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How the Banking Royal Commission affects HR

The Banking Royal Commission final report has highlighted blatant failings in organisational culture, governance arrangements and remuneration systems
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How the Banking Royal Commission affects HR

How the Banking Royal Commission affects HR

4 March 2019

The contents of the Banking Royal Commission final report are damning. We’ve seen some blatant failings in organisational culture, governance arrangements and remuneration systems. Shareholder value and trust has been lost, brands damaged and heads have started to roll.

It’s not surprising that the report has a whole section devoted to culture, governance and remuneration. HR is often tasked with overseeing culture and remuneration structures, and how it can be linked with risky and unethical behaviours. Making improvements in these areas is the responsibility of the organisation.

In the financial series industry, regulators have an important role to play in the supervision of culture, governance and remuneration. In the past, that supervision was focused on financial stability.

Today, supervision must extend beyond financial risks to non-financial risks and that requires attention to culture, governance and remuneration. We’ve broken down the key take-outs under each category.

Rethinking remuneration to reduce risk

The report states that poorly designed and implemented remuneration arrangements can increase the risk of misconduct. Well designed and implemented remuneration arrangements can play an important role in reducing that risk.

Remuneration arrangements, especially short-term variable remuneration programs (i.e. commissions), tell staff what the business rewards and values. In this case, the financial sector rewarded and valued financial performance over customer care. As a result, we’ve witnessed countless cases of unethical and illegal behaviour where customers were charged fees for no service. It comes as no surprise that several institutions will have to face criminal charges, while many others have been referred to ASIC for further investigation.

"Rewarding misconduct is wrong. Yet incentive, bonus and commission schemes throughout the financial services industry have measured sales and profit, but not compliance with the law and proper standards," Commissioner Kenneth Hayne states.

Hayne believes banks should adopt all the 21 recommendations outlined in the Retail Banking Remuneration Review. Some of the recommendations include incentivising staff on non-financial outcomes, i.e. not solely on sales performance and capping any financial metrics at 33 per cent or less by 2020.

Organisational culture and governance

Hayne’s recommendation is for financial services entities to take proper steps as reasonably practicable to:

  • Assess an entity’s culture and its governance
  • Identify any problems with that culture and governance
  • Deal with those problems
  • Determine whether changes it has made has been effective

Cultural shortcomings were exposed in the report which include lack of diversity at board and executive level. Leaders have failed to demonstrate awareness of sound values. Group thinking behaviours were prevalent and a clear culture of ‘greed’ at the expense of the organisation and its customers.

There was also a culture of little psychological safety which undermines a speak-up culture. A lack of clear accountability is an underlying theme which contributed to an inability to identify and communicate who is accountable when things go wrong. This meant there was inadequate issue escalation and business unit oversight.

A failure to communicate effectively also meant customers often signed up for products without knowing any of the terms and conditions of what they’ve signed up for. Again, the remuneration structures the financial sector had rewarded these behaviours.

Hayne states that culture is a continual process and not a one-off event. While culture can’t always be measured in real-time - it’s outcomes can be.

A lesson for all industries that culture is at the heart of everything

The Royal Commission recommendations is a lesson for all organisations - big and small regardless of the industry.

There is nothing more important to your organisation’s success than its culture. And as an HR person or business owner, you’re the one directly responsible for building and nurturing culture.

Every business needs the right environment and culture for success. The Royal Commission exposed a culture of short-term gain at the customers’ expense. An expense that’s deeply rooted within the culture and DNA.

What does your culture say about your business and it’s customers? If it doesn’t have the right culture now to satisfy your customers and grow your business, what do you need to fix? Do your remuneration structures encourage a culture of risk-taking behaviours? Do they take into account the psychology behind your staff’s motivation and the long-term effect on your business?

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