Money & Markets | opinion

Last year, Jeff Bezos warned of a precise problem that can derail companies -- and it has surfaced at the Commonwealth Bank

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A big focus of the APRA inquiry into failings at Australia’s biggest bank, the Commonwealth, is the company’s culture.

Specifically, the report talks about “a widespread sense of complacency” and an environment where success “dulled the senses of the institution” when it came to accountability and managing risk.

The final report has an entire section devoted to it, with 13 pages of observations and commentary and four recommendations to the bank to reddress the problems.

That section makes a cutting reference to the causes of the GFC in its introduction. “In many global institutions, a multitude of poor risk practices had been allowed to flourish, despite well-established principles of prudent risktaking. Notwithstanding the range of regulatory reforms introduced in response to the crisis, a series of scandals has continued to shine a light on ethical shortcomings and weaknesses in banks’ cultures,” said the report, written for APRA by John Laker, Jillian Broadbent and Graeme Samuel.

It then goes on to outline four cultural traits the authors identified through their investigations which they thought contributed to indecision and failures of accountability. Here’s their summary, which is worth reading in full, because it calls out some problems that will sound awfully familiar to people at companies of all shapes and sizes (emphasis added):

First, and obviously, a widespread sense of complacency has run through CBA, from the top down. CBA’s first ranking on many financial measures created a collective belief within the institution that CBA was well run and inherently conservative on risk, and this bred over-confidence, a lack of appreciation for non-financial risks, and a focus on process rather than outcomes. CBA was desensitised to failings with customers. Delays in (or premature closing of) risk and audit issues and the late delivery of projects were readily tolerated, with limited remuneration or other consequences.

Secondly, CBA has been reactive – rather than proactive and pre-emptive – in dealing with risks. Operational risk and compliance issues tended to receive attention only once they had emerged clearly or reputational consequences began to rear, but that attention did not always guarantee timely and effective resolution. A slow, legalistic and reactive, at times dismissive, culture also characterised many of CBA’s dealings with regulators. Taken together, complacency and reactivity led to a sense of ‘chronic ease’ in CBA, rather than the ‘chronic unease’ that has proven effective in driving safety cultures in other industries.

Thirdly, CBA became insular. It did not reflect on and learn from experiences and mistakes (its own and others’), including at Board and senior leadership levels. Lessons from previous incidents have not been readily captured or shared across CBA. A lack of intellectual curiosity and critical thinking about the ‘bigger picture’ and the full depth of risk issues inevitably limited CBA’s ability to learn, anticipate and adapt. CBA turned a tin ear to external voices and community expectations about fair treatment.

The fourth cultural trait is the collegial and collaborative working environment at CBA, which places high levels of trust in peers, teams and leaders. Reinforcing this is the significant value placed on the ‘good intent’ of staff. These are positive elements of a sound culture. However, they have had a downside. Pursuit of consensus has lessened constructive criticism and has led to slower decision-making, lengthier and more complex processes, and a slippage of focus on outcomes. It has also impeded accountability and the individual ownership of risk issues. Trust has not been continually validated through strong metrics, healthy challenge and oversight. Good intent has been too readily used to excuse poor risk outcomes.

Complacency is a well-known killer in business and it is extraordinary that it was allowed to seep in to such an extent at CBA when it is led by some of the most experienced and knowledgeable business leaders in Australia.

Amazon CEO Jeff Bezos talked about the dangers of complacency in his letter shareholders last year, where he expanded on his philosophy that Amazon should always behave as if it’s “Day 1” for the company. The approach is intended to ensure the company is always, always thinking about its customers first and not lapsing into complacency. Here’s what he said:

As companies get larger and more complex, there’s a tendency to manage to proxies. This comes in many shapes and sizes, and it’s dangerous, subtle, and very Day 2.

A common example is process as proxy. Good process serves you so you can serve customers. But if you’re not watchful, the process can become the thing.

This can happen very easily in large organisations. The process becomes the proxy for the result you want. You stop looking at outcomes and just make sure you’re doing the process right. Gulp. It’s not that rare to hear a junior leader defend a bad outcome with something like, “Well, we followed the process.” A more experienced leader will use it as an opportunity to investigate and improve the process. The process is not the thing. It’s always worth asking, do we own the process or does the process own us? In a Day 2 company, you might find it’s the second.

The APRA report talked about exactly this type of failing at CBA. It said that “complacency has manifested itself through repeated behaviours around avoidance of ownership of outcomes in favour of following a process. People focus on what they have to do; that is, they follow an often narrowly defined process or mandate, rather than seek to deliver the ultimate outcome or goal. This appears as a habitual pattern of behaviour and mindset throughout CBA.”

The bank’s chief executive, Matt Comyn, has been contrite this morning in his response. “Change starts with acknowledging mistakes. I apologise to the Bank’s customers and staff, our regulators, our shareholders and the Australian community for letting them down,” he said. “We will make the necessary changes to become a better bank and we will be transparent about our progress. This includes establishing a much higher level of accountability and consequence for our actions and the impact we have on customers. This starts with me.”

Comyn has cancelled his short-term bonus for this year, he revealed today.

The impact of this report will be profound on CBA, but the report can also serve as a warning to companies everywhere and should start some healthy conversations about whether success is breeding attitude problems in the business that will ultimately lead to trouble.

You can find it here.

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