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Banks and reputation

by Dr Simon Longstaff
05 November 1998
BUSINESS AND PROFESSIONAL ETHICS
Given that the sport of bank-bashing is at least as popular as some of the lesser known activities that merit a guernsey at the Olympic Games, it may be worth recalling that there was a time when banking was considered to be a respectable calling. Indeed, the ideal bank manager used to be thought of as a worthy individual committed to playing an active role in building and sustaining the local community.

So, what has gone wrong; and what lessons might the parlous state of the banks' reputations hold for the rest of business?

We might begin by noting that banking has been promoted as a kind of 'essential service'. For many people, branch closures represent the withdrawal of a basic entitlement – every bit as serious as the loss of access to health, education and telecommunications. What makes the situation so much worse is the fact that banks are enjoying record profits. The raw figures (for example, NAB's $2,000,000,000+ annual profit for two years running) are simply staggering when considered by ordinary folk. It is against this background that people struggle to understand the need for further cost-cutting. That's not to say that the arguments made by the banks are not valid – it's just that they are totally irrelevant to the concerns of most people.

This lack of relevance is symptomatic of a larger problem facing big business – a profound kind of 'forgetfulness' concerning the reason for its current form. It's not hard to spot the amnesiac, just look out for companies that justify every decision by appealing to the interests of shareholders. But to which shareholders is this duty of care owed – especially when it is realised that the obligation owed by company directors is to shareholders in perpetuity? The ultimate grounds for corporate decision-making are far more subtle than many assume and businesses are ultimately bound to consider the interests of a range of stakeholders that includes, but is not limited to, shareholders. That banks often seem to forget this is part of the problem that they need to address.
The latest thinking, increasingly recognised by leading businesses, draws attention to 'the triple bottom line' – social, environmental and financial. Business is now expected to perform well in all three areas.
Even then, there is a deeper obligation that seems to have been forgotten – one that is owed to the community as a whole. This obligation is not as old as some might think. In fact, it came into existence when the community decided to allow the implementation of powerful inventions such as those of limited liability and the joint-stock company. That is, the community extended to business a special kind of 'license to operate'. Like all licenses, it is subject to occasional review!

Neither limited liability nor shareholding is mandated by heaven; nor are such institutions written into the structure of nature. They are entirely artificial legal forms – but of a kind to confer considerable advantages on those lucky enough to have spare cash to invest. Just consider what it means to be able to invest one dollar knowing that there is no limit to the profits you might make. And if things go wrong, you lose no more than the dollar you initially invested – no matter how much is owed to the company's creditors!

There can only be one reason why a rational community would accord and then maintain such a privilege. It must be that, in granting these privileges, people believe that they will be better off than would otherwise be the case. That is, the benefits must outweigh the costs and flow far (and wide) enough to counteract the perception that shareholders are the only ones profiting from this set of arrangements.

Which brings us back to the banks – highly visible, sophisticated and emblematic of the market itself. Although it would be fanciful to suggest that most (or many) people dwell on the 'bargain' struck by society and its business sector, I do think that people have a very general sense of whether or not businesses are net contributors to community welfare. Nowadays, the 'bottom line' goes beyond simple financial considerations. The latest thinking, increasingly recognised by leading businesses, draws attention to the 'triple bottom line' – social, environmental and financial. Business is now expected to perform well in all three areas.

Some financial institutions have a natural tendency to relate easily to these broader obligations. Former building societies, like St George Bank, and the credit union movement have a long history of strong community involvement. Others, like National Australia Bank, have been trying to develop 'social capital' through programs like 'Communitylink'. For all that, one senses that people are not convinced. Part of the problem for the banks is that they are perceived to be somewhat heartless employers, having little regard for the welfare of their own employees. This popular perception may be completely false. However, it is one that 'bites' for the simple reason that people find it hard to believe that businesses, that seem to care so little for their own people, could possibly care for relative strangers.

The great challenge for the banks is to demonstrate that they understand and accept the nature of the bargain that businesses must honour. Life will become even more complicated, but until the banks demonstrate such understanding and act accordingly, they risk remaining unloved and if they are not careful – eventually, unwanted.
 
Dr Simon Longstaff AO is Executive Director of St James Ethics Centre.