Fitting your own oxygen mask first

Before I get into this week’s article, I want to stress that my reason for posting it is not intended to be self-serving, or self-aggrandising – I’m fully aware of such pitfalls, as captured wonderfully in The State of LinkedIn on Twitter. Instead, I hope it’s received as an example of paying it forward. And all starts with some advice I heard a number of years ago.

My erstwhile colleague, Dale Simpson, likes to use the following analogy when coaching his clients on career development, leadership and directorship:

“Be sure to fit your own oxygen mask first”

The reason being, how can you help others if you don’t take care of your own needs first? It’s not about being selfish, but about being present and able to serve others. It also recognises that in order to be useful, we need to work from a position of stability and resilience ourselves.

Dale also likes to use Maslow’s Hierarchy of Needs in his work. Both Maslow and the oxygen mask have clearly entered my own vernacular. A couple of weeks ago, I was listening to a neighbour at my co-working space talking about the work he was trying to do to help others become more resilient and overcome trauma. As the conversation went on, it was clear that his own circumstances were challenging, due to insecure accommodation, erratic income and other factors. He had also had to overcome a great deal of adversity and other challenges in his life.

I asked him if he had heard of Maslow – he hadn’t. I suggested that he consider what his own needs were, so that he would be better able to help others. A little while later, I went back to my desk and found the above note he had left for me.

I’m sure once he manages to sort out his own circumstances, he will be a fine coach and excellent mentor, because he was very certain of his purpose – he just needed to adjust his own oxygen mask first.

Next week: Steam Radio in the Digital Age

Life After the Royal Commission – Be Careful What You Wish For….

In the wake of the recommendations from the Royal Commission into Misconduct in the Financial Services Industry (aka the Hayne Report), one of the four major banks announced that it would be removing bonus payments for its front line tellers. This was supposedly in line with Hayne’s proposal that performance-linked remuneration, financial incentives and sales commissions in the financial services industry need to be restructured.

Image sourced from Small Caps

This prompted a mixed reaction among the public, based on some of the comments I have read on social media. Some felt that the tellers were being made scapegoats for the banks’ bigger failings – others felt that this was an inevitable outcome from the banking backlash.

Personally, I believe the announcement is potentially just one of the many likely “unforeseen consequences” to come out of the Royal Commission – I’m not saying this particular decision is good or bad, just that we need to be aware of what’s likely to happen based on Hayne’s key recommendations. Be careful what you wish for. And, as an underlying theme to this whole debate, let’s not forget that most Australians are shareholders (directly or indirectly via their Super) of the Four Pillar Banks (one of the greatest government-endorsed and legislatively protected market oligopolies around which also helped steer us through the GFC relatively unscathed….).

So, what else might we see?

First, as with financial advice, residential mortgages will move to a “buyer pays” model. Brokers would not be able to receive commissions from mortgage providers or other intermediaries based on the products they sell, recommend or refer – instead, mortgage applicants will be expected to pay for the services of a broker, who will therefore be under an obligation to find the best product for their client. But removing trailing commissions and other conflicted remuneration may also mean that brokers could seek to earn additional fees from their mortgage clients by re-contacting them a year or so later (with permission, of course) to inform them of a better deal. (Even now, lenders are not explicitly obliged to let existing customers know if they have a newer product that may be better for them). Some estimates suggest that fee-for-service will add about $3,000 to the initial cost of applying for a mortgage. Whether this will also lead to more competition among mortgage providers (who will no longer have to pay broker commissions) is not clear.

Second, the increased focus on acting in the best interests of the customer may result in placing all financial planners, brokers, advisors, insurers, and banks (and their officers, agents and employees) under a fiduciary duty of care to their clients – even if they are not directly managing specific assets, selling a specific product or advising on specific services or financial strategies. In other words, advisors etc. will be deemed to have taken ALL of a client’s needs and circumstances into account. (This is largely the result of the miss-selling of financial products, and the charging of fees for “no service”, by banks and their retail wealth management arms.)

Third, the increased cost of compliance will disproportionately impact smaller financial institutions such as credit unions, member-owned banks and other mutual societies, who came through the Royal Commission pretty much unscathed. Those costs will need to be passed on, to customers and members. Of course, there has also been some political debate around the need for some sort of banking levy – which will ultimately be passed on to shareholders or customers (who are often the same people…).

Fourth, and related to the above, the separation of roles between those superannuation trustees who act as both fund trustees and as responsible entities of managed investment schemes will have a knock-on effect in terms of operating and compliance costs. Such dual-regulated entities will have to decide whether to focus on their trustee role, or appoint a separate and independent responsible entity in respect of the asset management.

Fifth, the higher compliance and regulatory obligations may deter or inhibit more competition – either from new market entrants from overseas, or from local start-ups. The recent restricted ADI model (aimed at enabling challenger or neo-bank brands) has not exactly seen a raft of applications, and off-shore banks tend to come and go in successive waves, largely driven by market conditions. If lending standards are further tightened, it may be less attractive for foreign firms to set up local operations. In fact, there have been calls to force some smaller superannuation funds to merge with larger funds, or exit altogether for reasons of scale and efficiency – potentially taking out some of the competition in that sector. And if mortgage brokers have to move to a fee-for-service model, it will likely force some providers to exit the industry, as happened with the FOFA reforms in financial planning and wealth management.

Sixth, at the level of corporate governance, boards of financial services providers will need to be mindful of their duty to act in the best interests of the company – which has traditionally meant the share holders – and the increased duty of care towards their customers, which may at times be at complete odds. Non-executive directors willing to serve on the boards of banks and insurers may also be harder to find, at a time when there is already a high concentration of directors who sit on multiple boards across Australia’s biggest companies. So, board diversity may be even harder to achieve, especially if non-executive directorships become subject to even greater formal qualification, to ensure board members have appropriate professional experience, industry knowledge and technical expertise, as well as financial competence and risk management skills.

Finally, all this is happening as we face something of a credit squeeze (thanks to increased lending standards and greater provisioning for risk-weighted assets) heightened economic uncertainty (slowing GDP growth, lower productivity, wage stagnation, falling property prices), and an upcoming General Election campaign during which the Hayne Report will be held up as a key reason for why “things have to change”. The irony being that, except in a few areas, the complaints aired and wrong-doing uncovered during the Royal Commission could have been addressed by the regulators and enforcement agencies via existing laws on financial services, prudential standards, and general consumer protection (unfair contract terms, unconscionable conduct, deceptive and misleading behaviour). Plus, the Australian Financial Complaints Authority (which combines the remit of the former Financial Ombudsman Service, the Credit and Investments Ombudsman and the Superannuation Complaints Tribunal) has a wide jurisdiction over consumer complaints relating to Credit, Finance and Loans, Insurance, Banking Deposits and Payments, Investments and Financial Advice, and Superannuation. And as with most External Dispute Resolution agencies, AFCA and its predecessors have an obligation to report on systemic issues within their industry.

Next week: Pitch X

Culture Washing

Banks, Parliament, Cricket Australia, Political Parties, religious bodies, the ABC – the list of national institutions that have come under fire for failed governance and even worse behaviour continues to grow. Commentators are blaming a lack of “culture” within these organisations.

Some Boards end up washing their dirty laundry in public….. Image Source: Max Pixel

Already we are seeing a “culture” movement, which will inevitably lead to “culture washing”, akin to “green washing”, and other examples of lip service being paid to stakeholder issues.

Just this past week, the interim report of the Banking Royal Commission prompted the Federal Treasurer to say that banks need a “culture of enforcement and a culture of compliance”. I can already imagine the “culture checklists” and the “culture assessment” surveys and feedback forms….

There are consulting firms building “culture risk” assessment tools. There may even be some empirical evidence to suggest that companies with better employee engagement and “culture” can generate better share price performance. Even the AICD is getting in on the act with its upcoming directors’ update on how boards can gain “insights on culture”, and how to set the “tone from the top”.

(Actually, all any director needs to do to monitor the “culture” of their organisations is to track social media and sites such as Glassdoor, Whirlpool, Product Review, etc..)

But corporate and organisational “culture” is organic, and cannot be built by design. It is a combination of strong leadership and core values that everyone in the organisation is willing to commit to and adhere to. It also means ensuring that everyone knows what is expected of them, and the consequences of failing to meet those standards are clear.

As for employee engagement surveys, one of my colleagues likes to say, “The only question to ask is: ‘Would you recommend this organisation as a place to work, and if not, why not?’” Another colleague regularly says to his own teams, “If this is no longer a fun place to work, then let me know”.

Next week: Why don’t we feel well off?

 

Startup Governance

The recent debacle involving LaunchVic and 500 Startups comes at a time when startups and entrepreneurs are facing increased public scrutiny over their ethical behaviour. Having a great idea, building an innovative or disruptive business, and attracting investors is not carte blanche to disregard corporate governance and social responsibility obligations. So how do we instil a better “moral compass” among startups and their founders?

The TV sitcom, “Silicon Valley”, is drawn from experience of the software industry, but it also reveals much that ails the startup economy. As funny as it is, the series also highlights some painful truths. Scenes where founders “trade” equity in their non-existent companies are just one aspect of how startups can develop an over-inflated sense of their own worth. These interactions also reveal how startups can reward inappropriate behaviour – if sweat equity is the only way founders can “pay” their team, it can lead to distorted thinking and impaired judgement, because the incentive to go along with poor decision-making is greater than the threat of any immediate sanction.

A key challenge for any startup is knowing when to seek external advice – not just legal, tax or accounting services, but an independent viewpoint. Many startups don’t bother (or need) to establish a board of directors – and if they do, they normally consist of only the founders and key shareholders. The role of independent, non-executive directors is probably under-valued by startups. But even an advisory board (including mentors who may already be guiding the business) would allow for some more formal and impartial debate.

Another challenge for startups is that in needing to attract funding, they can find themselves swimming with the sharks, so doing due diligence on potential investors is a critical task in building a sustainable cap table that will benefit the longer term aims of the business.

Equally, if startup founders are motivated to “do their own thing”, because they are driven by purpose or a higher cause, or they simply want to make a difference, they can risk having to compromise their values in order to engage with bigger, more-established companies. So they may end up emulating the very behaviours they sought to change or challenge. Neither startups nor big corporations have a monopoly on unethical behaviour, but if founders stray from their original founding principles, they will soon alienate their stakeholders.

Finally, nurturing the “conscience” of a startup is not something that should be left to the founder(s) alone. The vision has to be shared with, and owned by everyone involved, especially as the business scales. Everything should be measured or tested against this criteria – “does it stay true to or enhance our reason for being here?” Without a clear sense of what is important to a startup, it will also struggle to convey its core value proposition.

Next week: Digital Richmond