Banking royal commission: Avoiding risk will stifle growth, leaders warned
Directors and senior management must fight the temptation to smother risk-taking as they digest the implications of the banking royal commission, warns a leading executive recruiter.
Ian Smith, of search firm Blenheim Partners, acknowledges that boards and executives may be inclined to take a more conservative approach to business expansion, lest they fall foul of regulators, the government or local communities, but warns that any move to lower risk will dampen growth prospects.
"Growth will be considered riskier than ever," Smith says. "This new world order will very simply mean that we are guaranteeing a zero-growth environment for a long time to come.
Directors and senior management are grappling with how to respond to the financial services royal commission. David Rowe
"Chairmen, don’t make your response to this crisis create even more problems. Resist another faultless and perfectly coiffured CV to add to the risk committee and appoint someone who has real experience on the front line of risk and reward, good and especially bad.
"Chief executives, if you still have a few skunkworks hiding around the place, get them out on the main floor and let others feel what it’s like to push and not squeeze," Smith says, referring to the temptation to simply make the current assets work harder.
A banking specialist adds that boards must resist "helicopter parenting".
The warnings come as directors grapple with how to respond to the financial services royal commission and the increased scrutiny from regulators, politicians, shareholders and the community at large.
Alison Kitchen, chairman of KPMG Australia, notes that in many instances directors are demanding that management concentrate on fixing existing problems before they focus on expansion. In other cases, executives fret about the cost of fixing problems at the same time as investing for the future. Some industry insiders have estimated that for financial services companies, the true cost of remediation is two to three times higher than the amount actually reimbursed to customers.
Kitchen says companies are right to be worried about the expense line, given investor intolerance of cost blowouts and lower returns. Another consultant, who asked not to be identified, says: "[Balancing the key priorities of fixing problems and investing for the future] is certainly something that people are struggling with. It’s the reality of the current market, given the competitive pressures."
David Moloney, chief executive of Internal Consulting Group, notes that bank boards are "certainly slowing or stopping big strategic bets", which he says is short-term thinking.
Moloney has some sympathy for the banks in particular, given the enormous resources that have been poured into remediating wronged customers.
'Now we over-remediate'
That in itself is a departure from past practices. A decade ago, companies would have simply stopped providing a product or service that was inappropriate. Now, notes one financial services industry insider, companies axe the product or service and remediate.
"Now we over-remediate," he argues.
Moloney points to the toll this has taken, particularly on the banks.
"Banks' executive resources and management consultant resources have been almost exhaustively consumed by the royal commission preparation and the delivery of existing and anticipated remediation and the ongoing changes to policies and processes."
Another industry commentator notes: "Remediation does provide a bottleneck at the top of the company. It is a distraction and a capital distraction."
The balancing act is also hard because of the extent of regulatory change on the horizon. Whereas banks in Britain and the United States have weathered increased scrutiny since the global financial crisis, Australian banks have cruised and are now having to play catch-up, say experts.
Moloney notes that lifting revenue and profit while carrying out the vital task of remediation is all the harder because staff morale is so low. "Senior executives have the wherewithal to deal with the backlash," he says. "The majority of staff doesn't. They are really struggling. They are being castigated."
Nevertheless, the ICG head warns that the risk of failing to invest in the future, particularly for Australian banks, is all the higher because smaller players, including fintech companies, are looking to exploit consumer disquiet and grab market share.
"Third-tier players will be doing all they can," Moloney says.
As a result, Moloney argues, banks have little choice but to tackle the problems of the past, including remediation, at the same time as taking on risk in an effort to grow. The adage of "business as usual" must be switched to "transformation as usual".
KPMG chairman Alison Kitchen says that in many instances directors are demanding that management concentrate on fixing existing problems before they focus on expansion. Supplied
He says the more astute companies will be able to do both together by making remediation "part of the transformation agenda". Kitchen agrees: "The really smart ones may well say that in fixing the past, we’re going to actually leapfrog forward."
Moloney cites the decision by Commonwealth Bank to establish a behavioural economics team, which studies the effects of a variety of psychological, emotional and cultural factors on economic decision-making.
He argues that the insights gained by the CBA team will allow the bank to pre-empt future regulatory changes.
Another solution is to use the insights gained from remediation teams into the root causes of any given problem in the design of new products and services. "Remediation activity cannot be run in isolation," says one consultant. "This is common sense but it’s challenging to achieve."
Turnaround could take time
But other experts argue that banks must prioritise the rectification of problems and remediation, pointing to the experiences of Australia’s two biggest food retailers. Ian McLeod, former Coles CEO, and Brad Banducci, chief of Woolworths, both warned that the turnaround of their businesses would take considerable time. As one expert says: "The priority is to fix stuff."
In the case of Australian banks, says one consultant, their core businesses are in good shape and the organisations are well run, so they will be able to recover more quickly than their northern hemisphere counterparts, which started out with a more sales-oriented culture.
"Not everything is broken," the consultant says. "Australian banks are better in terms of their technology and customer focus."
Another industry insider says that in any case, greater regulation will lift barriers to entry, giving the banks more breathing space. "You have to slow down and [remediate to fix the problems] thoroughly," the insider says. "I expect most companies will do that. I don’t think there is much choice in that."
Internal Consulting Group's David Maloney says that for the banks, the adage of "business as usual" must change to "transformation as usual". Nick Moir
Another says: "I think disruption will take longer than you think. Customers are not jumping off to fintechs."
Moloney says banks have little choice but to tackle the problems of the past, including remediation, at the same time as taking on risk in an effort to grow. Photographic
BMW, McLaren, Mercedes-Benz, Peugeot, Audi: luxury cars of the motoring future
Broken Bay Pearls to open first 'Shellar Door' (a cellar door for pearls) in NSW
How Catriona Wallace, CEO of ASX-listed Flamingo AI, is making bots less sexist
Wine revolution: Why unusual grapes are now the new normal
Forensic Architecture, the practice that solves crimes
How to turbocharge your productivity by managing information, time and people
John Hewson says profits don't have to take a hit in climate change transition
Here's what Sunsuper CEO Scott Hartley does before he gets to work
This advice from Xero chief Steve Vamos helped me become a better negotiator
Banking royal commission: Avoiding risk will stifle growth, leaders warned
Why hotel executive André Jacques would go back to Cape Tribulation any day
Next stop Marrakech: Step off your private 747 into a realm of souks and spices
The best new luxuries to spend your money on, including Paspaley and Chanel
Maison&Objet Paris: 6 interior design trends you need to know about
Barrie Kosky's The Magic Flute opera heads for Australia