Published by the Australian Financial Review, Thursday 31 August
What happened at the Commonwealth Bank is becoming a little clearer. It appears that the problems were well known and discussions underway with the regulator and internally about the appropriate action to take. That shifts the focus away from the operational areas and towards the groups inside the bank that are responsible for managing regulatory problems. It is likely then that the heart of the problems lies somewhere between the risk, legal and financial functions, rather than in the retail bank. It seems most likely that after analysing the situation, somebody in those core governance areas decided that it was not a material issue and that the remediation efforts underway were appropriate. Clearly, that was a big mistake and we can expect serious consequences for the bank and some of the individuals involved. The political and regulatory response has been severe. This should surely have been anticipated. Given the pressure from the Australian Labor Party on the issue of bank governance, and the previous tough steps the Treasurer has taken after previous bank snafus, it was very clear that any further problems would lead to a ton of bricks being dropped on the perpetrator.
Where were the alarm bells?
In this environment, why weren’t alarm bells ringing inside the bank about any potential breaches? The guardians of the bank in this sort of environment should be the government relations team and to a lesser extent corporate affairs. Either, these groups were not doing their job properly or they were not being listened to. Clearly, they were ineffective. There are lessons here for companies more broadly and particularly for highly regulated firms like banks. Government affairs teams are typically made up of people who have worked inside the offices of senior politicians. They are recruited for their ability to open lines of communication between the company and the government (and opposition). They are basically trading their contacts. And of course it is a two-way trade. In order to sustain the contacts they have to provide information about the company or sector into the political offices. It is not clear that this is actually in the interest of firms. The model of trading information for access seems likely to work best at putting out small spot fires. It is not the right approach when you have deep-seated and persistent problems. It might also work against the long-term interests of the firm, just depending on what is being traded outwards. Certainly, it has not been working for the banks at the moment. As fewer politicians have any experience of business, and fewer political staffers know anything other than politics, recruiting government relations people who also are former political staffers to change the mindset is not going to work.
Government relations needs to change
For heavily regulated firms, and for most major Australian firms, the government relations function has to change. The task has to be the education of the next generation of politicians. This is not an issue for political fixers. It requires a long-term, thoughtful strategy that teaches politicians and those around them the way in which firms respond to their environment. They need to understand the deep set of uncertainties within which senior management operates. Trying to understand how to position your business in its competitive framework is seriously difficult. Struggling against existing competitors every day in setting prices and motivating staff, in just understanding what is going on, is one level of the problem. The risk of having your business disrupted by non-standard entrants like Amazon, Apply or Alibaba makes positioning even harder. Customers too are a frequent source of change; as are politics, exchange rate fluctuations and macroeconomic issues. In this sea of uncertainty, firms have to make long-term investment decisions. It is very hard work. It surely has to be the task of government relations teams to help politicians and senior public servants understand some of the complexity. This is not to let firms hide behind the complexity, but rather so that policymakers understand better the difficult of making decisions, good decisions, in that world. This requires a different skill set within the government relations teams. These groups need to involve people who have been immersed in the business and to understand some of its complexities. Clearly some exposure to politics would be helpful so that they can communicate with politicians and staffers in a way they understand, but the key function is educational. For highly regulated firms, the banks, the energy companies, media, airlines etc, a spell in the government relations team should be a step along the path towards higher executive positions. Government relations is far too important for these firms to be left to budding, failed or ex-politicians.
Dr Rodney Maddock is professor at Monash Business School and Vice Chancellor’s Fellow at Victoria University. Until 2012 he was head of group strategy at the Commonwealth Bank of Australia.