- Are customers just a way to maximise profits?
- Capitalist theory says they are, according to Ken Henry, the chair of the NAB.
- He says the NAB believes its executive incentives should be aligned with customer outcomes.
NAB chair Ken Henry in the financial services royal commission today ended up in a dissection of capitalism and whether customers exist for companies to maximise profits.
Henry, a former federal Treasury Secretary, was being questioned by Rowena Orr, senior counsel assisting the commission, about aligning executive incentives with shareholder outcomes.
The way CEOs and senior executives are paid, and how staff are rewarded, has been a key theme of the royal commission, questioning whether current remuneration practices bring about a conflict between profits and the treatment of customers.
Henry referred to a question asked by royal commission Kenneth Hayne in the first round of hearings on whether financial services businesses, including banks, were too close to shareholders at the expense of customers.
Henry says that question goes to the behaviour of businesses, to what motivates them, and how boards hold themselves accountable.
“There’s a much deeper level of importance to this question because it goes to the state of capitalism,” he says.
“The capitalist model is that businesses have no responsibility other than to maximise profits for shareholders.
“A lot of people who have participated in this debate over the past 12 months have said that’s all that you should hold boards accountable for.”
The responsibilities of companies to the societies that support them is an issue that has been thrust into the spotlight globally in recent time. In January Larry Fink, the founder of $US6.3 trillion asset manager BlackRock, sent a letter to CEOs around the world saying that companies would need to demonstrate a clear long-term strategy and an understanding of the social impact of their business.
A company that fails to do this, Fink, wrote, “will ultimately lose the licence to operate from key stakeholders. It will succumb to short-term pressures to distribute earnings, and, in the process, sacrifice investments in employee development, innovation, and capital expenditures that are necessary for long-term growth. It will remain exposed to activist campaigns that articulate a clearer goal, even if that goal serves only the shortest and narrowest of objectives.”
Fink’s letter — which was seen by some as a veiled threat from the world’s largest fund to withhold investment on the basis of company values rather then pure performance — was a huge talking point among investors and executives at the World Economic Forum gathering in Davos, Switzerland, that month. It captured a shifting view in the corporate and investment world on the notion of sustainability: that it can be about both long-term business performance and responsible behaviour.
Holding boards solely accountable for their returns to shareholders did not mean customers could be mistreated, Henry argued at the royal commission today. That might be in the short-term interests of shareholders but not for the the long-term interests of the company.
“But even that approach sees customers as instruments … as the means by which shareholder profits are secured, rather than the customer being the focus, what the business is actually all about,” says Henry.
NAB has over the last few years thought very deeply about whether customers should be seen in purely instrumental terms, he says.
“Views on this differ. It’s open, obviously, to the commission to enter into this rather important debate. It could play a valuable role by doing so,” Henry told the hearing.
“But anyway, for what it’s worth, NAB’s view clearly today is that (executive) incentives should be aligned with customer experience, customer outcomes.
“That instead of positioning the business in this way, that the purpose of the business should be to maximise shareholder returns subject to customer tolerance and subject to regulatory tolerance, that rather the purpose of the business should be about maximising the outcomes for customers subject to financial viability. And it is a rather profound distinction.”
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