Concern for customers the key to NAB’s success

The Australian 12:00am May 23, 2018

Ken Henry

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. But my focus today is not the performance of the nation’s political system, but one of the most important issues confronting us right now: the role of business, particularly big business, in society.

The leaders of our large 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. It is our challenge.

There is a lot in this topic, only some of which has been illuminated by various matters before the royal commission.

The board of a bank is expected to take responsibility not only for the performance of the bank in every area of economic, social and environmental concern, but also for the values and culture of the organisation. Speaking for myself, that’s as it should be.

The royal commission has shone a light on conduct in the industry and the treatment of customers. The commissioner has 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.

The commission has been a necessary process, and 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 that the misconduct being examined by the 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 and rebuild trust.

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 focused 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.

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.

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 judgment, 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.

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.

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.

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.

Those who lead Australia’s banks know very well that we need to rebuild trust — and trust begins with transparency.

One area in which there has been agreement of insufficient transparency is executive remuneration, and incentive schemes more generally.

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 the treatment of customers, it will reward long-term performance, andit will ensure executive 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.