Last week must have been a terrifying wake-up call for Australia’s ruling class – not just our politicians, but also the chief executives and directors of our big corporations, both publicly and privately owned.
If they’re half as smart as they’re supposed to be – after all, we’re told they got their jobs on merit – their performance of their duties will be much improved “going forward”.
The problems at the ABC – managing director sacked and chairman resigned in the same week – and the problem behaviour of our banks are very different, but they have one thing in common.
Members of the ABC board were made aware, if they hadn’t already known, of the chairman’s alleged interference in the day-to-day running of the corporation in a way that endangered its independence from the elected government, but chose to do nothing. Until that knowledge became public and the public’s horrified reaction obliged them to act.
The directors of our big banks presided for many years over a system of remuneration incentives – from the chief executive down – that rewarded staff for putting profit before people.
If the directors didn’t know this was leading to bank customers being mistreated, regulators misled and laws broken, it can only be because they didn’t want to know.
Well now, thanks to the royal commission’s shocking revelations, all of us know the extent of the banks’ misconduct. And the directors have nowhere to hide.
See the link between the two cases? When you’re on a board, it’s easy to see how things look from the viewpoint of the insiders – the people in the room, and on the floors below. What’s harder to see, and give adequate weight to, is the viewpoint of outsiders.
But that’s the board members’ duty, statutory and moral: to represent the interests of outsiders, including the shareholders, but also other “stakeholders”. To view things more objectively than management does. To avoid falling into groupthink. To rock the boat if it needs rocking.
A good question is: how would it look if what’s now private became public? Because that’s what happened last week. And now a lot of executives and directors are viewing the consequences of their acquiescence with fresh eyes and are not proud of what they see.
The ABC’s governance problems, we must hope, will be fixed relatively quickly. The misconduct of the banks is a much tougher problem.
The interim report of the banking royal commission carried a wake-up call also for the financial regulators – particularly the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority, but also the Reserve Bank and Treasury.
Allow yourself to be captured by the people you’re supposed to be regulating, and one day your failure to do your duty according to law will be exposed for all to see. How good will you feel?
Get too cosy and obliging, and the banks take advantage of you behind your back. Conclude from things they say - and the way they keep cutting your funding – that your political masters want you to go easy on their generous-donor mates in banking and, when the balloon goes up, the pollies will step aside and point at you.
Since you did neglect your duty to protect the public’s interests, you won’t have a leg to stand on.
Some people were disappointed the interim report contained no recommendations – no tougher legislation, no referrals to the legal authorities – but I was heartened by Commissioner Kenneth Hayne’s grasp of the root cause of the problem and the smart way to tackle it.
Too often, he found, the misconduct was motivated by “greed - the pursuit of short-term profit at the expense of basic standards of honesty . . . From the executive suite to the front line, staff were measured and rewarded by reference to profit and sales”.
Just so. But what induces seemingly decent people to put (personal) profit before people? That’s a question for psychologists, not lawyers. We’re social animals with an unconscious, almost irresistible urge to fit in with the group. A tribal urge.
Most of us get our sense of what’s ethical behaviour from the people around us in our group. If what I’m doing is no worse than what they’re doing, that’s ethical. Few of us have an inner moral compass (set by our membership of other tribes – religious or familial) strong enough to override the pressure we feel under from what our bosses and workmates are saying and doing.
Sociologists call this “norms of acceptable behaviour” within the group. When regulators first said that banks had an unhealthy corporate “culture”, business leaders dismissed this as soft-headed nonsense. Now, no one’s arguing.
But, we’re told, how can you legislate to change culture? Passing laws won’t eliminate dishonesty.
Fortunately, that’s only half true. Rationality tells us people’s behaviour flows from their beliefs, but psychologists tell us it’s the other way round: if you can change people’s behaviour, they’ll change their beliefs to fit (so as to reduce their “cognitive dissonance”).
Hayne says “much more often than not, the conduct now condemned was contrary to law”, which leads him to doubt that passing new laws is the answer.
So what is? His hints make it pretty clear, and I think he’s right. Make sure everyone in banking knows what’s illegal, then police the law vigorously with meaningful penalties. Fear of getting caught will override greed, and a change in behaviour will be reinforced by an improvement in the banking culture.
