NAB Chairman Dr Ken Henry AC – Speech to the ASA Conference
**check against delivery**
Thank you, Judith, for the introduction. And thanks also to the Australian Shareholders’ Association for inviting me to be here with you today.
I have been asked to talk about the political and economic state of the nation: the big picture.
NAB’s purpose is ‘to back the bold who move Australia forward’. That’s our big picture. Our purpose drives the bank. It is intended to motivate everybody in it. And our 33,000 people are ambitious for Australia’s future.
We want to be bold. We want Australia to move forward.
The political and economic state of the nation therefore matters to us deeply.
I have had a fair bit to say on this topic in the past, including calling on our political system to address a set of increasingly daunting national issues and opportunities.
But the focus of my address today is not the performance of the nation’s political system, but rather what is undoubtedly one of the most important political and economic issues confronting us right now; and that is the role of business, particularly big business, in society.
The leaders of large Australian businesses have never been under greater scrutiny. All of us have a fair idea of the reasons for that. In short, we have, in several respects, fallen short of community expectations.
This has to change. And it will change, of course. It is our challenge.
There is a lot in this topic, only some of which has been illuminated by various matters currently before the Royal Commission.
Accountability to all Australians
Recent events have highlighted that it is not only shareholders who take a keen interest in the performance of the directors of Australia’s largest companies.
Bank directors, in particular, are acutely aware of the demands that are being made of them by multiple stakeholders.
Beyond customers and our people, these include: activist shareholders; short-sellers; hedge funds; proxy advisers; credit rating agencies; left wing politicians; right wing politicians; former politicians and former businesspeople; prudential regulators; conduct regulators; competition regulators; payments system regulators; counterterrorism regulators; newspaper columnists; and talkback radio hosts.
In recent times, stakeholder expectations have lifted. The board of a bank these days is expected to take responsibility not only for the performance of the bank in every area of economic, social and environmental concern to any one of its stakeholders, but also for the values and culture of the organisation.
Speaking for myself, that’s as it should be. That’s what should be expected by anybody who assumes responsibility for governing the delivery of a complex set of financial services to all Australians.
NAB has more than nine million customers. Interactions with them vary, from providing short-term credit to individuals and families to meet everyday expenses or to buy a car or go on a holiday; lending to buy a home, or to start and grow a business; right through to arranging finance for large-scale critical projects such as hospitals, roads, rail and clean energy infrastructure.
Shareholders share in the responsibilities the bank owes to its customers and the community more broadly, given their unique position in determining who represents them on the board.
Not having a vote on board membership, other stakeholders are increasingly looking to regulators and their political leaders to influence outcomes.
The Royal Commission has shone a light on conduct matters in the industry and the treatment of customers. As I speak today, the Royal Commission is in session.
The Commissioner has rightly questioned how the industry reconciles the needs of shareholders and customers and whether balance has been lost, to the detriment of customers.
During the hearings so far we have heard evidence of conduct that is simply unacceptable. From our own bank, we have heard examples of systems and processes having failed us, where individuals have acted dishonestly. There is no excuse for any of this.
Some of the cases heard have damaged reputations – at an industry, organisational and individual level. In some instances, shareholder value has been eroded.
I have been following the Royal Commission closely. It has been a necessary and important process, providing an open forum in which customers can be heard.
Already, it is catalysing action.
Speaking for NAB, we see an opportunity to accelerate improvements and make real change. I am confident it will make us stronger.
I want to stress, however, that the misconduct being examined by the Royal Commission does not represent the majority of the people at NAB. Most of our people simply do not recognise themselves in what they are reading.
Our people are hurting; they are being asked by friends, family and strangers to justify the poor behaviour of some individuals.
Poor behaviour is not what they stand for. They know it is not what NAB stands for. They know we are working hard to lift standards, to focus on customers and rebuild trust. But, like those who lead the bank, they also know that we have a task ahead of us.
There is no doubt that, if customer interests had been better served, misconduct better addressed, and sooner, we would not be participating in a Royal Commission today.
Some have suggested that misconduct is a consequence of our employees being too focussed on the shareholder, to the detriment of our customers. I don’t think that argument can be sustained. Misconduct occurs when individuals serve themselves, when they find a loophole in the system, or they blatantly break the rules. Mostly, it has been to the ultimate detriment of the shareholder.
There will always be people who choose to do the wrong thing.
Just as leaders must motivate people to do the right thing, systems must be in place to incentivise people to do the right thing, and to identify wrongdoing and apply appropriate consequences.
An important question is whether we are incentivising our people to do the right thing, and whether we have organisational cultures that support those incentives.
Culture & governance
Businesses exhibiting cultures that produce poor social outcomes will find themselves the subject of regulatory intervention. That’s just how it is.
However, organisational culture can’t be legislated. Rather, a company is responsible for creating and governing its own culture. That is an accountability of its leaders.
That doesn’t mean legislators will ignore organisational culture.
Those on both sides of the parliamentary chamber understand there is no set of laws that could possibly satisfy the demands of all stakeholders across every aspect of economic, social and environmental performance, and values and cultures. Moreover, they know that no one can legislate for perfection.
But they know they must do something.
Given the multiplicity of stakeholder interests, it takes careful political judgement, even in relatively quiet times, to avoid responding with a bewilderingly complex, ever expanding, set of laws and regulations.
Right now, most people seem to be of the view that the reason for several instances of bad behaviour is that our incentive structures and cultures pay too much attention to our shareholders and too little to everybody else upon whom we rely to run our businesses.
The priority we are considered to be giving to shareholders is not shared by anybody else. What concerns policymakers and regulators of the financial system these days has little to do with the treatment of shareholders. Rather – and understandably – their focus is on:
- Allegations of poor customer treatment;
- Behaviour that might jeopardise depositor security; and
- Overall system stability.
The management of these matters rests with directors – acting on behalf of the shareholders who have appointed them – demonstrating, through their decisions, an appreciation of and responsiveness to the societal context within which the company operates. The expectation that directors will understand their obligations in this broad manner sits comfortably with the protection afforded shareholders under the concept of limited liability.
To put all of this in simpler terms: we are in this together.
Economic theory assumes that businesses seek to maximise profits. Profit maximising behaviour does not necessarily disadvantage customers; indeed, it should generally secure an alignment of shareholder and customer interest.
A business that doesn’t treat its customers well will not sustainably generate attractive returns for shareholders. That has to be true. But what time period is implied by the word ‘sustainably’?
Today, we would have to admit that even several years of strong performance for shareholders does not necessarily mean that customers are being treated fairly, depositors protected and banks made safe from the risk of failure.
The global financial crisis (GFC) demonstrated that stellar total shareholder return (TSR) performance over many years provides no assurance of prudential safety or systemic stability. And in the aftermath of the GFC, regulators in the UK and the US found some senior banking executives had been handsomely rewarded – indeed, lauded – for outstanding, long-term TSR and Return on Equity (ROE) performance, despite ripping off their customers for years.
But what if the financial objective of the business were, instead, expressed in these terms – to maximise customer benefit and provide an attractive return on capital to shareholders?
A business with that dual objective would know its purpose beyond profit, it would earn the trust of the community and it would deliver strong performance over the long-term.
The task has to be to design incentive schemes that reward a good customer experience and good shareholder returns. Even better, to have a deeply embedded culture of delivering both.
Importance of Purpose
But how do you drive a customer-focussed culture? How do you measure culture? And, importantly, how do you govern it?
In a bank, culture derives overwhelmingly from the way in which people think about and engage with customers. That’s why we at NAB have a social purpose that goes beyond profit maximisation.
Building the right culture involves the identification of a motivating purpose and strong corporate values, talking to people about them and embedding them in the organisation. When an organisation has a strong culture, the vast majority of people actually feel uncomfortable acting in a different way.
NAB’s purpose statement, ‘to back the bold who move Australia forward’, reflects our corporate culture, embedded in a strong set of values. It motivates us to deliver for our customers – and, through their success, our shareholders.
Living our purpose and values starts with the Board. We get out of the boardroom; to see, feel and hear what is happening across the bank and to hear directly from our employees and our customers.
Every NAB director is a NAB shareholder. More importantly, every NAB director is a NAB customer. It is essential that we experience NAB products and services first-hand – and that it is through this lens that we are engaging customer-delivery teams across the business.
Every NAB director is exposed to unfiltered, direct feedback from customers. In recent years we have been to many places right across Australia, including meeting customers and our people in Moree, Mildura, Darwin, Alice Springs, Parramatta and Toowoomba. Over the last 12 months, I have either met with or hosted over 500 customers at dedicated board-client engagements.
Sitting alongside the need to understand our customers, is the need for the directors to have a quality relationship with each other and with the management team.
These must be relationships built on respect but which also have the necessary tension and challenge to continually lift, and to avoid complacency. Our intent is to be supportive of each other, and of management, yet challenging.
With each Director, I undertake 1:1 annual performance assessments. Every year, the Board does a self-assessment of its effectiveness – and every three years we have an external review.
Every Monday morning, I sit down with our CEO, Andrew Thorburn, to discuss what is happening in our bank and how his team of senior executives is performing. I meet with each of his direct reports and I make the effort to talk to employees at every level, regularly and outside of the Board agenda.
Directors don’t want wordy and overproduced Board updates. Board papers must adhere to the “two plus five” rule, where the primary paper can’t be more than two pages with five pages of attachments. This is because we want to engage with management on the issues, the risks and the strategies.
We are involved. We play an active role in guiding the strategic direction of the bank, and in monitoring strategy execution and business performance.
We value frank discussion. When things go wrong – and at times they do, of course – we know that our ability to participate in the development of a constructive and sustainable response depends overwhelmingly upon our understanding of the customer, the quality of our relationship with management, and the depth of our understanding of all of the systems – including the various dimensions of risk, regulatory compliance, remuneration and IT platforms – that support the bank.
Trust through transparency
Those who lead Australia’s banks know very well that we need to rebuild trust – and trust begins with transparency. That’s why I have spent some time today talking about some of the ways in which we are challenging ourselves to improve.
One area in which there has been widespread agreement of insufficient transparency is executive remuneration, and performance incentive schemes more generally.
The NAB Board is focusing on the structure of remuneration and how this drives behaviours, at every level of the organisation.
Given what has happened in recent years, it is clear that ‘behaviours’ need to be considered alongside ‘financial performance’.
Our focus on ‘behaviours’ started well before the Royal Commission, and will continue, as we move to implement all of the recommendations of the Sedgwick Review by 2020.
Last year, over 700 of our retail branch managers, assistant branch managers, and sales team leaders in consumer call centres moved from product based incentives to the group incentive based on a balanced scorecard and NAB performance. No retail branch manager or assistant branch manager has a product based incentive. No call centre team leaders have product based incentives.
While I will leave the substantive details until our Annual Financial Report is released later this year, I can confirm that we are working to design a new executive remuneration framework to apply from next year.
Our reform of executive remuneration has four key objectives:
- it will be simpler for employees and shareholders to understand;
- it will incentivise the right behaviours, especially with respect to the treatment of customers;
- it will reward long-term performance; and
- it will ensure executives’ remuneration is aligned to shareholder experience by having a significant portion of the reward deferred over the longer term in the form of equity.
I look forward to engaging with investors and shareholders on these reforms over the coming months.
The dangers of complacency
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. 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; ‘she’ll be right, mate’.
Well, she wasn’t right. Too many years of complacency failed to build any measure of trust in the world economy, especially in global capital markets. And when the protective barriers began falling in the 1980s, that absence of trust cost us dearly.
It took an enormous policy reform effort over many, many years – in fact, I would say a whole generation of reform – to re-establish that trust. I am part of that generation. I understand how complacency erodes trust and what it takes to rebuild it.
The best antidote to complacency is ambition.
We are ambitious for change. In it we see exciting new opportunity. Our customers are increasingly more agile. If we are to keep pace then we must become simpler and faster too.
Over the next three years we are investing $4.5 billion in a significant transformation; one that will take considerable focus and commitment over many years, with the ambition of delivering great outcomes for customers.
We are not looking to the other Australian banks for benchmarks – but at what leading banks and technology companies around the world are doing for their customers.
As a vote of confidence in this strategy, all of NAB’s directors and executive team purchased at least 1,000 shares on the day of our full-year results last year; this is on top of the minimum shareholding requirements set out in our charter.
We are taking these actions because we are committed to long-term shareholder value creation; and because we take very seriously the many stakeholders who have a legitimate interest in our business and the contribution it makes to the economic, social and environmental performance of the nation.
Beyond our own business, we have great ambition for our customers – and on their behalf, our economy. In backing our customers, we are taking calculated risks in order to maximise new growth opportunities and support our economy to transition.
This needs emphasising because fears have been raised that an unintended consequence of the current environment is that banks will step-back from risk-taking.
This is understandable. It’s a topic that will continue to surface throughout the Royal Commission. What I would emphasise is that if we become too risk averse we will end up doing nobody a service; least of all our customers. We must not lose sight of the need, reinforced by the Royal Commission, to deliver better outcomes for customers.
I have spoken at length in the past on the urgent need for a broad-based reform program in Australia, including:
- Budget repair;
- Long-term planning to prepare for a growing and ageing population;
- Delivering energy security and mitigating climate change risks; and
- Making the most of the Asian century.
I haven’t spent any time on these topics today, but am happy to engage with you in conversation.
We, at NAB, will not be complacent in our own business. We will not be complacent with the investments our shareholders’ have made with us. We will not be complacent with our customers, nor with their communities. And we will not be complacent in our contribution to Australia.
We can’t be complacent because we have ambition.