‘Mates culture’ must end now in banks, ATO and defence contracting

It’s easy to see what’s gone wrong in administration of not only the Commonwealth Bank, but the ATO and defence contracting.

Incoming BHP chief executive officer Ken MacKenzie (centre) has vowed to focus on five strategic pillars: safety, the portfolio, capital discipline, capability and culture and “social licence to operate”. Photo: AAP

What is going wrong in the administration of so many of the pillars of our society including banks, the savings industry, the Australian Taxation Office and defence contracting?

And these are simply the areas where bad practices have been uncovered. No doubt similar practices have spread to other parts of the society.

So let’s step back and first look at what is happening and then at least try to look at why it is happening and how we start to fix it. They are not easy questions.

In the banks, the savings industry, the ATO and defence contracting, the managers were engaged in bad practices and journalists uncovered some of them. What followed was an absolute denial from the managers that there was a problem. Sometimes the people at the top actually did not know what was happening in the lower levels of their organisation. In other instances they were covering up their own actions.

In banking and savings, the whole affair required a Royal Commission to uncover. Does that mean we will need a Royal Commission into the ATO and defence contracting? Not yet, but we are clearly headed in that direction as more and more facts emerge of the ATO’s unrestrained persecution of innovators and small enterprises.

In addition, Japanese and Canadian recognition that the Joint Strike Fighter can’t match the looming Russian and Chinese aircraft makes the statements made to our parliament simply wrong. And there are a range of similar defence errors.

Some would argue that bad corporate/public service decision-making has been with us for generations but in the past it was not revealed until the corporate enterprise collapsed or, in the case of defence, when a war broke out (World War II) and we found we had the wrong aircraft.

In banking and investment, the Royal Commission is revealing a pattern of bad practices towards customers that were simply ignored. When journalists began uncovering these bad practices massive amounts were spent on public relations to deny them.

Why is this happening?

Let me submit some reasons and I recognise that not everyone will agree and that, in any event, I am only touching the surface and there will be many other valid reasons because this is new territory.

I see management weaknesses most clearly in the ATO because I am confronting the mistakes at the micro level. The banking and savings Royal Commission is revealing the same sort of management weaknesses, again at the micro level.

In big corporations and the public service covering all levels of management we find that there are mates (both male and female) that stick together united by the fact that if a major error appears in their area they lose their careers.

Sometimes the errors originate from a human activity but increasingly it’s a systems mistake. In the corporate area, analysts are watching profit detail so if the mistake affects earnings then the share price is trashed and the CEO’s job is on the line. Down the line where the mistake is made, efforts are made to try to bury it so the board and CEO do not know and sometimes the board and CEO get involved in the cover up.

In the case of the public service the same forces are involved but it is the minister’s job that is on the line.

Sometimes it seems that the politicians have become part of the concealment process because they questioned bank CEOs, the tax commissioner and defence people but rarely asked the right questions or were fobbed off with answers that required further probing to get the truth.

How do we solve the problem?

APRA set out a vast amount of actions required in the banking sector, which the Commonwealth Bank today embraced. It involves a management revolution, which a large number of other companies will need to look at.

But there are other forces at work.

There is a massive drive developing to jail corporate executives for long periods. It will certainly minimise the problem but it will lead to a non-risk taking society. There are provisions in the statutes to jail public servants who mislead but the “mates” culture means that it is not invoked. It may need to be.

I think the beginnings of the long term answer is emerging in the corporate sector. BHP chairman Ken MacKenzie at the annual meeting said the company needed to focus on five areas — safety, the portfolio, capital discipline, capability and culture, and “our social licence to operate”. The concept that corporates must have a “social licence to operate” is new. I think it is certainly going to apply to banks and life offices like AMP but BHP reckons it’s essential for corporations. Let me quote MacKenzie on what this means for BHP. Of course as MacKenzie would agree, it is one thing for the chairman (or CEO) to say these things and another for it to happen out in the field. MacKenzie says that public acceptance and trust are an imperative for BHP and a social licence to operate “can create a strategic advantage for the company and by extension, value for shareholders. Without it, we have nothing”.

MacKenzie illustrates BHP actions in this area with its remedial actions at Samarco and its reduction in greenhouse gases.

“It is hard to measure the benefit of trust, but it is very easy to measure the losses associated with not having it. For BHP, our social licence is central to our business case and provides a foundation for all value creation.”

AMP is a perfect example of the damage created by the loss of trust. The new CEO and chairman of AMP will have to regain a social licence to operate. The first step is major changes to the mates culture in the board that removed the previous chairman. Banks have the same task albeit they are less damaged, although the royal commission has not concluded.

Whether the change in culture comes via different boards or managers or via the threat of director jail, the events in banking are going to start the change. But it needs to spread to the ATO and defence contracting plus areas of the public service and the politicians. And again words are easy. Cultural change and actions are harder.