• Dennis Gentilin

Why more banking regulation won't fix bank culture

This article first appeared in the opinion section of the Australian Financial Review on the 13th October 2016. Click here to view the original version.

Of all the revelations that have come out of the inquiry into the banking sector by the House of Representative Committee on Economics, perhaps the most significant is our primitive understanding of culture. This was most apparent in the questioning which for the most part failed to get to the root of the issues.

A special mention must go to Julia Banks. No doubt aided by her corporate experience, her line of questioning displayed a deeper knowledge. Arguably the best example was when she took Shayne Elliot to task on the “blokey culture” in ANZ’s dealing room and asked him whether he had “heard of the concept ‘Go-see Kaizen’”, a Japanese management principle that recommends a leader should walk the factory floor and “go and see” if they really want to understand their business.

The fact is that if you really want to learn about the culture of any organisation, then the CEO is probably the last place to start. In large organisations it is typical for the board and executive to state, with the greatest of sincerity, that ethics is central to everything they do. It is only when you do indeed “Go-see Kaizen” that you learn that ethics is a moving feast.

Therefore, a far more accurate picture of culture is provided by listening to the stories told by those at the coal face when they provide answers to the following types of questions: What are people rewarded for? What happens to people who don’t hit their targets? Who are the people that are promoted and held out to be champions of the business? Are they role models of the organisation’s values?

The answers to these questions, from the right people, will reveal what the organisation really values and what people need to do to get ahead. Unfortunately the CEO is not one of these people.

And this is not necessarily because the CEO (or his fellow executives) lack integrity. Rather, in any large human network, it is extraordinarily difficult to get alignment in thought and action. And furthermore, although leadership sets the tone, it is not their explicit directives that motivate wrongdoing – even the most subtle and seemingly inconsequential action by an executive can act as a catalyst.

A big clue on how this could have manifested in the banking sector was provided by RBA Governor Philip Lowe. In his appearance before the committee, Governor Lowe was asked to explain the performance of Australian banks. In contrast to their foreign peers, they have maintained a healthy return on equity despite the increased capital charges imposed by regulators since the financial crisis. Although there are several ways this outcome could be made possible, Governor Lowe suggested that customers “have largely borne the cost”.

It therefore goes without saying that over the past few years, in addition to preaching the importance of ethics and service to customer and community, bank executives have also been preaching the importance of “making the numbers”. And one could assume that at times this latter message, knowingly or otherwise, has carried greater weight.

One must not conclude that this approach is necessarily “unethical” – you only have to look at the recent volatility in financial markets caused by the rumours surrounding Deutsche Bank for evidence of why it is important to have a banking system that is financially stable and generates solid returns.

However it is these types of scenarios that can create a disconnect between what the CEO and executive says and what the organisation does. Absolutely there will be those who despite the pressure didn’t lose sight of their ethical duties and continued to act in the best interests of the client. But in this environment it is only natural that some will become cynical. When “making the numbers” is perceived (rightly or wrongly) as being the only priority, all the talk on ethics is seen as a hollow, hypocritical, PR exercise. At this point leaders lose their credibility and people can begin justifying questionable means to deliver the required ends.

Add to this some flawed incentive schemes and an environment that shuns those who speak up, and it won’t be long before the slippery slope of unethical conduct ensures that a minor indiscretion quickly degrades into significant maleficence. In this light, rate rigging, mis-selling and poor advice all of a sudden appear plausible outcomes.

With this dynamic in mind, it would be incredibly disappointing if, as some have suggested, the response to this inquiry is to increase the regulatory burden. More compliance is not the answer. The change that is required must be leadership led. And it is not just the responsibility of the board and executive. Rather, leaders at all levels of the industry must begin, in both their actions and words, prioritising principled conduct and service to customer and community.

This change will take some time, but we’ll know we have gone too far when in 15 to 20 years from now the then Prime Minister calls a parliamentary inquiry to question bank CEOs on why industry returns are dangerously low. Now that would be ironic.

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