As a former head of Treasury, Ken Henry has plenty of experience in the failings of the political system, particularly where it involves the frustrations of tax and regulatory reform.
As chairman of NAB, Henry is also one of the few high-level former political bureaucrats to cross over to join the upper echelons of corporate Australia.
Not that this is at all a comfortable place to be right now, especially for a big banker type. Henry’s lunchtime address to the Australian Shareholders’ Association on Tuesday is an admission of the obvious in terms of his more recent career.
So he leaves aside his usual criticisms of politicians failing to address future spending to concentrate on tax cuts in favour of conceding the failings of big business to address what needs to change.
“The leaders of large Australian businesses have never been under greater scrutiny,” he says. “We have, in several respects, fallen short of community expectations …
“There is no doubt that, if customer interests had been better served and misconduct better addressed and sooner, we would not be participating in a royal commission today.”
Well, quite. Naturally, Henry now agrees the royal commission is a necessary and important process to be a catalyst for action.
He still dismisses the argument that misconduct is a consequence of banks focusing on shareholders to the detriment of their customers.
Mostly, he says, misconduct has been to the ultimate detriment of shareholders as well, given there is generally an alignment of shareholder and customer interest.
But over what time frame is that assessed?
Henry concedes several years of strong returns for bank shareholders haven’t necessarily translated into customers being treated fairly, depositors protected and banks made safe from the risk of failure.
The dual financial objective of a business, he says, should be to maximise customer benefit while also providing an attractive return to shareholders.
Achieving that objective is, of course, the problem. Henry ponders how banks can incentivise people to do the right thing – and do so in organisational cultures that support that.
For most sceptical customers, however, any talk of incentives goes directly to the organisational financial services culture of generous bonuses to people for merely doing their jobs, often very badly.
That leaves NAB, like many other bank boards, rethinking its approach to executive remuneration.
Changes will include having a significant portion of the money deferred to encourage a longer-term perspective and making remuneration simpler for employees and shareholders to understand.
That sounds sensible enough but it’s hardly going to assuage community irritation about the level of bankers’ pay as well as their behaviour.
According to Henry, the main problem in financial services has been an excess of complacency – which also happens to be a recurring feature of Australian politics.
“When historians of finance look back on this period they will identify an unusual level of corporate complacency driven by relatively benign macroeconomic conditions and a long period of impressive ROE performance,” he says.
“They will suggest that corporate leaders fell into believing that a sector capable of generating ROEs in the mid-teens for so many years couldn’t be doing a lot wrong.
“Economic historians look back on Australia’s macroeconomic performance in the 1960s in much the same way. Blessed with an abundance of natural resources and a strongly growing population politicians in the so-called ‘lucky country’ fell into the trap of believing that they didn’t really have to do very much.”
That sort of complacency certainly resulted in a high bill to be paid by Australians over the following decade leading to the reforms of the 1980s and ’90s. Yet reform in this century seems trapped in a depressingly similar repetitive loop in both the political and business cycles.
Now the banks’ miscalculations have been exposed to public view verging on community disgust, the basic question at the heart of the royal commission and countless other reports is how banks (like politicians) regain community trust.
For bankers, that must also include the attempt to limit the onslaught of massive new regulation being imposed from outside by demonstrating their commitment to driving change from inside.
Henry warns that an unintended consequence of the current environment is the fear also being expressed, if without the fanfare, that banks may step back from risk taking. That’s a result, he says, that would do no one any good – least of all bank customers.
But as the commission grinds through another day of excruciating testimony on small business lending and the impact on people who guarantee loans without understanding the risks, it only seems more likely that banks will become considerably more cautious.
Westpac, for example, will be looking very hard at its willingness and processes in using parents as guarantors to fund their children’s business plans.
This is after the protracted probing of its flustered executive, Alastair Welsh, over just one case study that went badly wrong for a sick pensioner mother.
Royal commissioner Ken Hayne expressed himself typically bluntly in asking Welsh to describe the usefulness of Westpac’s supposedly elaborate processes to check on the suitability of a guarantor.
“If it’s form rather than substance, why do it?” he said. (To tick the right boxes, of course!)
Henry’s argument – one that will no doubt be expressed by other chairmen too – is that NAB will still resist any push to become risk averse in terms of its overall lending policies while still putting in new protections for customers.
The bank’s ambition, he insists, is still to take “calculated risks” in order to maximise new growth opportunities and support the economy. Let’s hope.