Our report is an attempt to make realize the relevance of the principles of corporate governance and the application of the ethical principles to be applied in making the complex financial decisions so that to prevent the misconduct in the Banking, superannuation and finance service industry. To facilitate our study, we have taken the reference of the interim report furnished by the Australian Royal Commission dated 28th day of September 2018 in this regard together with the subsequent release of the article in the Australian financial review after the submission of the aforesaid report (Kusolpalalert, 2018). Further our report is primarily confined to provide the solution to the set of a questionnaire consisting of the three questions, i.e., the first being how and why the culture of greed is the result of remuneration disincentives, the assessment of effectiveness of the Australian corporate governance principles as provided by ASX corporate council and deciding whether putting people before profit as suggested by Mr. Freedenberg can be of great help to lift these principles and finally making a comparative study of the Australian banking and financial sector with that of United states so that to evaluate the suggestion as made by Mr. Freedenberg to prevent the repetition of the interim report of Australian royal commission in future (Norberg, 2018).
To answer the above question, the reference of the Volume 2 case studies of the interim report of the Royal commission and the application of the agency theory have been resorted to.
A brief discussion on the same is made hereunder:
The first case being referred here is NAB introducer Home loan case in which after making enquiries the bank itself accepted the fact that the fraud committed by the Bankers (its employees) and introducers were caused due to some of its system related issues one of which more badly was the ill-structured incentive programmed for both of its employees and the introducers as well (Wellmer, 2018).
As it showed that NAB was all aware of the fact since April 2015 that its star sales incentive programmed was the reason for the potential misconduct by its employees which used to reward its employees with bonuses for the achievement of the target in respect of the sale of home loan plans (Johan, 2018). Hence as per the reward structure more weight was provided to the financial matter in terms of targets with the less weight to the compliance related matters while disbursing such loan. That gave birth the sense of greed amongst its employees to achieve such home loan disbursal targets under any circumstances to have such incentive (Dan, 1995). Again, the structure of paying commission to those introducers also required committing the target of referring a minimum amount of $2 million in a year on personal lending and $10 million for business lending as the commission paid to the introducers themselves tied to the amount of loans that caused the collusion between employees and introducers resulting into the inappropriate behavior on theory part (Webster, 2017).
In this case the employees or so-called bankers were nothing but the agents of the NAB and though expected to work in the best interest of the bank itself ignoring their self-interest, but the conflict of interest occurred and finally the bank had to pay for it (Coate & Mitschow, 2017).
The second case being referred is the Westpac car loans in which the inappropriate structure of rewarding the dealer of the Company’s Car and the application of the agency theory both were correctly found fit. The Westpac itself acknowledged that their current system of remunerating its dealers in terms of flex commission may cause a conflicting interest between its dealers and the customers as dealers who acted as intermediary shall ignore the compliance requirement as prescribed by the Westpac. As it further supported the viewpoint of the ASIC that the flex commissions paid to the intermediaries became the root cause of the increase in the price of the credit contract, because of which consumers were paying excessive interest on their car loans. As in the given case such flex commissions were simply contrary to the principles of the community and industry standards as suggested by the ASIC (Charles H, et al., 2015).
Our third reference while satisfying the above statement is the case of Citi international transaction fees details in which case it was clearly found guilty of misconduct from the two different perspectives, the first being the breach of the licensee’s obligation of doing all things necessary to ensure that credit activities authorized through the license are fair, homestand efficient and the second being there was lack of professional ethics noticed in the activities of the city as it failed to act fairly and reasonably towards the customer. As the in the enquiry it was clearly found that city did not reveal its customers the nature and basis of charging the international transaction fees clearly and accurately, In the given case the city was acting as a member of master and visa card based payment scheme in which when a city credit card customer entered into any foreign currency transaction at that time international transaction fee was charged on the same. It was observed that on the part of the city failed to make the following disclosure expressly that it shall charge the international transaction fee for the transaction with the offshore merchant in case where the website operated by the offshore merchant either quoted prices in AUD or used Australian website etc., Though in january,2017 it recognized the need to make perfect its disclosure status but in between there would have been more customers found whose international transaction fee should have been refunded that was not done and finally it benefitted the CITI (Bouret, 2017). So, we see that regulations become important to make sure that banks are fulfilling their obligations to make proper disclosures as and when needed and support the company and its overall operations. In case they fail they would be penalized for that.
Hence it can be seen that on various occasions and situations these banking companies who were in power to manage the affairs of the customers, they failed on any grounds as they were concerned with making profits first and then serving the customers who are working for them on continuous basis. So, we see that there are many amoral grounds on which the companies had failed to perform their duty for the customers (Yadao, 2018). In all of the above cases the major points that was common was the breach of the agency theory by all of the agents who acted not in the interest of its principal and the second thing was that the greed of all these agents was the result of ill structured remuneration package designed by their relevant principals who were the giants of the Banking and Financial Industry and destroying the authenticity of the same.
There are certain reasons due to which despite the core corporate governance principles as laid down but still the banks and other financial organizations in the Australia are found the guilt of misconduct. These reasons are explained in brief as hereunder:
The bank is finally a profit-making unit like any other business in which case based on its financial figures published its successfulness of the business is being measured (Norberg, 2018). Therefore, they are certain areas in which the company cannot function accordingly as they are also thriving to make their business a success, so they often end up taking their customers for granted and making decisions that might affect the customer position (Williams & Adams, 2013).
The second reason is the Australians are highly dependent on these banks as there are only four major players in the market. Hence in the given case they are utilizing their position to achieve the desired level of profit by ignoring the requirement of its customers. Since there are not too many banking companies there these banks have an upper hand with their operations and the customers have no option then to come and fulfil their financial needs from there.
They can easily hide their misconduct using well decorated apology (Boghossian, 2017).
Again, whatever the law was framed the level of permissible behavior.
Hence it is being suggested that the corporate governance principles should not be lifted rather than attempt should be made that banks need to see these compliance requirements that shall cause the value enhancement for them, the banking industry should feel free from the competitive pressure for which the regulatory authorities need to create an environment to ensure the application and effectiveness of these eight laid down principles. If banks are compliant enough it would reduce a lot of issues that the general public faces when they operate in these banking operations.
The US banking sector basically relied on the policy of the empower, enforce and educate policy to deal with the Global financial crisis. The term enforcement simply talks about the approach of the regulatory authority so that it can consider its moral duty to ensure the compliance for which it is mandatory that it should be adequately empowered to enforce the law and finally it is the need to educate the people that cover the common man so that the sense of awareness can be generated to prevent such incidents as were reported in the Royal commission’s report. These things were completely missing in the Australian banking sector that became the major reasons of its weak banking and financial industry structure (Awasthi, et al., 2018).
The major points to be considered are hereunder:
Conclusion
From the above analysis and detailed study it is to be concluded that all those incidents that was described in the Royal commission’s report simply emphasized the need that in order to ensure the compliances with the principles of the corporate governance, there is an urgent need to make people aware working in the Banking and financial industry that how does the ethical principles matter in making financial decision and finally it is the professionalism of those who are making the complex financial decisions that is going to be a key factor and the integration of these ethical principles with those of the professionalism of the people working in this industry is inevitable. At times a well drafted regulatory provision simply fails just because of the lack of the application of these ethical principles and the standards of professionalism that cause the fraud and embezzlement in this industry. The approach should be a persuasive one rather than imposing the same.
References
Abdullah, W. & Said, R., 2017. Religious, Educational Background and Corporate Crime Tolerance by Accounting Professionals. State-of-the-Art Theories and Empirical Evidence, pp. 129-149.
Awasthi, A., Omrani, H. & Gerber, P., 2018. Investigating ideal-solution based multicriteria decision making techniques for sustainability evaluation of urban mobility projects. Transportation Research Part A: Policy and Practice, 116(2), pp. 247-259.
Boghossian, P., 2017. The Socratic method, defeasibility, and doxastic responsibility. Educational Philosophy and Theory, 50(3), pp. 244-253.
Bouret, I., 2017. Benefits of higher education in mid-life: A life course agency perspective. Journal of Adult and Continuing Education, 23(1), pp. 15-31.
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Johan, S., 2018. The Relationship Between Economic Value Added, Market Value Added And Return On Cost Of Capital In Measuring Corporate Performance. Jurnal Manajemen Bisnis dan Kewirausahaan, 3(1).
Kaufmann, W., 2017. The Problem of Regulatory Unreasonableness. First ed. New York: Routledge.
Kusnadi, Y. & Wei, K., 2017. The equity-financing channel, the catering channel, and corporate investment: International evidence. Journal of Corporate Finance, Volume 47, pp. 236-252.
Kusolpalalert, A., 2018. The relationships of financial assets in financial markets during recovery period and financial crisis. AU Journal of Management, 11(1).
Naci, T. & Hasan, O., 2012. The Measurement and Management of Unused Capacity in a Time Driven Activity Based Costing System. Journal of Applied Management Accounting Research, 10(2), pp. 43-55.
Norberg, P., 2018. Bankers Bashing Back: Amoral CSR Justifications. Journal of Business Ethics, 147(2), pp. 401-418.
Romney, M., 2012. Accounting Information Systems Australasian. 12 ed. Australia: Pearson Australia.
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