiency, while only rarely serving the purpose it was intended to achieve. An undiminished faith in the invisible hand and in the virtues of highly protected competition.
These beliefs have been reinforced by a deeply promiscuous environment in which poachers – members of major boards for example – become gamekeepers – appointed to major authorities on the basis of their business expertise – and, as often as not, the experts asked by government to review the operations of the law. This merry-go-round has often been all too cosy, not least when almost all of the players have shared the same broad ideological beliefs about the primacy of the marketplace, and have had all too little experience with the consumer or public interest side of the regulation.
Some of the environment and culture of the regulation industry might be said to be similar to that described in a report on the board and management of the Commonwealth Bank issued this week:
- Widespread complacency - a willingness to accept less than optimal outcomes, and to attribute them to factors over which they have no control.
- An insular environment which did not reflect on experience and mistakes.
- Inadequate oversight and challenge by the board, unclear accountabilities, weakness in dealing with issues, incidents and risks, especially non-financial risks, such as with compliance to the law, to bank reputation, or damage to the interests of the customer.
- Overly complex and bureaucratic internal processes.
- A remuneration framework and bonus system that had little sting for senior management after bank or customer losses.And incentives to staff for doing things that were not in the interests of customers.
- Reacting to crises, rather than anticipating them. And a tendency, when considering what to do about problems, to factor in issues such as risk, reputation and the rights and interests of the customer or consumer.
- A tendency to regard risk controls as impediments and brakes – baggage rather than fundamental parts of business.
- Being aware of risks, but not doing enough to address them, and failing to “walk the talk” of proclaimed values.
- A focus on action, and a failure to provide time for reflection, introspection and learning from mistakes, with the result that mistakes are repeated in other business units, and staff often miss the bigger picture or the full breadth or depth of issues.
- A collegial high-trust environment, leading to some over-confidence and over-collaboration. Pursuit of consensus lessened the scope (or the courage) for constructive criticism. And, it is clear, both a yes-man culture, in which some were reluctant to express doubts, and one which individual responsibilities and accountabilities were not clearly allocated.
- A focus on empowering group managers led to weakened collective responsibility and a failure of executives to speak out about matters out of their direct responsibility.
- A tendency to excuse bad performance if intentions were good.
- Thinking oneself customer-oriented, while failing to invest in long term solutions for customer problems, and failing to properly consider the complaints or criticisms of dissatisfied customers.
This could, of course, describe any number of Commonwealth departments, including central agencies, as much as it describes the regulators, or the CBA.
The CBA report, commissioned by APRA after the Commonwealth Bank got into trouble over its failures to adhere to the law about potentially suspicious overseas currency transactions, does not directly address some of the scandals before the commission, even if they make clear not only how these could occur, but how they could have festered under a reactive and complacent culture. Down the track, the commission will probably look also at how many of the problem areas – such as with insurance, wealth management, and financial planning were not “core” activity, even if they became in time, key areas of new profit making. APRA and Reserve Bank controls – some under new powers granted in recent years – have been strongly focused on matters of capital, reserves and capacity to cope with fresh events (even, possibly, a new global financial crisis, which Australia weathered quite well in 2007-08.) But some of these modes of regulation are not well adapted for money-making activities outside direct banking, least of all in the poorly regulated and controlled buccaneering field of financial advice.
It should hardly surprise that exposure of some shabby, unethical and dishonest practices will affect the business community generally, as much as it affects bank managers and boards. There are first of all the overlaps, not least with the activities of financial planners outside the direct banking sector. But there has also been a steady succession of scandals in different parts of business which would seem to many to dovetail neatly with the latest problems seen at banks. Deliberate large-scale underpayment of employees – particularly international students – at franchises such as 7-11s and service stations, perennial complaints about tax evasion and avoidance, particularly by multi-nationals, and regular complaints about the insecurity and casualization of the workforce have undermined some of the old self-confident verities about the integrity of business. So too has been the pace at which some smarties – often very well connected in politics – have rushed in to plunder schemes where government money has been available – such as for vocational education, child care, aged care or pink bats.
All the worse, perhaps, when some of the business lobbies have seemed more focused on demanding further incentives, such as business tax cuts, from government, or parliament, rather than being seen to be addressing some of the reputational issues. As governments (and it may well be a Shorten government) come under pressure to show they have learnt from these fiascos, they may find that the public is fed up with trust, self-regulation, and having Caesar investigating Caesar. It is not hard to imagine a fresh era of regulation, if perhaps with a stronger focus on outcomes rather than processes.
The cynic will have noted two strange events last week. On Monday, the lead story in The Australian announced that superannuation companies owned by the banks were “gouging” consumers, and “boosting their revenues by paying consumers interested in the lowest-risk cash options interest returns that were as little as one quarter of actual market rates.
“Industry experts have suggested systematic gouging by the big four banks could explain the chronic underperformance of their super funds”, it said. Implicitly it said that industry funds are, on average, better bets than the retail funds.
This is not actually news, but it is not something usually volunteered either by the government, the retail funds industry, or The Australian, which has long campaigned against union (as well as employer) influence in the management of industry funds. Indeed, when government reluctantly acceded to demands for a royal commission, it added in terms of reference designed to renew its war on industry funds, focused on the idea of union conflict of interest and hints of diversion of funds to union causes. In the light of the battering the banks are getting for their stewardship and advice with superannuation monies, it is doubtful that this will go far.
But there are also political signals galore in that The Australian has decided to enter into full-bore populist attacks on the banks. Politicians with banking backgrounds or connections, hoping that everyone will soon settle and get “serious”,” sensible” and “practical,” are beginning to appreciate that there may have to be a few hangings first. They’ve been having enough problems with National Party members, now including Barnaby Joyce, but if the Australian is in the lynch party, the Financial Review will not be far behind.
It’s yet another signal the crisis of confidence in bank management has gone beyond being a public relations problem, a case of a few rotten apples, or a nine-day nightmare, soon to be forgotten. It’s systemic, and, by the time the medicine has worked its way through the system, it will not only be banks that are changed, but many other Australian institutions, including government.
