
A new analysis of the Australian Royal Commission (RC) into financial services has laid blame for the industry-wide scandal squarely on the victory of short-term profit-seeking over poorly designed corporate values.
In a study commissioned by the Australian Actuaries Institute, author Barry Rafe says while many financial services executives grilled during the RC were “fully aware” of the broader impact of their decisions “maximising profit within the bounds of the law was the only value considered”.
“The boards of the organisations studied appeared to be fully engaged and committed to acting ethically but the CEOs consciously made decisions that breached their espoused values to maximise short term profit,” Rafe says in the report.
All told, the RC is forecast to cost the Australian financial services industry over A$10 billion, the paper says, along with ongoing regulatory action and enormous corporate disruption.
“The fallout included four directors of the AMP, their CEO and senior counsel resigning, the CEO and chair of the NAB resigned, all of the major banks decided to sell their insurance and wealth management businesses and the regulators took action against a number of the financial services institutions,” the Rafe study says.
But the analysis suggests the problems identified in the RC could not be sheeted to “weak boards” given the Australian institutions slammed during the Haynes inquiry had some of the most capable and well-paid directors in the land.
“Excusing misbehaviour on incapable boards does not explain misbehaviour in the Australian banking sector,” Rafe says.
Instead, he says while boards typically set “espoused values”, short-term executive remuneration incentives tended to over-ride any “ethical expectations”.
The study says “a complex organisation” such as a bank needs to design more practical corporate values – that satisfy the demands of customer, community and profit (CuCoPr) – backed up with regular reviews and aligned remuneration policies.
Rafe says “espoused values set by the board need to be more than just for ‘branding’ and ‘marketing’ purposes, they set the tone for how decisions are made”.
“Boards need to understand, through reflection, why the values-in-use in the routine actions of the senior executive team do not fall within Zone CuCoPr,” the report says. “Based on feedback and reflection the board and the senior executive team may decide that either, the trade-offs in espoused values are not able to be operationalised effectively and hence should be amended, or the operationalising of the espoused values is de-prioritising an important value.”
Rafe, a former Australian Actuaries Institute president, is principal of his eponymous consulting firm.
The RC findings also spilled across the Tasman in a joint regulatory review of the banking and insurance industries, which led to wholesale changes to remuneration practices. In the wake of the NZ regulator reviews, the government drafted new ‘culture and conduct’ legislation set to impose a new licensing regime on insurers, banks (and non-banks).
The second reading of the Financial Markets (Conduct of Institutions) Amendment Bill is currently seventh on the parliamentary order of business, suggesting the new law should be in place within the next few weeks.