Thanks to the royal commission into the financial services industry we are currently getting detailed insights into what happens to an industry when extreme demands for profit growth combine with poor regulation and poor leadership. Whilst we had plenty of isolated ‘villains and victims’ stories in the media before the royal commission, these were continuously excused with the old ‘bad apple’ theme to deflect attention from the systemic abuse and breaches of laws and regulations.
Of course, the financial services industry is not on its own, we can see similar patterns in the franchising sector and more. The only concern is for profit growth and boards and executives are complicit in throwing customers, employees or franchisees under the bus.
How did we end up in this situation? It required the coming together of a number of recent trends:
- Decline in trust in institutions
- Myopic view of business purpose
- Regulatory capture
- Lack of moral hazard
- Underinvestment in leadership
The decline in trust in institutions from government to political parties and business has been well documented. As the rising tide no longer lifts all boats (these days only the superyachts), people have understandably concluded that the system and its institutions no longer work for them and can’t be trusted. The flipside is that now people expect the very same institutions that were created to protect them (such as government regulators) to fail them instead. Which in turn excuses those institutions to continue to preference the needs of the rich.
The needs of the rich are also closely aligned with the singular view of business purpose – to grow profit. The rich want to get richer and business and finance are the machines that make it possible. What is new today is that this is predominantly driven by business executives, not shareholders. Boards are complicit in the self-enrichment of executives through their narrow focus on shareholder returns, but the driver is executive remuneration, not shareholder activism.
Boards and executive are aided in their quest for cutting costs and cutting corners by regulatory capture, the famous revolving door between politics, regulators and industry. This revolving door destroys the ability of regulators to be effective (with the help of ongoing funding cuts by the government).
Yet all of the above would not be enough to enable unethical and illegal behaviour if there was sufficient moral hazard – if directors and executives were held accountable by clawing back pay and bonusses and sent to jail. The aftermath of the financial crisis in 2008 showed everyone that this moral hazard is non-existent in practice, as only a handful of low-level ‘bad apples’ went to jail and no-one’s bonusses were clawed back.
Which leaves the question – where are all the good guys? Why didn’t the ‘good’ leaders speak out and stop this from happening? Where was the internal backlash inside businesses from the people who have a moral compass that goes beyond self-enrichment?
As always when we look at how ‘evil’ triumphs in human history, it happens in small steps which can be excused at the time and which then over time compound to create patterns of unethical and illegal behaviour. Leaders don’t operate in a vacuum and who rises to the top is very much related to prevalent social norms and expectations. In addition, the strong investment in leadership capabilities in the 90s and early 00s gave way to outsourcing, cutting costs and investing in technology instead.
We have all seen this play out in practice – increased sales targets go hand in hand with job cuts and murky accountability relationships, creating a stressful environment where cutting corners becomes a means of advancement and survival. If those who ‘cut corners’ are tolerated (or even encouraged), the behaviour will take hold until the next iteration. With each cycle we progress from cutting corners, to unethical and finally illegal behaviour, fully endorsed by those who either know or choose not to look.
I think it is necessary to acknowledge that the royal commission into the financial services industry is unlikely to lead to significant changes. Underpinning all of the above is our continued, collective belief in the virtue of accumulation of money and wealth. As long as this overarching belief exists we are unlikely to support drastic changes, because if getting rich is ‘good’, then how you get there is only a secondary consideration. When was the last time you saw a forensic audit of how a newly minted billionaire got their wealth instead of a fawning portrait in the paper?
So yes, good leaders are important, but they need to be nurtured and developed and they need a moral compass, which they get it from the social norms in broader society. We are not going to see ‘better’ leaders until we change our collective narrative about the accumulation of wealth. Despite the fact that we no longer trust our leaders, we keep them in power, because we still fundamentally believe in the integrity of both the narrative about money and the structures and institutions that we created to support that narrative (neoliberal capitalism).
At the same time, businesses need to acknowledge how this progression of small steps can lead to illegal behaviour and equip their leaders with an internal moral compass and the necessary courage and skills to tolerate discomfort. A good example is the current stand-off between Google as a corporate entity working on AI for combat robots and the engineers and researchers inside Google questioning the compatibility of this project with the ‘do no evil’ motto of the company. Because of this long-standing motto their concerns cannot be easily dismissed by the executives and they have the skills and courage to make their opposition known internally and externally.