Australian Banks, Ethical Standards and HRM Systems Failure

Banks are crucially important institutions within societies as they perform numerous roles that are vital for the economy and community well-being (Balluck 2015). They provide useful information for borrowers and investors... [ view full abstract ]

Banks are crucially important institutions within societies as they perform numerous roles that are vital for the economy and community well-being (Balluck 2015). They provide useful information for borrowers and investors to ensure proper use of the funds that they have at their disposal, obtained largely from depositors, (Balluck 2015). Banks also execute key roles in capital markets and theoretically ‘contribute to the efficient functioning of financial markets’, but as demonstrated in the GFC, ‘banks can create and propagate risks in the financial system given their scale, as well as the interconnected and complex nature of their activities’ (Balluck 2015 p. 4). When banks lose their ethical compass, from an economic perspective the society is at risk (Bhandari 2014), as was shown in the GFC (FCIC 2011).
The global banking system has been embroiled in a series of scandals including collusion and rigging markets, defrauding clients, tax evasion, money laundering and fraud (FCIC 2011). This all occurred in the context of an elaborate system of national and international financial regulation designed to support the stability of the financial systems. It is not only the practices and conduct of individual banks that have been questioned, but it is also the failure of the regulatory systems around the banking system that has been questioned (Verick and Islam, 2010). The public scandals, regulatory failures and public bailouts of banks have been on a grand scale. For example the Royal Bank of Scotland in February 2009 reported the biggest annual loss of £24 billion (Werdigier 2009) in British corporate history, and signed up for Britain’s asset protection plan underwritten by the British public (Correy 2011). The Anglo-Irish Bank received a 4 billion government bailout from the Irish government in 2009 (Correy 2011). In Iceland, three of the largest banks collapsed when it was found they were in $120 billion debt, which represented the country’s entire economy multiplied by a factor of ten (Correy, 2011). In 2008 the giant American insurance company American International Group, Inc. (AIG) was bailed out by the United States government (Correy 2011) for $182 billion (Grunwald, 2014).
Pre and post GFC, Australian banks have been subjected to ongoing public scrutiny regarding their advice to clients, the effectiveness of their training programs, the efficacy of their governance systems, and the fees charged (and profits earned) in a regulated oligopoly market. Allegations of unethical behaviour have been so serious that Senate inquiries (Senate Economics References Committee 2014, 2015a, 2015b) were conducted, and considerable media commentary followed highlighting a culture of unacceptable behaviour across the banking sector. Thousands of clients appeared to have been given unreliable advice and lost millions of dollars in assets and savings, generating personal and community hardship that in many cases is subject to ongoing litigation. Behind these events is a systems failure where the bank’s human resource management (HRM) systems and programs allowed such practices to proceed largely unchecked. The banks operated with a code of ethical and professional practice that was not met by some of its employees nor was it enforced by the bank. If the HRM systems had been operationally effective then many of the practices would have been prevented or dealt with expeditiously.
Theory/Foundation
This paper demonstrates that Hopper and Hopper’s (2009) generic view on how an enterprise should be founded and its key purposes, as well as its ethics and corporate social responsibility has departed significantly in major finance organisation in Australia. Ethics being the array of “moral principles” or “values” that defines what is appropriate or “right and wrong” for individuals and corporations (Williams and Mc Williams 2010). Morality is defined as doing things correctly (Solomon, 1998). Ethics involves exhibiting behaviour based on moral beliefs and the practices individuals adopt (Laverty, 1989) underpinning the standards we humans regulate our behaviour in order to achieve aspirations and goals in life (Jones & Ryan, 1997). Business ethics embody principles, norms, and standards of conduct governing an individual or group in work situations (Trevino & Nelson, 2006). But the causes and ongoing practices of the key players in the financial crisis internationally, and subsequently Australian banks, exhibit a disturbing departure from acceptable standards of individual and business ethics (FCIC2011).
Theoretically corporate social responsibility (CSR) entails concepts closely allied to ethics.CSR is embodied by stakeholder management, sustainability, accountability, citizenship, responsiveness with each “characteristic” legitimising external the many forms of interaction and impact a corporation has within the various societies in which it “interacts”. To Wilmot (2001) corporate moral responsibility (CMR) underpins CSR and has two important dimensions. The first dimension of CMR relates to the quality of corporate behaviour questioning whether the behaviour of the organisation is moral and right (Wilmot 2001). The second dimension of CMR relates to accountability and holding corporations morally responsible for their actions and behaviour as individuals are held for their responsibilities and actions (Wilmot 2001). But the causes and ongoing practices of the key corporate players in the financial crisis and in the Australian case of predatatory lending practices exhibit a disturbing departure from CSR and CMR (FCIC2011).
Research Questions
To what extent does the apparent failure in the ethical standards of employee behaviour in Australian banks reflect on the HRM systems? Could the publicised unacceptable practices have been curtailed through improved HRM processes?

Methods
The paper draws on secondary information that has been gathered through a number of public inquiries (Senate Economics Reference Committee, 2015 a, b, c) that have been held into the lending practices of Australian banks. These inquiries have collected written and oral submissions from banks, regulators and bank customers. An ongoing Australian Senate inquiry into the conduct of Australian banks provides an extensive source of submissions and documentation that outlines the ethical failures of the banks towards the community and customers.
Findings
The paper provides an analysis of two large banks operating in Australia and highlights the failures in the operating systems and accountability for unethical business behaviour. It is also instructive in indicating the importance of an operational and effective HRM system that develops and enforces ethical standards within the organisation.

References
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Banking; ethical standards; reputational risk; Australia; HRM systems Importance [ view full abstract ]

Banking; ethical standards; reputational risk; Australia; HRM systems
Importance