How do you eat an elephant? Can the big banks really change their corporate governance models?

GGI’s governance team examines what changing culture means in the wake of the Royal Commission and looks at another high profile cultural crisis – and how the board responded.

A prominent casualty of the Royal Commission, NAB chairman Ken Henry, has said that culture is one of the hardest things to change about an organisation like a bank and predicted it could take a decade to overhaul NAB’s culture. But do the big banks have the luxury of time?

Changing culture is a daunting task. The Sydney Morning Herald recently characterised Australia’s banks as addicted to profits and identified change of leadership at the top as critical to meaningful and authentic changes in bank culture. This has created significant expectations of change from society and regulators with substantive action the only solution. How a bank manages that change is fundamental. We, on the outside, may not have much visibility of the real impact of change.

What does changing culture mean?

For boards, a change in corporate culture can be a daunting prospect. A board has a role to set the tone at the top, explore the purpose of the organisation and set accountabilities and outcomes for management to meet. But board members can’t walk the floors each day or spend time with each employee to model the culture they expect.

Boards will need to plan to improve their focus on culture, which the Hayne report found to be largely absent. This may call for boards to first take a long, hard look at their own operations and how they spend their time. It also means understanding the problems specific to their own organisations (including people challenges) and identifying what new accountabilities are needed from management and what meaningful change really looks like.

And although the pendulum has swung strongly in favour of consumers and culture, every bank director and executive knows that there are a large swath of shareholders relying on their piece of the action in the form of regular dividends. Dividends are the tangible result of profitability.

Grappling in the dark? Few ‘hard’ measures to implement

As a number of observers have noted, there are few significant structural changes to our system of corporate governance to be found in the Royal Commission report. This leaves boards with a relatively blank page on which to devise and drive their cultural programs. There’s upside and downside opportunities in this situation. Banks would rather not have cultural requirements imposed by external regulators, but this leaves the heavy lifting to the boards and executives themselves.

The boards are going to have to work closely with management to envision the future of the bank while understanding the real meaning for them in the Hayne report. Finding the balance between delivering returns, consumer service and care and looking after their own people will be a daunting task.

Hard questions for a hard time?

The focus on culture means big questions for banks. Saying and doing the right things is critical, but part of this is thinking through the less popular questions for bank boards as well. Less than a decade ago, Australia celebrated the robustness of its banking system in the face of global economic crisis. Today, the crisis in banking is home grown.

What is the role of a bank in society? Do we want a more risk averse banking system? Can we expect banks to act like community cooperatives? Why should banks not be hard nosed and driven for profit as they underpin our capital market system?

How do banks find the right focus?

One further question is whether the focus on corporate culture will have an opportunity cost. Is there a risk we focus too much on culture at the cost to another benefit of the banking system?

One of the obvious outcomes of more controls in banking is the possibility of greater risk aversion. That is a significant question for Australian business: do we really want an economy where banks are disposed to lend less, support business less and spend more time considering risk than profit.

Have boards faced anything like the Royal Commission before?

The hill that Commissioner Hayne has set for the banks to climb reminds GGI of another organisation that faced the highest profile cultural crisis eight years ago: BP.

The Deepwater Horizon disaster in the Gulf of Mexico claimed 11 lives and was the largest oil spill in world history. It resulted in a Presidential commission, lawsuits, enormous penalties of US $18b and unleashed a tidal wave of public criticism and abuse against BP.

The environmental damage was horrific. As the Guardian reported “Tar balls had washed ashore on the Texas coast. A flotilla of boats was trying to skim or burn oil from the water’s surface.”

Many still remember BP’s early public relations stumbles including CEO Tony Hayward who described the likely environmental impact of the disaster as modest, asked his executives what the company did to deserve this and possibly the most infamous quote:

“We’re sorry for the massive disruption it’s caused their lives. There’s no one who wants this over more than I do. I would like my life back.”

Six years after Deepwater Horizon, the United States Chemical Safety Board released its findings that found the primary reason for the spill was a failure of safety culture at the company. Hayward was soon rolled as BP boss and the new CEO Bob Dudley vowed cultural change when it came to tackling safety issues at the company.

BP designed better safety metrics as well as “Enhanced training and development programmes, particularly around the practical aspects of process safety techniques.” It overhauled its facilities and gave every employee the power to stop an operation if safety were at stake. It also reviewed its safety protocols, invested in change and dealt with government in a cooperative and transparent way.

In an inherently complicated and risky process such as offshore drilling, there is still plenty of debate over whether BP went far enough.

One thing is sure. It’s difficult to get visibility on change within an organisation from the outside. What we do know is that change is difficult.

The public will need to invest its very scarce trust in our financial giants to develop a forward plan. They have the resources and the impetus for change. Do they have the will?

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