The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry began in December 2017. It was projected to run for 12 months at a cost of $75 million. The hearings have powerfully raised the stakes on culture, its impact, and the role of directors in relation to corporate culture.
The Commission has handed down its interim report and some of the key lessons are becoming clear.
These outcomes are revealing significant leadership failures, governance and accountability breakdowns, lack of risk management, and complacency around culture and ethics. Many of the larger banks in particular have been accused of serious misconduct that has dramatically affected their customers. Australian consumers’ trust in banks and financial services providers has eroded as a result of these actions.
Recovering from the Royal Commission
For banks and other financial services providers to recover from the body blows delivered by the banking Royal Commission’s revelations, they will need to invest significantly in rebuilding that trust.
This will require a sustained and proactive effort to improve governance across boards and committees. In a practical sense, this could have a significant impact on the board’s role, composition, and operation. Some recommendations include conducting performance evaluations for all boards and committees.
It’s also essential to ensure that risk identification and remediation is not just reactive and complacent, but empowered, challenging, and striving. This means banks and other financial services providers will need to adopt a proactive approach for managing and reporting on operational risk and compliance controls.
Customers, shareholders, and other stakeholders will also require assurance that senior managers are appropriately governing risk and focusing on the quality, independence, and reliability of internal processes to manage risk. This includes acting promptly on advice from auditors, for example.
This type of evolution requires comprehensive reporting that clearly highlights matters warranting specific attention, along with deadlines to do so. This means boards must be able to support technology innovation and trust managers to identify areas to enhance governance practices.
Much of the wrongdoing to date stems from a focus on short-term profits, a disorganised approach, and a blame culture that makes people afraid to speak up about questionable practices. This creates a significant risk of loss of business and reputation, as has been seen as a result of the Banking Royal Commission.
Australia’s major banks and financial services organisations need to work diligently to achieve a more mature governance stance. This usually takes place across four key stages: compliance; efficiency; integrated strategy; and purpose and passion.
In the compliance stage, institutions are likely to take a minimalist and ad hoc approach to meet their legal requirements in a reactive way. They may look to implement awareness around compliance, minimise risks, and develop awareness in supply chain risks. Their audit and reporting capabilities will meet or even exceed compliance requirements and be treated as an essential and non-negotiable part of doing business.
In the efficiency stage, financial businesses will look to increase compliance initiatives even though these likely operate in silos across the business. There will be a markedly increased emphasis on reporting and risk avoidance. These businesses will look to achieve improved efficiency and engagement, which will be linked to their supply chains. Importantly, these actions will be functional and repeatable.
Importantly, businesses in the efficiency stage will rely on systems that help them measure and improve results, facilitate closer supplier engagement, and help manage the environment more effectively.
The next stage is the integrated strategy stage. These are innovators who look to transform the enterprise and fully integrate compliance strategies into corporate strategy. This will be demonstrated by proactive and systematic procedures, high-level interpersonal skills at the management level, and certification across the business. These businesses may require a structural redesign to provide the flexibility required to innovate.
The fourth and most mature stage is the purpose and passion stage. Commonly seen in genuine industry leaders, this stage is marked by a transformative culture that permeates the entire organisation. It’s driven by a passionate, values-based commitment to the wellbeing of the enterprise, society and environment. It’s cultural and ingrained in the system so that any wrongdoing would be immediately obvious and not tolerated.
This stage lets organisations redefine their business relationships and deliver high levels of transparency, auditability and accountability both upwards and downwards.
Leaders in these mature organisations are known for ‘walking the talk’, sharing knowledge with stakeholders, and supporting sustainable project and process development. They have long since moved on from a reactive posture to one of extreme proactivity.
Achieving this level of maturity will require constructive challenges throughout the senior management and board of each organisation, with clear roles and responsibilities across business units as opposed to a federated structure. Proper reporting and an appetite for consequence management, investment in tools and systems that support risk management, and a proactive leadership culture.
The lessons learned from the Banking Royal Commission must lead to practical changes including improved transparency, prompt responsiveness, a managed culture, strong performance systems and a focus on managing risk.
Financial organisations must prepare for potential outcomes that include a review of service standards, consumer redress mechanisms and internal systems, as well as industry codes of conduct and self-regulating systems. There is potential for millions of dollars in bonuses to be clawed back if revelations of misconduct are upheld.
Furthermore, there should be consideration of the competency of boards, a limit on the number of directorships and term limits. Class orders and changes to Australian Stock Exchange (ASX) expectations on corporate governance, plus extensions to already-sizeable financial penalties, are also likely.
Perhaps the most important change required is in organisational culture. In its Prudential Inquiry earlier this year into the Commonwealth Bank of Australia (CBA), the Australian Prudential Regulatory Authority (APRA) already identified that frameworks of governance, culture and accountability were “in need of considerable improvement”.
Of specific interest were the three Internal Audit “Red Reports” that were presented to the CBA audit committee. Instead of attracting the anticipated high level of urgency, APRA found that the audit committee had what it called a ‘light hand on the tiller’. It’s important that the successful closure of audit issues is monitored and that boards are aware of the extent of audit issues being raised by internal audit; especially any issues of a systemic nature.
Regarding the APRA review, Graham Bradley, non-executive chair of HSBC Bank Australia, spoke at the AICD Directors Update on the topic. He said “regulators, investors, and boards of directors across the world, and across industry sectors, will look to it in coming years as highlighting the standards expected of boards of directors of public companies and, I would suggest, private and not-for-profit companies as well”.
There are increased expectations of the role directors play in shaping culture. It’s therefore important for boards to ask for data on how employees feel about the organisation to ensure a positive and ethical culture is being maintained. Understanding what behaviours are rewarded, what’s driving those behaviours, and demanding ownership of outcomes will help banks remediate their cultures and find a way forward that builds trust again.
Jenny Johanson is a senior advisor at RSM Australia.