Comm Bank scandal: what happens when too much power is placed in too few hands
Tom Westland
Wednesday 9 August 2017
It is generally considered poor taste to kick someone while they’re down. In the case of Commonwealth Bank CEO Ian Narev, I think an exception can and should be made
Narev is the extraordinarily well-paid executive of an extraordinarily profitable bank that has this week been accused of having forgotten – on 53,506 separate occasions – to notify regulators of large cash transactions.
The bank was required to make these notifications by law; apparently a computer coding error prevented CBA from doing so. This cock-up, regulators allege, meant that criminal syndicates were able to feed large amounts of dirty cash into the bank’s ATMs anonymously and deposit it, suitably laundered, into offshore accounts.
The bank is currently retailing the idea that although they broke the law 50,000 times, since there was only one coding error, there was only one violation, with one relatively small fine. I hope there is a separate financial penalty under the relevant legislation just for the chutzpah.
Narev, for his part, is shocked – shocked – to discover that gambling was going on in his establishment. He has said, in the euphemistic language spoken natively only by banking executives, sporting coaches and management consultants, that he isn’t spending any time “contemplating his future”: he’s focused on “doing his job”.
What, though, does his job entail, if not preventing this kind of thing? The money laundering business, we are supposed to believe, is the kind of mishap that could happen to any CEO. No doubt he also resents being blamed for the CBA’s financial planning scandal (which, to be fair, largely predated Narev’s tenure, though he was there for bank’s tardy response) and other sundry disasters that have befallen the bank in the six years since he took the top job.
And in a way, it is unfair to blame him for everything that has gone wrong during his time at the wheel. The Commonwealth Bank is a large institution with a truly enormous balance sheet, and no human being could be expected to supervise every aspect of its operations.
The problem is that while the CBA board does not require Narev to be omniscient, they pay him as though he was: in 2016 alone, he received over $12m. This is many multiples of the salary of the manager of the CBA’s Leichhardt branch, who tried to raise the alarm over a series of questionable deposits in 2015, to no effect. And which of the two has behaved more in the bank’s long term interest?
While this scandal raises a great many questions – about corporate governance, about the enforcement of financial regulation, and about the internal culture of the Commonwealth Bank – it’s worth considering what the implications are for the ongoing debate in this country about income inequality.
It’s often said that paying top executives very high salaries is a reward for their talent. In big firms like banks, however, this is ludicrously unrealistic.
For one thing, executives have substantial bargaining power. Finding a new CEO is costly for a bank, and firing an existing executive is bad for its reputation. This gives the executive leverage in negotiating higher pay. This dynamic not only leads to oversized bonuses and rising inequality, it may also not be very good for business in the long term, either.
High pay for bank bosses can also encourage them to make poor long-term investment choices that look good in the short or medium term, as well as to discourage subordinates who don’t face the same financial incentives.
More generally, this scandal raises questions about power, and about the cult of the “leader” that has become increasingly dominant in Australia’s economy and, more broadly, its society. We blame football captains for their team’s poor performance; we attribute a political party’s strong polls to its leader and, when things go south, we naturally wonder when they’ll be rolled by their party room.
Leaders are complicit in overstating their importance, obviously, but there’s no reason that the rest of us should buy into their own mythology – or, like CBA shareholders and customers, be forced to pay for it.
The cult of the leader is a natural consequence of the way in which our economy is organised. In theory, in a free-market economy, information flows from disparate sources towards people with power, helping them to make informed decisions.
However, as the philosopher Elizabeth Anderson points out in a provocative new book, large corporations look much more like Stalinist command economies than the idealised world of independent artisans that Adam Smith envisioned.
As a result, conscientious workers like the Leichhardt branch manager find that they have little influence in a top-heavy organisational system that is almost designed to tolerate or overlook bad behaviour. And you can be sure that if the CBA is fined for each violation, it will be the conscientious workers who suffer: Narev may have been fired by then, but I can guarantee you he’ll be living fairly comfortably.
In the case of the CBA, it is clear that lower-level employees in the bank knew more about what was going
on – or, at least, were more proactive about raising their concerns – than their superiors were. If they had
been listened to, then the bank might have avoided the potential $1tn fine it could now face.
The Commonwealth Bank, therefore, could serve as a metaphor for an economy that places too much wealth
and too much power in the hands of too few people. Not only is this inequality unfair – it’s also dangerous.