Scott Morrison hails 'miracle' as Coalition snatches unexpected victory

The Coalition has been re-elected in a shock result in which Labor lost seats in Queensland, Tasmania and NSW and failed to make more than minimal gains nationally.But former prime minister Tony Abbot...

Michelle Grattan, Professorial Fellow, University of Canberra - avatar Michelle Grattan, Professorial Fellow, University of Canberra

Coalition likely to win election in Trump-like upset, but Abbott loses Warringah

Against expectations, Scott Morrison has led the Coalition government back to power.Wes Mountain/The Conversation, CC BY-NDWith 57% of votes counted in the election, the ABC is projecting that the Coa...

Adrian Beaumont, Honorary Associate, School of Mathematics and Statistics, University of Melbourne - avatar Adrian Beaumont, Honorary Associate, School of Mathematics and Statistics, University of Melbourne

Infographic: what we know about the results of Election 2019 so far

As of 10.01pm Saturday, May 18 2019:...

Emil Jeyaratnam, Data + Interactives Editor, The Conversation - avatar Emil Jeyaratnam, Data + Interactives Editor, The Conversation

Bob Hawke, the environmental PM, bequeathed a huge 'what if' on climate change

Since the news broke of his passing, Bob Hawke has been feted as the “environmental prime minister”. From saving the Franklin River, to protecting Antarctica from mining, conservationists ...

Marc Hudson, Researcher, University of Manchester, University of Manchester - avatar Marc Hudson, Researcher, University of Manchester, University of Manchester

You are what you vote: the social and demographic factors that influence your vote

Your income, type of work, where you were born, and other social and demographic factors influences your vote more than you may think.The Conversation / ShutterstockAustralia has changed in many ways ...

Rob J Hyndman, Professor of Statistics, Monash University - avatar Rob J Hyndman, Professor of Statistics, Monash University

View from The Hill: Bob Hawke was master of managing government

It’s always easy to romanticise the past – in celebrating the prime ministership of Bob Hawke it is important to remember it had its peaks and troughs.Trouble marked many years – the...

Michelle Grattan, Professorial Fellow, University of Canberra - avatar Michelle Grattan, Professorial Fellow, University of Canberra

Vic Stockwell’s Puzzle is an unlikely survivor from a different epoch

Sign up to the Beating Around the Bush newsletter here, and suggest a plant we should cover at batb@theconversation.edu.au.On the western side of Mount Bartle Frere, the tallest mountain in Queensland...

Andrew Thornhill, Research botanist at the Botanic Gardens and State Herbarium of South Australia/Environment Institute, University of Adelaide - avatar Andrew Thornhill, Research botanist at the Botanic Gardens and State Herbarium of South Australia/Environment Institute, University of Adelaide

Vital Signs: for the best election predictions, look to the betting markets, not the opinion polls

It turns out that betting markets are quite good predictors, on average.www.shutterstock.comOpinion polls haven’t done too well in some important recent elections.Polls failed to foresee the Bre...

Richard Holden, Professor of Economics, UNSW - avatar Richard Holden, Professor of Economics, UNSW

What I learned from Bob Hawke: economics isn't an end itself. There has to be a social benefit

When I was growing up in Adelaide in the 1970s I wanted to be like Bob Hawke. Other kids generally wanted to be cricket, football or rock stars. I wanted to be a research officer with the Australian C...

Tim Harcourt, J.W. Nevile Fellow in Economics and host of The Airport Economist, UNSW - avatar Tim Harcourt, J.W. Nevile Fellow in Economics and host of The Airport Economist, UNSW

GetUp!'s brand of in-your-face activism is winning elections – and making enemies

GetUp! protesters outside the second leaders' debate in Adelaide earlier this month.David Mariuz/AAPIt can be hard for a political cause to get noticed in a jaded world awash with information, but con...

Mark Rolfe, Honorary associate, School of Social Sciences, UNSW - avatar Mark Rolfe, Honorary associate, School of Social Sciences, UNSW

VIDEO: Michelle Grattan on the passing of Bob Hawke - and the final campaign push

University of Canberra Deputy Vice-Chancellor Leigh Sullivan speaks to Michelle Grattan about the week in politics. They discuss the passing of former Labor prime minister Bob Hawke and his legacy, as...

Michelle Grattan, Professorial Fellow, University of Canberra - avatar Michelle Grattan, Professorial Fellow, University of Canberra

As we face pressing global issues, the pavilions of Venice Biennale are a 21st century anomaly

One of the most powerful images at this year's Venice Biennale is Christoph Büchel's Barca Nostra, 2018-2019, Shipwreck 18th of April 2015. La Biennale di VeneziaThe 58th Venice Biennale of Art o...

Felicity Fenner, Associate Professor at UNSW Art & Design, UNSW - avatar Felicity Fenner, Associate Professor at UNSW Art & Design, UNSW

This is what happens to a baby's body during birth

Delivering a human baby – which has a large, highly developed brain – is risky for mother and baby. jaredandmelanie/flickr , CC BYPregnancy, labour and delivery are incredibly physically ...

Ian Wright, Professor of Paediatrics and Child Health Research, University of Wollongong - avatar Ian Wright, Professor of Paediatrics and Child Health Research, University of Wollongong

Final poll wrap: Race tightens in Ipsos and Dutton just ahead in Dickson, plus many more seat polls

The election campaign is finally coming to an end, with Australians to head to the polls tomorrow.AAP/Bianca de Marchi/Tracey NearmyThe federal election will be held tomorrow. Polls close at 6pm Austr...

Adrian Beaumont, Honorary Associate, School of Mathematics and Statistics, University of Melbourne - avatar Adrian Beaumont, Honorary Associate, School of Mathematics and Statistics, University of Melbourne

In its interim report published four months ago, the Banking Royal Commission chalks up shocking misconduct in the finance industry to greed – “the pursuit of short-term profit at the expense of basic standards of honesty”.

“How else,” it asks, “is charging continuing advice fees to the dead to be explained?”

It is seductively easy to explain misconduct in terms of this base human motive, one of the seven deadly sins. But moral failure does not satisfactorily explain why humans misbehave in organisations. There are also organisational reasons.

The royal commission is, of course, aware this. Its interim report points to greed stimulated by incentive payments or bonuses: “From the executive suite to the front line, staff were measured and rewarded by reference to profit and sales.”

Is the solution, then, to simply get rid of incentive payments?

Read more: We'll wait an eternity for the banks to fix themselves. Here's what we can do now

My view, based on many years looking at the causes of catastrophes such as the Deepwater Horizon disaster, is that there is no easy way to do this.

The uncomfortable reality is that incentive payments are an inherent aspect of modern capitalism.

The only effective way to detoxify the incentive individuals have to do the wrong thing in pursuit of bigger profits is to counterbalance them with equally compelling incentives to not act dishonestly.

The principal/agent problem

The interim report does not explicitly say incentive payments should be done away with, but it is the implication of much of the commentary.

It states (on page 317) the premise that staff and intermediaries will not do their jobs properly without incentive payments “must be challenged”.

It suggests there is too much conflict of interest in “customer-facing staff” being paid according to what they sell or advise customers: “And if customer-facing staff should not be paid incentives, why should their managers, or those who manage the managers?”

But it also acknowledges that attempts to change the incentive culture would most certainly be resisted: “Changing culture in the Australian banks may not be easy and may take time. It cannot be assumed that entities will embrace change willingly or immediately.”

Commissioner Ken Hayne at the initial public hearing, in February 2018, of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. Eddie Jim/AAP

It’s important to understand why the banks would be so hostile to such a change.

Incentive payments are a way to address a fundamental problem in modern capitalism, particularly in large publicly listed companies with multiple layers of managers.

In business literature it is called the “principal/agent problem” – the principal being the owner (or shareholder) and the agent being the manager (or executive) hired to run the business on behalf of the owner (or, in the case of a large company, many thousands of owners).

Agents have legal duty to put shareholder interests above all others. The “problem” is that, if left to themselves, they may in act in their own interest, putting their own wealth, power and prestige before the interest of the owners.

Tying executive remuneration to company financial performance has developed as a way to mitigate this problem. Remuneration consultants have developed very finely tuned schemes with huge incentives for top executives enrich themselves only by enriching their principals, through maximising total shareholder returns.

Read more: Will Hayne blink? The problems with banks demand tough measures that neither they nor their regulators want

Irresistable incentives

The downside, as the royal commission has exposed, is that such incentives also encourage executives to consider customers as sheep to be fleeced.

Key to this is how long-term incentive schemes are structured.

Short-term incentives are bonuses paid to top executives annually. In addition to these, each year a large bonus equal to or greater than their base salary is provisionally awarded. The payment is deferred for a period, often three years. The executive gets this long-term incentive only if certain conditions are met.

Those conditions largely concern the company’s financial performance in the intervening years. In most schemes the company’s performance must also be better than most of its competitors. Typically this is determined by comparing it with a select group of companies. If it achieves less than the median, the executive loses all or most of the long-term bonus.

It is hard to imagine a system better designed to pressure a chief executive to put profit ahead of all else.

Long-term bonuses operate in this way in many sectors of the economy, not just banking. They lie behind many of the major accidents in the oil and gas industry that I have written about.

Penalty counterbalance

So the problem with the banking and financial services sector is a whole system designed to maximise shareholder returns. It is the greed of shareholders that drives the system.

How can we mitigate the antisocial aspects?

One way is to ensure the huge incentives to do the wrong thing in pursuit of maximum profit are counterbalanced by the penalties. Right now that’s just not the case. The penalty for corporate malfeasance is often a fine, imposed on the company, not individuals.

We should hold top executives and even directors personally and criminally liable when companies fail to take proper account of the interests of consumers, customers and employees. This will ensures it will not always be in their interests to align their morality with the interests of shareholders.

Read more: Confiscate their super. If it works for sports stars, it could work for bankers

Health, safety and environment laws impose such criminal liabilities on senior office holders when they fail to protect their employees and the environment. Acute awareness of this liability has resulted in a much greater concern for the lives of workers and the environment than would be dictated by shareholder interests alone.

In my own research I have found the influence of corporate safety risk managers is enhanced when they can highlight the legal liability of their bosses. One might expect the influence of chief risk officers in financial institutions to be similarly strengthened.

It will be interesting to see how far the royal commission ventures down this path in its final report.

Authors: The Conversation

Read more http://theconversation.com/what-banking-regulators-can-learn-from-deepwater-horizon-and-other-industrial-catastrophes-108989