The systemic issues uncovered by the Banking Royal Commission come as no surprise when the Australian banking sector has been shielded from competition by the government’s four pillars policy. This has fostered an environment of mediocrity within senior management and boards, and banks have failed to implement business excellence practices that are commonplace in other industries.
Driven by bonuses: Profits before business excellence ultimately lead to the establishment of the Banking Royal Commission, say Dr Vik Kortian and Prof Norma Harrison from the Macquarie Graduate School of Management.
As a result, an aggressive sales-driven culture which emphasises profit at all costs has flourished, enabled by a flawed compliance structure, and the refusal to hold anyone in a senior position accountable.
In our research, we found in comparison with the chemical industry, the banking industry has not adopted key business excellence practices, yet it has outperformed the chemical industry by a factor of 10, partly due to the unique protections of the four pillars policy that reduces competition and insulates the banks from global economic turbulence.
Systems audits are the answer
Banks have been increasing profits year-on-year and therefore there was no reason to change. Senior executives’ bonuses are linked to profits which further solidified the desire not to change.
If the government is going to maintain the four pillars policy, it needs to bring in an independent body that can enforce business excellence practices, similar to safety in the airline industry. The Australian Civil Aviation Safety Authority certifies the safety of planes. It has the right to inspect all the necessary preventive safety measures civil airlines are required to carry out and if found deficient, can revoke their license to fly.
The Australian Prudential Regulation Authority has the power to investigate issues in the banking industry, but has historically only become involved when the “plane” has already crashed. There needs to be a more proactive approach whereby independent management system audits are carried out routinely and not just around customer complaints and how they are responded to.
A lack of proactive oversight has created an environment where best practices in management have not been adopted, and this has led to the numerous complaints that were not addressed by the existing regulatory authorities, ultimately leading to the Banking Royal Commission.
With an independent body monitoring business practices, senior executives would need to use internal management system audits similar to internal financial audits to assess whether their achievements meet their objectives and check compliance with established processes and standards. It would identify situations similar to the ones being exposed by the Banking Royal Commission thereby forcing management to take actions to prevent these occurring again.
Boards would need to be aware and educated on best practices, specifically business excellence frameworks, including building organisational agility.
Agility audit: Independent bodies monitoring banks would provide proactive oversight on management practices in the banking industry.
Outdated IT strategy deepens woes
The Australian banking industry has been anything but agile, especially with respect to technology. Most of the banks still do not have a single IT platform and rely on individual systems that need to be integrated.
The Australian banking industry would be forced to catch up with the rest of the advanced world with its IT capabilities. To date, only one of the four major banks have planned, and commenced in establishing, a single, integrated IT system. The other three have yet to commit to this strategy. Without an established business process framework that is integrated with its IT platforms, management decisions become difficult and problems, such as those identified by the Royal Commission, get buried.
Banks would also need to better measure true customer satisfaction by having more valid Key Performance Indicators and removing customer satisfaction indicators such as Net Promoter Scores that do not correlate to true customer satisfaction. If an organisation has put customer satisfaction at the forefront of its improvement efforts but the measurement used is inaccurate, it leads to wasted resources, incorrect conclusions, and employee and customer dissatisfaction.
The government protects the banking industry partly for the stability of Australian retirees’ investment and superannuation interests. If this protection is to continue, then independent oversight is vital to ensure the banks don’t fall back into the same bad habits. It would compel the banks to continually improve to achieve organisational goals of efficiency and effectiveness, as well as greater customer satisfaction.