NAB chairman Ken Henry told the bank royal commission that the director's duties should be expanded beyond shareholders to the entire community, saying that their Sole focus was the reason people no longer trusted business.
As the royal commission Hears evidence of reforms to prevent misconduct in its final week, the former Treasury secretary said it could take a decade for NAB to Embed a culture that would restore customer trust.
"In my view, the public Tolerance of that model of accountability has been pretty well eroded to zero", Dr Henry said on Monday, adding that it was "one of the most important reasons for a loss of trust in business."
"I think that boards should understand – and I think they increasingly do – that their responsibilities to the community go beyond their obvious responsibilities for shareholders."
Dr Henry said complacency, remuneration policies and "insufficient attention" to regulatory, compliance and conduct risk were also key reasons for the banks had run into trouble. Stronger culture "would have prevented some of the misconduct we've seen," he said.
However, he warned that there was also a risk in viewing behavior solely through risk measures and the core focus should always be what was right for customers.
"Had we been more concerned about the customer circumstance, had we been running the business – all of us – in the interests of the customer rather than the profit and loss and the balance sheet, those risk categories [regulatory, compliance and conduct risk] would not have mattered so much, "he said.
Ahead of an appearance in Melbourne by Australian Prudential Regulation Authority Wayne Byres later in the week, Dr Henry said APRA should be preferred to the Australian Securities and Investments Commission in regulating risk culture – but said this could not be legislated into place.
He also highlighted APRA's overreach, saying that its prudential standard that "ensures" they have formed a view of the risk culture is "a step too far" because ensuring something was a very high bar.
Under Australian law, directors have a statutory duty to act "in good faith in the best interests of the corporation", which in practice, means in the interests of the shareholders (and creditors, when a company is in financial trouble).
But the directors should be accountable to not just shareholders but customers and to the community more broadly, the NAB chairman said, in comments likely to ripple across the director community.
"So you think boards should be accountable to our community now and our future community?" Senior Counsel Assisting Rowena Orr, QC, asked.
"I do, really," Dr. Henry said.
He later added director accountability could also be "to the country, and for the country's future".
Australia's approach contrasts with that of Germany and France, where the directors' duties are owed to a wider range of stakeholders including shareholders, customers, creditors and the local community.
The "stakeholder" approach has been considered for Australia but will be considered by the government on the basis of local directors, when it governs the interests of employees and others in so far as they are relevant to the interests of the shareholders.
Dr. Henry said Shareholder Primacy is based on them supplying the most risky form of capital to a company and typically having the most to lose. But he said the misconduct Revealed by the Royal Commission has had a bigger impact on customers.
Reserve Bank of Australia Governor Philip Lowe said last week that the scandals in the finance sector are undermining public confidence in important institutions and that trust must be restored to avoid a more damaging backlash against the economic and political system.
Dr Henry agreed with Ms Orr that remuneration policies have played a key role in driving misconduct, but said fixing them would not necessarily be a panacea and it was important to ensure staff were able to do the job.
"If a business, in response to poor behavior, if all it does is continually imposing financial consequences on people who are not equipped to do the job, performance is not going to improve. Indeed, most likely performance will deteriorate even further," he said.
APRA could also be doing more on culture, he said. Commissioner Kenneth Hayne asked if APRA's "suggesting and nudging" was enough or whether it needed to go beyond that. "Beyond that, indeed. Beyond that," Dr. Henry said.
Ten years to get it right
He also disclosed the "cultural inhibitors" that NAB has provided to APRA, in the bank's self-assessment against the damning finding of the Prudential inquiry into Commonwealth Bank.
These are NAB's not putting enough intensity on getting things right all the time for customers; its systems; not listening closely enough to Regulators; not resolving issues intensely enough; and putting other priorities ahead of customers.
Ms Orr asked how Dr. Henry would know when NAB had fixed his culture. "We will know we have a healthy culture when we see things like few incidents of noncompliance with external regulation but also with internal policies," he replied.
"And if we continue to see poor customer experiences of the sort that we have seen over the past few years, then, again, that will be another indicator for us that we do not have the right culture in the organization."
But this would take time, he said – Revealing that compliance and regulatory risk ratings are still "red" and "amber" respectively.
Ms Orr asked Dr Henry whether he had a view "how long is it going to take to Embed the culture that you want?"
He said: "It could be 10 years, it could be, I hope not, but I would not be surprised at all, that would not be unusual for organizations that seek to Embed challenge in cultures."
Dr. Henry will return to the witness box on Tuesday morning.