Ken Henry analyzes the state of capitalism – and agrees that it is not beautiful
Ken Henry's soliloquia about the state of capitalism offered one of the most philosophical moments in an appearance sometimes tested before the royal bank commission.
Assistance counselor Rowena Orr was probably wrong when he asked the President of the Australian National Bank a fairly open question about whether the bank was too focused on shareholders at the expense of its clients.
Henry said the question went to the business behavior and what motivated them; the things the councils have held responsible for managing their business.
"It goes to the state of capitalism," he said.
"The capitalist model is that businesses have no other responsibility but to maximize profits for shareholders," he said.
"A lot of people who have participated in this debate over the past 12 months have said that everything that you should be responsible for forums is that they focus on maximizing profits for shareholders.
"Now, of course, some people will say," but that does not mean you can spoil your customers because they might be the interests … of the short-term interests of the shareholders, but not of the long-term interest of the shareholders. "
"But even this approach sees clients as instruments instrumentally, as customers are seen as the means by which the profits of shareholders are secured, rather than the client being the focus, what the business is all about."
He said that some have seen clients as means for a purpose rather than as an end in itself.
Rather than positioning the business to maximize shareholders' profitability, according to customer tolerance and regulation, NAB's goal today was to maximize customer outcomes, depending on financial viability. He described a "profound difference" and "a monumental change."
The opinion of clients and shareholders as competing interests, where the sole responsibility of a business is to maximize shareholders' profitability, is a rather crude and antiquated.
Most businesses now recognize – and the fact from the Royal Banking Committee points out – that they need a social license to operate. Indeed, they have to deal fairly and fairly with clients and suppliers and respect the law and regulations if they have to survive.
There is, however, a tinge of reality for Henry to have a first-hand experience.
In recent years, there have been adverse reactions from institutional shareholders when companies have attempted to include non-financial and / or subjective non-financial measures in their remuneration systems.
Last year, the "first strike" against the Commonwealth Bank's remuneration ratio and its plan to give social weight the same share of the financial values in the variable remuneration assessments was mentioned by Orr.
Some fund managers, with business models that offer incentives to prioritize their short-term performance, want a short-term alignment of shareholders and companies' interests; one focused on returning short-term shareholders.
The NAB itself has recently restructured the executive remuneration system, generating a mixed response from the market.
It has collapsed short and long-term variable remuneration for its directors in one reward, 40% payable in cash at the end of the financial year and 60% in shares that can not be paid for four years.
The metrics that will shape and determine the size of directors' reward funds and how they are distributed include customer results and risk and regulatory outcomes as well as financial values. Risk and compliance outcomes are "gateways" that the bank needs to clarify before granting any performance incentives.
It will give the Board more discretion – and greater responsibility and responsibility for the results.
"It's quite enough"
In parallel with the Banking Executives' Accountability Regime, in which individuals identified and responsible – and accountable – for their compliance performance are responsible for the different functions of the bank, incentives should better reflect individual performance, both in terms of concerns both financial and non-financial aspects.
The nature of the remuneration structures that banks are trying to implement in the context of the royal commission's broadcasting of their dirty linen and resistance to the inclusion of non-financial values states that Henry's dissatisfaction with the state of capitalism is not as anachronistic as it could originally appeared.
Proof of budding, of course, consists of food. Company directors tend to see payment variables as they are all at a disadvantage. In spite of what their royalties were transmitted by the Royal Commission, the directors of the banks still tended to give their most of their incentives.
NAB chairman, Dr Ken Henry, tells the royal committee that the board should have told the board "enough is enough."
If NAB really listens to customers, risk and compliance outcomes before simple shareholders' surrenders, successes or failures should be measured as much by the rewards they do not distribute – directors and shareholders – do.
It is likely that there is (and already exists) a short-term cost for switching to customer focus and compliance and far from a fixation with total return on shareholders.
If banks and other major financial institutions that were rescued by the Royal Commission do not make this change, however, there may not be a longer term future for their directors or shareholders.