Banks, insurance companies and other corporate failures

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The Commonwealth Bank of Australia in Martin Place, Sydney (image by Alpha via Flickr)

In the end, it is not companies that perform well or badly. It is people.

OUR POLITICIANS ARE rightly receiving a hammering for their failures. We really do need to restore public trust in our political system. I have suggested a national summit after the next election on democratic renewal, different in subject but similar to the economic summit that former PM Bob Hawke called in 1983.

But to restore public trust, our business sector must also clean up its act. There are too many second-rate business executives doing a third-rate job. They should “stick to their knitting” instead of running to the government for help or blaming the trade unions.

In the end, it is not companies that perform well or badly. It is people. They must be held accountable, particularly directors and senior executives.

Essential Media regularly reports on our trust in various institutions. The last report in October 2017, a year before the Financial Services Royal Commission gave us its interim report, told us that only 28% of Australians had trust in our "business groups". That was on a par with our trust in federal and state parliaments, and religious institutions that have been so damaged by sexual abuse. The 28% trust in business groups was well behind our trust in the police, the High Court, the ABC and the Reserve Bank. As the Royal Commission proceeds, our trust in business is likely to fall further.

The Australian business landscape is littered with poor performance and often much worse behaviour.

Here are some examples:

  • From the 2018 Rich List in Australia, we learn that there were very few business people who accumulated their wealth through entrepreneurial activity. 50 of the 200 most wealthy Australians made their fortunes from real estate, where, with the help of lobbyists, success depends on twisting the arms of governments for zoning and re-zoning. Very few of the rich list were from the services sector, which we have been led to believe is the industry of the future. Many had inherited their wealth. It did not come from their business skills.
  • Deloitte Access Economics estimates that if the gap in management quality between Australia and the U.S. was halved, our productivity would rise to 80% of the U.S. level. This would represent an increase of GDP of about $70 billion which is equivalent to about $3,000 per person per year.
  • The Business Council of Australia (BCA) spends an inordinate amount of time trying to secure corporate tax reductions, which would overwhelmingly benefit foreign shareholders. The BCA campaign started as an attempt to generally reform the whole tax system (which is necessary), but quickly degenerated into a campaign to assist the Liberal Party’s political agenda.
  • As a result of bad business judgements, there have been massive capital write-offs by large companies such as BHP Billiton, Rio Tinto and, more recently, Wesfarmers. Frightened to invest in their businesses, many have also embarked on large-scale share buybacks, and very generous dividend policies and of course excessive executive salaries.
  • Wage theft has been widespread in companies such as 7/11 and similar franchise groups that exploit non-unionised workers and young people.
  • In co-operation with the four large accounting firms, many foreign-owned corporations have engaged in massive tax avoidance.
  • These accounting firms have major conflicts of interest. Their traditional accounting and audit roles have been overwhelmed by their advisory and consulting services.
  • Industry superannuation funds, which are jointly managed by employers and employees, have over a long period achieved far better returns for policyholders than the retail funds. These are mainly owned by the banks.
  • Many of our companies give lip service to the gathering storm of human-induced climate change. But there has been little real action to meet the Paris objective of keeping temperature levels to no more than 1.5% of pre-industrial levels. Many business organisations have decided to play the Coalition political game on climate change, whilst ignoring the corporate risks that climate change poses for their organisations and the planet. They have the gall to tell us that we need bi-partisanship in climate and energy policies when they have supported so many crazy and contradictory Coalition policies in the past.
  • The business sector has failed comprehensively to shape their companies and to employ the people who have relevant skills for the Asian century.

Tim Soutphommasane, the former Racial Discrimination Commissioner at the Australian Human Rights Commission, put the problem this way in my blog, Pearls and Irritations, on 13 April this year:

Our examination of almost 2500 senior leaders in business, politics, government and higher education shows only very limited cultural diversity. Almost 95% of senior leaders at the chief executive or ‘c-suite’ levels have an Anglo-Celtic or European background.

Of the 372 chief executives and equivalents we identified, 97% have an Anglo-Celtic or European background. All up there are 11 of the 372 CEOs and equivalents who have a non-European or Indigenous background. A mere cricket team’s worth of diversity.

The 1989 Garnaut Report, 'Australia and the North East Asian Ascendancy' and Ken Henry’s 'Australia in the Asian Century' White Paper both made several recommendations on how we should respond to Asia’s growth, including skilling Australian companies for the job ahead. But both reports disappeared almost without a trace. The media and our corporate sector sat on their hands. Australian corporations are still not equipping themselves for Asia’s rise. They have gone on “smoko”.

We could count on the fingers of one hand the number of CEOs and directors of our “top 200” ASX companies who can fluently speak any of the languages of our regions. The male, pale and stale directors club shuns new talent and appoints people like themselves with the same limitations.

And the crowning failure of our corporate sector has been our banks and insurance companies. The Royal Commission revealed incompetence, greed and dishonesty on a wide scale. The Royal Commission has also demonstrated how directors of our major companies have been more concerned with advancing their own careers and the careers of their friends, rather than the interests of the companies and customers they should be serving.

Where were the chairs and directors of our major banks when all this was going on? Even dead people were being charged and fees were levied against customers when no services were provided. But bank directors sat tight on their inflated directors’ fees. Some casually moved out of regulatory jobs in Treasury and the Reserve Bank and equally egregious and greedy banks, like the NAB and Macquarie.

The chairs of our four main banks, Lindsay Maxsted (Westpac), David Gonski (ANZ), Ken Henry (NAB) and Catherine Livingston (Commonwealth), must bear a heavy responsibility for the disasters produced by their banks. Didn’t they know what was happening under their watch, or did they decide that this is the way business is done these days? They all earn excessive remuneration just like their CEOs. They have let us down badly.

We are all naturally anxious that the Royal Commission will result in significant reforms of our financial system. Will the profit culture before everything else be changed? Will the regulators really do their job? Will new legislation impose such penalties that greedy wrong-doers will think twice in future?

We can expect to see some improvement, but the banks will seek minimal reform and hope that the presently unfavourable publicity will blow over.

Clearly, the regulators must do better and I expect they will. But my experience with regulators in the aviation and intelligence sectors is that the regulators become part of the club. It’s obvious that regulators, who should have been effectively and firmly supervising the banks, came under the bankers’ spell. In the intelligence field, the supposed regulators, supervisors and inspector generals – including even parliamentary committees – join the intelligence club.

One banker went to gaol in the U.S. for the malfeasance in the financial sector that precipitated the global financial crisis. It’s unlikely any directors and CEOs in Australia will face criminal charges. Very astutely, they have mainly hidden from view in the Royal Commission.

What has happened in the Royal Commission into the behaviour of banks and our financial institutions comes as no surprise. On my blog on May 30, 2014, ‘Are our bankers listening or caring’, I drew attention to a conference in London on "inclusive capitalism". At that conference, the Governor of the Bank of England and the IMF Chief said that bankers regarded themselves as different, and not bound by the need for economic and social inclusion that is essential in a modern society. Both the Governor and the IMF Chief said that the banks' actions were marginalising them from mainstream society.

And that is precisely what our banks have done in Australia as revealed by Commissioner Hayne.

Surely it is time to look again at the banking arrangements of the 1940s under Labor’s former PM Ben Chifley, with the publicly-owned Commonwealth Bank operating both as a central bank as well as a trading and savings bank. Our publicly-owned Reserve Bank could now develop some real banking competition, by providing an online banking system to compete with the poorly performing Australian commercial banks. This could be facilitated by offering lending services, particularly for housing directly to the Australian community.

Unfortunately, the bankers’ club – which includes Treasury, the Reserve Bank and the commercial banks – doesn’t want to upset the present cosy arrangements that are serving us so badly. I am sure the Australian community would welcome the breaking up of this cosy bankers’ club and some real competition.

Surely it is time.

This article was originally published on John Menadue's blog 'Pearls and Irritations'John Menadue is a commentator, businessman and former diplomat. You can follow John on Twitter @johnmenadue.

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