"The capitalist model is that businesses have no responsibility other than to maximise profits to shareholders,’’ he said. "A lot of people who have participated in this debate over the past 12 months have said that all that you should hold boards accountable for is that they are focused on the maximisation of profits for shareholders. "Now, of course, some people will say: ‘but that doesn’t mean that you can mistreat customers, because doing so might be the interests of … the short-term interests of shareholders, but not in the long-term interest of shareholders.’ "But even that approach sees customers as instruments in an instrumental fashion; that the customers are seen as the means by which shareholder profits are secured rather than the customer being the focus, what the business is actually all about.’’ Ken Henry ponders the state of capitalism Credit:Webcast

He said some saw customers as the means to an end rather than as an end in itself. Rather than positioning the business to maximise shareholder returns, subject to customer and regulatory tolerance, NAB’s purpose today was to maximise the outcomes for customers, subject to financial viability. He described that a "profound distinction’’ and "a monumental shift.’’ The view of customers and shareholders as competing interests, where the sole responsibility of a business is to maximise shareholder returns, is a rather crude and antiquated one. Most businesses now recognise - and the fact of the banking royal commission underscores it - that they need a social licence to operate. Indeed, they have to deal decently and fairly with customers and suppliers, and comply with the law and regulations if they are to survive. There is, however, a tinge of reality to it that Henry would have first-hand experience of.

Loading There has been pushback from some institutional shareholders in recent years when companies have tried to include non-financial and/or subjective measures in their remuneration schemes. Last year’s "first strike’’ against Commonwealth Bank’s remuneration report and its plan to give social metrics equal weighting with financial metrics within its variable remuneration assessments was referred to by Orr. Some fund managers, with business models that provide incentives for prioritising their own short-term performance, want a near-term alignment of shareholder and company interests; one focused on near-term shareholder returns. NAB itself recently restructured its executive remuneration scheme, generating a mixed response from the market.

It has collapsed the short-term and long-term variable remuneration for its executives into a single reward, 40 per cent payable in cash at the end of the financial year and 60 per cent in shares that can’t vest for four years. The metrics that will shape and determine the size of the executives’ reward pool and how it is distributed include the outcomes for the customer and the risk and regulatory outcomes as well as financial metrics. Risk and compliance outcomes are the "gateways’’ that the bank has to clear before any performance-related incentives are awarded. It will give the board far more discretion – and far more responsibility and accountability for the outcomes. Company executives tend to see variable pay as all upside with little downside. In tandem with the Banking Executives Accountability Regime, where individuals responsible for various key bank functions are identified and held accountable - and liable- for their compliance outcomes, the incentives granted ought to better reflect individual performance on both financial and non-financial issues.

The nature of the remuneration structures the banks are trying to put into place in the context of the royal commission’s airing of their dirty linen and the resistance to the inclusion of non-financial metrics, says that Henry’s musings about the state of capitalism aren’t quite as anachronistic as they might initially appear. The proof of the pudding, of course, lies in the eating. Company executives tend to see variable pay as all upside with little downside. Despite what’s been broadcast of their behaviours by the royal commission, bank executives have still tended to be granted the bulk of their incentives. Loading Replay Replay video Play video Play video If NAB is truly elevating customers, risk and compliance outcomes ahead of simple total shareholder returns, it’s successes, or failures, ought to be measured as much by the rewards it doesn’t hand out - to executives and to shareholders - as by those it does. There’s likely to be (and already is) a near-term cost to the shift in focus towards customers and compliance and away from a fixation with total shareholder returns.