Banking’s Rot Spread Far And Wide

It’s now time for large enterprises around Australia, led by those in the Business Council of Australia, to realise that the bad cultures that created the banking scandals are not confined to banking.

The banking culture sulphur fumes have spread throughout the land, embracing companies and governments

The royal commission will revolutionise conventional banking.

but last night small business minister Michaelia Cash took another big step by ending the hidden banking scandal that plagues large corporations and governments. Longer term, the Cash revolution which affects $550 billion in contracts annually, may have a bigger lasting impact than the royal commission.

Currently large corporations and governments make small enterprises their “bankers” by delaying payment times to 90 days or more. That’s going to be reduced to 20 days, with penalties for delinquent large enterprises. That simple move will transform the way business is conducted in Australia.

More on that later because first, it’s important for the community wake up to the wider implications of the bank scandals

For example, as I detailed yesterday, it’s time for Australia’s leading financial and investment institutions to recognise that they played a big part in the banking debacle. It was their obsession with short-term profit performance and the trashing of shares in companies that did not meet their expectations that contributed to the change in bank management cultures.

The role the institutions played in banking spreads to large areas of our large corporate community who face similar dangers. Every chairperson in Australia needs to watch the way Rowena Orr QC took apart the chair of our largest company, because what she did at CBA is duplicated around the land.

Worse, we are now seeing a parade of banking chief executives blaming themselves and/or their predecessors, as well as those around them for their bad management decisions. Simply showing the current chairs and CEOs the door won’t solve the problem. A deep cultural issue has developed, and it starts with the institutions.

Emphasising the role of the institutions does not excuse the bank directors and top managers. But it is now time for the people behind our institutions, as well as smaller investors, to reflect on the role they played in changing banking culture and to consider what now needs to be done.

Paradoxically, the consideration of new institutional attitudes comes at a time when there is a massive transfer of money from the large retail superannuation funds and some self-managed funds into large industry funds. It’s now up to the industry funds to lead a new way of looking at investment strategies for the benefit of their superannuation, retirement and other members and the community as a whole.

Australian institutions have been a global joke for a long time. Their obsession with short-term performance has mitigated against the interests of so many of their members. People who invest in superannuation usually want their money managed for the long term, but the institutions competed vigorously on short-term performance.

Most of the institutional questioning of chief executives concentrates on trying to establish a profit forecast for the next six to twelve months. Detailed examination of long term strategy is a rarity. Chief executives that miss their institutional profit forecasts are therefore punished by a severe drop in share price, often helped by a few extra blows through institutional shorting of the stock.

As we have seen with the banks, salary structure and appointments are often made on the basis of people’s ability to lift short-term earnings. All bank shareholders are suffering considerable market price loss as the community reaction to this deep cultural flaw threatens their earnings.

Unfortunately down in institutional land, there is very little understanding of their role in this banking problem.

But some of the industry funds have now become so large that they really do need to start investing longer term. Indeed one, of the reasons that many of the large industry funds outperformed the retail sector funds was that they invested in property and infrastructure with an eye to the longer term.

The retail funds did not do this on the same scale because they were always frightened of a run on their funds. In other words, exactly what is happening now. But when it comes to the sharemarket, most of the industry funds contracted out much of their investment management. So they also became deeply involved in changing bank management culture away from customers to profit.

But if we are to set new investment paradigms it won’t simply come from institutional change.

It was the boards of our big banks that weakened in the face of the institutional short termism. All boards are going to start acting in the long term interests of shareholders. They need to stand up to be counted and to encourage their CEOs to stand up to the institutions still peddling short-term issues.

Boards must learn to communicate directly to all shareholders once the right policies are in place. A first step will be to look more closely at current remuneration policies and make sure that all bonuses are long-term and not just simply short-term exercises.

The salary packages need to be established in a way that enables the boards to stand up and publically fight for those packages. At the moment they just cop on the chin, possibly because they are not proud of their actions.

Directors also have to explain to their shareholders their long term strategies and concentrate on those strategies. And again when the institutions dump their stock because of a short term hiccup, they shouldn’t be frightened to speak up.

Out of all of this we may emerge with a far better capital system. But that revolution will take time and will require a major change in the way board appointments are made.

Meanwhile the Michaelia Cash revolution will be much more immediate and dramatic. All those tendering for government projects must pay their small business suppliers in 20 days. Yes, 20 not 30. And from 1 July 2019 the government will also make its payments within 20 days. There will be annual reporting requiring large businesses with over $100million turnover to publish payment information on how they engage with small business. Some 3,000 large enterprises will be required to report.

The delinquents will not get government contracts and those large enterprises who are discovered dealing with the delinquent companies may also find it tough in government tendering. Michaelia Cash wants the states to agree and I think it is almost certain that they will. NSW and Victoria are on board.

There is some $550 billion in contracts likely to be affected. It’s a huge boost to the economy and many large enterprises will be seeking higher bank overdrafts.


By Robert Gottliebsen - Robert has spent more than 50 years writing and commentating about business and investment in Australia. He has won the Walkley award and Australian Journalist of the Year award. He has a place in the Australian Media Hall of Fame and in 2018 was awarded a Lifetime achievement award by the Melbourne Press Club. He received an order of Australia Medal in 2018 for services to journalism and educational governance. He is a regular commentator for The Australian.

The Australian

22 November 2018

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