Ken Henry

As the political pressure mounted on Australia’s four big banks to be subject to a Royal Commission, National Australia Bank chair Ken Henry and the board finally decided: there must be a circuit-breaker. The historic letter in November from the big-four bank CEOs and chairs to Federal Treasurer Scott Morrison was the result.

“I had been thinking for some time that a Royal Commission into the banking system in Australia was unwarranted, but perhaps politically necessary, because nothing else was likely to break the political deadlock,” Henry recalls. “I’m sure this conversation was being had around every board table for months. I’d be very surprised if, at some stage over the past several months, every non-executive director on every bank board in the country hadn’t asked themselves that question.”

In terms of the board managing risk on the issue, Henry says acceptance was critical. “The first thing was to accept this is not just an out-of-control public debate. There is something real here for which we have to take responsibility. There are instances of poor conduct, poor treatment of customers and these are matters for which we have to hold ourselves accountable.

“To some extent, some of these issues reflect elements of undesirable culture and boards have to take responsibility for the culture of organisations. It needs to happen and probably hasn’t had sufficient attention given to it. There’s a lot of attention being given to it now!”

Prime Minister Malcolm Turnbull’s throwaway line that the Royal Commission wasn’t about putting capitalism on trial, begged the question. “There is a view that seems to be increasingly widely held among commentators and sections of the community: that capitalism is broken and no longer capable of delivering appropriate economic, social and environmental outcomes for citizens. It is the case that some people have been left behind in economic and social terms, and that the exercise of capitalism has not always produced appropriate environmental outcomes. Yet it remains the case that capitalism, is more capable of producing sustainable increases in living standards than any alternative.”

Henry says part of what’s required is for businesses to do a better job of ensuring capitalism produces social and environmental outcomes that are sustainable, enduring and benefit the community at large. He says the traditional model — that business exists in order to maximise profit and the government’s role is to pick up the pieces, provide public goods, address negative externalities and market failure — is deeply flawed.

Business leaders see themselves as having a legitimate interest in the economic, social and environmental development of the nation.

“These are just simplifying assumptions economic models make. It was never intended to be a normative prescription of the allocation of roles and responsibilities. There is a growing frustration among some business leaders with this role they have to play. They see themselves as having a legitimate interest in the development of the nation, in economic, social and environmental terms. It was one of the reasons business leaders spoke out on the topic of same-sex marriage.

“The disconnect happens because businesspeople don’t often talk openly about their vision for Australia and the things they see their businesses doing that make a positive contribution to the pursuit of that vision. They need to do so in order to build that trust. I say to businesspeople: let’s just pretend government doesn’t exist. How would our conversation go? There’d be no point in writing up a list of demands. Whatever our aspirations for Australia’s future, why don’t we try to solve some of these problems ourselves?” Henry joined the NAB board in 2011 after a distinguished career in Federal Treasury, becoming chair in 2016. He saw the strengths of the shared-value model, practices that enhance competitiveness while improving social and environmental conditions.

“When you talk to investors about shared value, they understand it. They don’t want to see returns compromised, but they understand if a business is not seen to be delivering for society it is not going to deliver for shareholders sustainably, either. There’s an assumption that trade-offs are necessary; that if you’re pursuing a social or environmental objective, it comes at the cost of return on equity. This is not true. Shared value starts with an understanding of the external impact of commercial activities and the taking of responsibility for that impact. There are many opportunities for Australian business to find commercial returns in activities that generate positive social and environmental impacts.”

One example of shared value at work at NAB is the rethinking of its debt collection business, NAB Assist. It has brought in new skills and a new approach in collections, reframing it as financial counselling support. Staff equipped with training from Lifeline help identify and manage customers experiencing financial hardship. If a customer starts to fall behind they receive a call to see how the bank can help. NAB says the approach has seen more than $70m in cost savings as a result of the early contact with customers, and has helped more than 25,000 people in financial distress, with 90 per cent of those who had fallen behind being back on track within a month.

Henry says the social and community impact is substantial. “People generally don’t fall behind in their payments because they want to do the wrong thing. They are probably suffering considerable stress.”

With regard to the NAB culture, Henry says the bank has a “fairly good sense” of the issues in the public domain. At NAB, he says, the focus is shifting to better clarify the purpose of individual staff and the bank as a whole. “The stories that have the most emotion resonate in the bank and at board level. If that resonates in a set of values, a code of conduct you sign up to, it’s feasible to develop a corporate culture that does not expose us to the risk of inappropriate conduct. There have to be consequences or you won’t be able to change the culture.”

Shared Value

Companies create shared value when they generate measurable returns by addressing social and environmental challenges. Shared value has gained traction since the 2011 publication of Creating Shared Value: Competitive Advantage Through Social Impact by Prof Michael Porter and Mark Kramer in Harvard Business Review.

The authors argue that only business can create economic prosperity through meeting needs at a profit. Society faces significant social, environmental and economic issues, but NGOs and governments lack the resources to meet the challenges alone. While corporate philanthropy and social responsibility programs are more prevalent than ever, business legitimacy has fallen.

They say that in the wake of the GFC, the relationship between banks and society has grown increasingly combative. Yet with more than US$100 trillion in assets, banks are essential to fostering innovation, industry and community growth.

“Banks... need to recognise that the health of their businesses is inextricably linked to the long-term prosperity of their clients and communities, and to sustained local and global economic growth. They have to turn their tremendous capability for innovation to financing consumer, social, and environmental solutions that benefit society while representing good investment opportunities for private capital.”

It’s about addressing relevant societal problems with a business model generating measurable returns.

“Shared value must be approached through the lens of business strategy, not as a matter of public relations.”

Dr Ken Henry AC will deliver the closing keynote at the 2018 Australian Governance Summit in March. The go-to event for Australia's director community is fast approaching capacity. Book your place today.