The Australian banking sector has a lot on its plate as it recalibrates after a year of scrutiny. In a bid to win back consumer trust, banks are undergoing massive culture transformation. But can they actually pull such transformations off – or will we be reading about more bad news in the future?
In February 2019, Australia’s banking royal Commissioner Kenneth Hayne handed over his final report into the banking sector to the country’s Treasurer Josh Frydenberg. Hayne’s landmark report, Misconduct in the Banking, Superannuation and Financial Services Industry, dragged through the shock and gore of banking industry scandals that dominated headlines throughout 2018.
To recap, the investigation into misconduct allegations by Australia’s banking industry lasted nearly 12 months and included 68 days of televised hearings, more than 10,000 submissions and more than 130 witness interviews. What came to light sent shockwaves throughout the country, as we heard evidence about a litany of abuses flowing from entrenched conflicts of interest and poor governance.
One year on and the fallout has been gasp-inducing. Reputations have been crushed, some organizations have collapsed, consumer trust is battered, and high-profile senior executives have been scalped.
Hayne’s 951-page final report, and the inquiry that preceded, laid the blame for the misconduct squarely on senior banking executives. Failings of organizational culture, poor management of regulatory, compliance and conduct risks, as well as remuneration systems laid at the heart of much of the misconduct examined in the report.
According to Commissioner Hayne, “There can be no doubt that the primary responsibility for misconduct in the financial services industry lies with the entities concerned and those who managed and controlled those entities, their boards and senior management.”
One year on and the fallout has been gasp-inducing. Reputations have been crushed, some organizations have collapsed, consumer trust is battered, high-profile senior executives have been scalped, and the legal floodgates opened as lawsuit after lawsuit was filed, prompting the industry to set aside billions for compensation.
The scandal and resultant erosion of consumer trust has cost the industry dearly, with Australia's big-four banks’ cumulative annual profits for the 2018/19 financial year falling AUS$2.3 billion (7.8 percent) on the previous financial year.
In a bid to clean up their act and to start to rebuild trust, work to improve culture and governance is continuing in all banks. However, there is truth in the adage that old habits die hard – and given the deep-seated toxic cultural behaviors revealed by the Hayne report, it will seemingly take quite some time before they will be able to implement effective and sustainable cultural change.
Driving cultural change is typically easier said than done. It is more likely to succeed if an organization takes a more commercial approach, one explained in business terms, rather than making it a compliance exercise.
On balance, driving cultural change is typically easier said than done. It is more likely to succeed if an organization takes a more commercial approach, one explained in business terms, rather than making it a compliance exercise. The board should not merely aim to cascade messages to the rest of the firm; changing the culture at an organization begins with understanding it deeply.
This is why a tactical approach alone cannot build the resilience and collective capacity needed to overthrow an ethos of customer exploitation. Installing a culture based on restored trust, accountability and the fair treatment of customers can only take place when leaders authentically and determinedly make this a top priority.
Leaders must support change by altering their own behaviors and become more visible and vocal when it comes to ethical conduct. After all, ethics has everything to do with management, but without a supporting culture and controls imposed from the top, an organization is susceptible to breakdowns and ethical failures. Where leaders fail to do this – and have been given appropriate support and time to change – they may need to be replaced with people who support the ethical movement. For a culture change to succeed, it must be taken seriously, and tough decisions often need to be made.
But the transformation of culture cannot be achieved through simple modelling and a top-down mandate alone. Values, beliefs, behaviors, and systems, including the specific ethics and compliance (E&C) activities that most businesses focus on, all have a role to play to fix the cultural issues.
To maximize the ethical focus and capacity of the company, all levers should be used and calibrated appropriately to ensure cultural practices are integrated into daily business operations. Systems and processes need to be built to help employees feel responsible for the state of ethics, reason in a less biased way, and actively engage to protect the company’s ethical core.
For an industry that is in such a state of flux, Australia’s banks need to look beyond profit optimization or profit maximization to providing a sense of purpose for the business and their employees.
It is crucial, therefore, for business leaders, their managers, employees and the board to believe in the need for ethical change and to be champions of the movement because deeply embedding an ethical culture requires buy-in and commitment from all levels of the company. If the established corporate vision for change can trickle down, then simple acts of compliance with best practices can also rise up to shape a workplace culture of integrity.
For an industry that is in such a state of flux, Australia’s banks need to look beyond profit optimization or profit maximization to providing a sense of purpose for the business and their employees. Those who place equal focus on their bottom line, their people, their customers and their community will be the companies that thrive into the future. Those that don’t are throwing open the front doors to competitors the community can trust even more.
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To help your organization measure its ethical capacity download our whitepaper, Predicting Risk: A Strategic Culture Framework for the C-Suite, which will provide your board and senior leaders with a tool to frame strategic conversations, monitor business activities, measure the effectiveness of specific programs, and re-calibrate internal processes and systems.