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Trust has to be as important as profit if banks and their boards are to regain their corporate legitimacy

  • Written by Rosemary Sainty, Academic, UTS Business School, University of Technology Sydney
Trust has to be as important as profit if banks and their boards are to regain their corporate legitimacy

Central to the banking royal commission (and central to recent revelations about the ABC) has been the role of boards.

Although they’ve said little publicly about how they see their roles, in a confidential research setting they have conceded their role should be about far more than profit: it should be about maximising trust[1].

For the past three years I have used confidential, high-level interviews and forums[2] to examine the views of board members (including members of bank boards) in order to understand the tensions and trade-offs they make as they navigate social, environmental and stakeholder concerns.

Read more: Banking Royal Commission's damning report: 'Things are so bad that new laws might not help'[3]

Many find it hard to break out of self-reinforcing systems that maximise

  • shareholder primacy

  • profit maximisation

  • remuneration structures that reward profit maximisation

  • a legalistic and risk-based approach to decision-making

  • short-term approaches to incentives and returns reinforced by reporting cycles and the global marketplace for chief executives.

Underpinning these issues is an awareness of the importance of maintaining corporate legitimacy, or a “social license to operate”.

Concerns within banking and finance

My findings were discussed in a recent deliberative forum hosted by the Banking and Finance Oath[4] whose signatories represent some of the most senior members of the banking and finance sector in Australia.

It provided an opportunity for a frank discussion of current challenges.

Important themes emerged including

  • the task of addressing normalised bad behaviour within their organisations

  • an imbalance favouring shareholders’ interests

  • a disconnect from customer empathy

  • executive remuneration

  • the need for moral courage and collaborative conversation in the boardroom.

They are significant issues that require further, deeper and wider conversations.

There’s case for changing the way they work

Last month the UK Labour opposition released a report calling for changes to the way boards work entitled A Better Future for Corporate Governance: Democratising Corporations for their Long-Term Success[5].

It recommends a model similar to those used in a number of mainland European countries.

Using either a single or a two-tier board structure, employees and long term shareholders and other stakeholders are given a place at the table in order to guide corporations to long term success.

It’s an approach that warrants serious consideration in Australia.

Read more: Britain's broken corporate governance regime[6]

We need to reconsider the purpose of the board and the corporation as well as the role of business in society.

Boards capable of engaging in and strategically managing both pragmatic and moral legitimacy strategies are more likely to adapt, innovate and sustain their corporations over the long term in the face of emerging challenges.

There is a growing consensus businesses have a broader purpose than profit: an implicit social contract. Recognising this is the only way they can rebuild trust and be assured of a continued social licence to operate.

Authors: Rosemary Sainty, Academic, UTS Business School, University of Technology Sydney

Read more http://theconversation.com/trust-has-to-be-as-important-as-profit-if-banks-and-their-boards-are-to-regain-their-corporate-legitimacy-104053

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