Got to keep the customer satisfied, Ken

Eric Lobbecke Op Ed Cartoon for 05-12-2018. Version: Ozoped Artwork (1280x720 - Aspect ratio preserved, Canvas added)COPYRIGHT: The Australian's artists each have different copyright agreements in place regarding re-use of their work in other publications.Please seek advice from the artists themselves or the Managing Editor of The Australian regarding re-use.

On a summer’s day, there is nothing quite like homemade lemonade. Some savvy young entre­preneurs tapped into this market at the beach last Sunday. Two girls, and I mean girls, chatty, smiling little girls, aged nine or 10, announcing “cold lemonade” to passers-by. They were sitting on foldaway chairs behind a fold­away table on the footpath, selling wonderfully tangy lemonade from a glass jug. I bought four drinks at $1.50 each because demand at home was high. And because there is nothing quite like watching the free market at work on your doorstep.

It’s quite a jump to go from a local lemonade stall to Australian banks but maybe bankers could learn a thing or two by running a lemonade stall. As the Hayne royal commission’s public hearings drew to a close last week, it is an understatement to say that the banks and other financial institutions have sorely and systemically let down customers. The consequences have been swift. Boards have been embarrassed, corporate governance tick-a-box processes have been exposed as a joke, executive heads have rolled, share prices have tanked and public trust has nosedived even further.

And then the hand-wringing by banks and other financial institutions about rebuilding trust. Try this: treat your customers right, and the rest will follow. Just like the young girls selling lemonade to locals.

Yet last week former Treasury boss, now National Australia Bank chairman, Ken Henry delivered a pretentious and prolix lecture, pointing the finger for corporate misdeeds at “the state of capitalism”.

“The capitalist model is that businesses have no responsibility other than to maximise profits to shareholders,” he said. And public tolerance for this model of accountability had been pretty well eroded, he concluded. In other words, we need a new model. Out with capitalism. In with, well, who knows what? Henry’s claims will have nanny-state interventionists clamouring for “reform” — aka, another layer of regulation to be added to the layers and layers already on the books.

Here are a few alternative explanations for corporate wrongdoing. One is simply bad behaviour by people who have lost sight of a simple truth: treating customers well goes to the core of their business model.

The other explanation is that companies behaved badly because they could. In other words, hopelessly inadequate law enforcement by the Australian Securities & Investments Commis­sion. ASIC has been more intent on doing deals with banks than enforcing the law on behalf of customers and shareholders.

Henry’s self-indulgent soliloquy about the evils of capitalism is simply wrong. The real culprit is this intersection of dodgy, lazy cultures within business and regulators. It’s called crony capitalism for a reason. Contrary to Henry’s sermon, Australian companies don’t need a new accountability model. Today’s capitalism works just fine when boards and corporate executives follow the law. It’s already the case, laid down in law that dates back to 1883, that a company and its board have wide discretion, even a duty, to consider stakeholders beyond sharehold­ers when it benefits the company to do so. It’s not rocket science to conclude that looking out for customers benefits the company.

Henry’s capitalism refresher course could start with reading about one of his NAB predecessors. As National Bank’s chief executive from 1935 until 1952, Leslie McConnan appeared as a witness at the 1936 royal commission into Australia’s monetary and banking system. After the economic crisis of the early 1930s, banks came in for much criticism. History records McConnan, a feisty Scot who was educated at what he described as the University of Backblocks, was regarded by the commissioners to be one of the best and most useful witnesses for the quality of his evidence.

McConnan’s belief in the free market made him a standout. The Australian Dictionary of Biography notes: “Not surprisingly, he argued strongly that the existing relationship between the Commonwealth Bank of Australia and the trading banks — based on voluntary co-operation — provided the fledgling central bank with all the powers it required, and that legislation to give the Commonwealth Bank wider authority was both unnecessary and unworkable.”

A decade later, McConnan provided the intellectual heft for the campaign against bank nationalisation. Understanding the existential costs of Ben Chifley’s radical plan, McConnan wrote to every NAB customer explaining that state interference could interfere with banks lending money to them. Other corporate leaders were missing in action. Sound familiar? Except today there is no McConnan.

On August 12, 1948, the morning after the High Court tossed out the Chifley government’s plan to nationalise the banks, McConnan walked into the NAB banking chamber in Melbourne’s Collins Street and was greeted by hundreds of cheering staff. His wisdom about the benefits of private banks over nationalised state-owned ones was confirmed when Paul Keating privatised the Commonwealth Bank and deregulated the banking system decades later.

Contrast the no-nonsense McConnan and a pontificating Henry whose performance last week before the royal commission was dismissive in style and misguided in substance. And as for any modern banker being cheered by their staff? Only in their wildest dreams.

It is true that free markets and capitalism are on the nose. But that is because the benefits of free markets are poorly understood and poorly articulated by people who should know better. Educators at schools and universities fail to tell the true story of capitalism. Large swathes of the media are activists for state intervention. Bankers and other corporate leaders would rather walk naked over hot coals than articulate the real-world benefits of free markets.

The position is so dire that our national stock exchange’s new draft corporate governance rules fail to mention growing shareholder wealth as a core goal. As for politicians, even Liberals have legislated the kinds of nanny-state intrusions into boardrooms that would make that socialist senator Doug Cameron blush.

Instead of sounding like a Naomi Klein thesis about savage capitalism, Henry should watch Johann Norberg’s brilliant YouTube series Dead Wrong. Capitalism has delivered benefits to rich and poor not replicated in human history. The moral case for free markets is made out by facts such as this: worldwide GDP per capita increased in the 25 years between 1990 and 2015 at almost the same rate as it did in the previous 25,000 years. In that same short period, extreme poverty was reduced from 37 per cent of the world’s population to less than 10 per cent.

For every minute Henry listens to Norberg speak, a further 100 people will escape poverty. The percentage of people who go hungry has halved, illiteracy has more than halved, as has child mortality. As Norberg says: “If this is savage capitalism, then what the world needs right now is a double serve … with fries please.”

Now back to those girls selling lemonade from the footpath. A few years ago, a local council in Bunbury, Western Australia, closed down a little lemonade stall run by an 11-year-old girl. Last year, a local council in London did the same thing to a younger girl selling cups of lemonade for 50p.

Can we please keep Big Brother away this time? Let kids learn first-hand that the free market rocks. Then, just maybe, the next generation of bankers won’t need a set of laws to tell them that the customer comes first.

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