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Ken Henry blames 'corporate complacency' for misconduct

National Australia Bank chairman Ken Henry says unusually high levels of "corporate complacency" gave rise to the behaviour uncovered by the banking royal commission – a process he conceded was not only important but "necessary".

"When historians of finance look back on this period they will identify an unusual level of corporate complacency driven by relatively benign macroeconomic conditions and a long period of impressive ROE [return on equity] performance," Dr Henry told an Australian Shareholders' Association event in Sydney on Tuesday.

"They will suggest that corporate leaders fell into believing that a sector capable of generating ROEs in the mid-teens for so many years couldn't be doing a lot wrong."

Dr Henry said shareholders, along with customers, were the victims of misconduct.

Ken Henry said "from our own bank, we have heard examples of systems and processes having failed us, where individuals ...
Ken Henry said "from our own bank, we have heard examples of systems and processes having failed us, where individuals have acted dishonestly". AAP

"Some have suggested that misconduct is a consequence of our employees being too focused on the shareholder, to the detriment of our customers," he said.

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"I don't think that argument can be sustained. Misconduct occurs when individuals serve themselves, when they find a loophole in the system, or they blatantly break the rules. Mostly, it has been to the ultimate detriment of the shareholder."

Dr Henry said he had been following the royal commission closely and NAB would be using the process as a further catalyst for change.

"It has been a necessary and important process, providing an open forum in which customers can be heard," he said.

"During the hearings so far we have heard evidence of conduct that is simply unacceptable.

"From our own bank, we have heard examples of systems and processes having failed us, where individuals have acted dishonestly. There is no excuse for any of this."

Dr Henry said he had been asked to speak about role of business, particularly big business, in society.

"The leaders of large Australian businesses have never been under greater scrutiny. All of us have a fair idea of the reasons for that. In short, we have, in several respects, fallen short of community expectations," he said.

Dr Henry compared the recent era of complacency of the 1960s, when Australia was happy to rest on its laurels, leaving a strong endowment of natural resources and strong population growth to do the heavy lifting.

But what followed was a painful adjustment in the 1980s, he said.

"The best antidote to complacency is ambition. We are ambitious for change. In it we see exciting new opportunity.

"Over the next three years we are investing $4.5 billion in a significant transformation, one that will take considerable focus and commitment over many years, with the ambition of delivering great outcomes for customers."

As a result of the royal commission process, politicians would have little choice but to act, although it was impossible to legislate for good culture, Dr Henry said.

"Given the multiplicity of stakeholder interests, it takes careful political judgment, even in relatively quiet times, to avoid responding with a bewilderingly complex, ever expanding, set of laws and regulations," he said.

New banker pay regime for NAB

At NAB, a new executive remuneration framework will apply from next year.

Mr Henry said it would be simpler for employees and shareholders to understand, as well as deferring a significant portion of reward over the longer term in the form of equity.

In the branches, the bank was getting rid of bonuses linked to sales volumes, Mr Henry said.

"Over 700 of our retail branch managers, assistant branch managers, and sales team leaders in consumer call centres moved from product based incentives to the group incentive based on a balanced scorecard and NAB performance.

"No retail branch manager or assistant branch manager has a product based incentive. No call centre team leaders have product based incentives," he said.

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