About David, Goliath and The New Ethos in Banking
My journey of writing a book on The New Ethos in Banking took me across the world, where I learned from Corin Millais, Head of Socially Responsible Banking at Teachers Mutual Bank in Australia, that things “down under” are not that different to here in Europe when it comes to ethos, pathos and logos.
The article below reflects the personal views of Corin Millais and does not represent the views of his employer, Teachers Mutual Bank Limited.
As a start, I am curious about Teachers Mutual Bank Limited. Who are they, and what is their positioning in the market?
We are a mutual bank. We're part of the credit union and mutual banking sector. There are about 70 credit unions and mutuals – it’s a small $150 billion size, yet we have four million customers.
With $11 billion Australian dollars in assets under management, we are Australia's fourth largest mutual bank, with 230,000 customers. We are a bank for essential workers – in education, health, and firefighting communities. The people who society relies on to function.
The Australian banking sector is different from other countries: the economy is $1.8 trillion, with a banking sector worth $6 trillion, all big guns. The top five banks are in the ASX 20. The Big Four banks: Westpac, ANZ, CBA and NAB are worth $1 trillion each – essentially, those banks represent the economy. They are massive, and it’s an oligopoly, and that is who we compete with every day, mainly in the mortgage market.
Frankly, the economy and the banks are seen to be interchangeable. Housing ownership is a huge part of our economy and psyche in Australia, so we are all focused on winning share of the mortgage market. CBA’s mortgage book, the biggest of the four banks, is more than $350 billion.
The Australian banking sector is hugely powerful and seen to be very stable and secure. And politically, this matters, given the wider geo-political and security issues.
In context to the banking environment, we are competing against this with a purpose-led banking model. And the main way - probably the only way as we don’t have deep pockets - we do this is by being a global ethical banking leader - they just can’t do that. And it’s satisfying to out-compete to win against four banks with 400 times your balance sheet – it’s a David and Goliath vibe.
How would you define ethos in banking?
What is the character of banking? Here if you ask people, they would say the big banks are greedy and care for profit over customers and pay their executives too much. A few years ago, the banking system endured a massive scandal with ethical lapses and culture of greed at the core of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. It was front-page news for months – it’s receded now, and COVID gave the bigger banks a chance to redeem themselves with the community.
However, leopards don’t change their spots and there’s a bit of ‘purpose-washing’ going on. Their purpose is crystal clear - make profit. Our purpose is fundamentally different - profits are the lifeblood of any bank, obviously including ours, but they are not the sole metric.
There are winds of change coming though. Expectations on banks and pension funds are high, and Australians are overwhelmingly concerned about where their money goes – especially younger demographics who will drive future growth. Australians want their money to have a positive impact, in fact according to RIAA (Responsible Investment Association of Australasia) 61% of Australian adults would try to save and invest more if they knew it made a positive difference in the world. 80% reported it is important that their bank and super funds deliver positive impacts, while 84% want their bank or super funds to reduce greenhouse gas emissions. They are concerned about greenwashing though and this stops 65% from switching to an ethical bank.
I recently spoke to an executive of one of the global banks who reasoned that ethos is less about ethics and more about culture and reasoned that that must change. Culture must be the critical driver of change in banking. And during the past 30 to 40 years, culture and financial institutions shifted the wrong way.
Of course, culture defines behaviour and actions, and we’ve seen what culture does. It’s been a global phenomenon of unparalleled greed and growth with a byzantine world of complex structured securities, sub-prime, and in the end, assets and liabilities that simply could not be traded, and that, of course, was the GFC (Global Financial Crisis).
Banking was so far away from people and communities that we all paid the price. Not sure we’ve learned any lessons about systematic failures. There’s a second ‘GFC’ type event in the making, the failure of the banking system to account for environmental and social impacts. They scorched our economy, now they are scorching the planet. People are doing this in banks and that’s a cultural flaw, even if individual people are not intrinsically unethical.
Essentially, the culture of banks remains fixed on a sole metric – the dollar – whether it’s NPAT (Net Profit After Tax), ROI (Return on Investment) or NIM (Net Interest Margin). This is why banks find it hard to understand the complexity of sustainability and ESG: because they've only really been trained in one single metric their entire life – it appears they're all hardwired that way. However, the system is changing, and we do see a rise of a new breed of financiers who are making serious money from ESG, climate and green bonds in various emerging markets.
It’s not all ‘banking bad’ – it’s clear to me and many others that in the end, it really will be the finance industry that will save the world, because that will cost many trillions.
And when I say ‘ESG’ here I am using it as shorthand for all the sustainability and ethical considerations, not just the reporting.
To put that in context, you talk about shareholder-model banks, not the stakeholder-model banks?
We are finally seeing that a balance sheet is not just money but has people and planet on it as well - the so-called triple bottom line. Turns out planet earth is a very important shareholder. So bankers have to count non-monetary entries, intangible assets, and externalities. An Italian monk invented the accounting balance sheet in the 15th Century, and corporations were being set up in the 16th century, so the shareholder model has a long history, whereas triple bottom line and ESG reporting has barely been in place for 20 years.
Mutuals like us, we’ve had a stakeholder business model for 55 years, long before ESG and climate issues made it all trendy. We're doing the exact same banking things that the big banks do – selling mortgages, opening savings accounts and running liquidity while managing risk. But the difference, and I've worked in listed companies, is I don't have an ROI number on my back every quarter. The profit is retained in earnings. So I don't have to report to a shareholder.
Our members - our customers - are our shareholders and we don’t serve two masters but one. We can think longer term, and no daily share price obsession is a huge gift. Who I answer to is the member – that’s our primacy. Everything we do has to be for the member first, in the same way as a listed bank, which is all about the shareholder first. Their message of being customer-centric is questionable - it's all about returns.
There's no dividend; it is retained. We're not sucking money out of the business. And no surprises then that people want us to look after and respect the community and the environment.
This very ethos is precisely how we’ve been able to build a world leading ethical bank, which I detailed in Chris Skinners book Digital for Good. It’s so innate to us, now it’s more of a way of being than a management discipline. We very deliberately chose this path and built it from scratch out of a tiny regional credit union. Stakeholder-model banks have to be built and grown with as much discipline as building a balance sheet.
A Different way of looking at ethos is from a rhetorical point of view: ethos is one of the three elements of the rhetorical triangle. I reason that the people looked down on banking; they lost trust in banks because banks lost the balance in their rhetorical triangle. We can argue that banks make mistakes on ethos, pathos, and logos. Because of that, they're currently having difficulty positioning themselves as a trusted partner in people's lives. You have touched upon quite a few of the elements of ethos, pathos, and logos already. Is there anything you would like to add besides what you already explained?
Banks aren’t seen as the good guys. It’s Telsa or Greta (Thunberg), or the PV company. Banks have gotten away for years not having to care about the environment, society, or the community at large. I mean, there was never anyone employed in a bank for decades who was even thinking about that. You might have had a few CSR folks a decade or more ago and its promising to see a build out of ESG teams, but they are still proportionally miniscule. What can 15 ESG people really achieve in a company of 30,000 employees?
So historically, they've never much thought about this stuff, much less strategise or compete on it. Society and the banks are completely divorced. What's changed is that banks are now part of society. How do you then become a good corporate citizen – that’s the core question.
In my research, I found that the very first people laying the foundations of the CSR manager’s role were sometimes being characterised as anti-business back in the 90’s. There was a consensus it wasn’t the right approach. In that respect, some of the things you say are not just a banking evolution but also a societal evolution.
For people who were the early CSR corporate pioneers, they were perceived as anti-growth, anti-business or just the recycling officer with a bit of green PR. Certainly banned from being anywhere near the business levers. And that it’s an expense, and you had to choose either/or. Having CSR was a cost, now it’s a 180 reverse - the cost is not having CSR.
What’s changed in the last 20 years or so and especially for business is that a day of reckoning is coming where everyone has to account for what they're doing for society or the environment.
Climate change is the bellwether for that because people are realising it's not one day in the future, but it's happening now. People are looking at institutions and companies and going, “Well, what are you doing?”
Companies in the firing line have typically been the oil industry, fossil fuels, or chemicals. People haven't really been fingering the banks. Now, I think they're under pressure, as people figure out that behind a dirty company is the dirty money that funds it. It’s an interesting time of transition.
Banks do find it hard to do deep thinking about the non-financial world and ESG complexity, and lack the historical skills and cultural experience - that's why they're confused by politics, regulation or policy let alone science or community sentiment. It’s always the Board and Executive who have the least understanding. For people like me, this is normal stuff, it’s what I’m trained in and developed expertise in.
ESG is all about complex, systematic future horizons thinking. Its fundamentally non-linear. That’s why the moaning about the plethora of ‘complex’ ESG standards is strange, and the plea to have just ‘one’ standard shows a lack of nuance. That’s absurd - I may as well say, oh let’s have only the one currency in the world, it’s all money isn’t it?
Go to a UN climate COP meeting if you want to see complexity in action; 20,000 stakeholders, 192 Government views that never get reconciled like a balance sheet can be. I can read that like a banker can read a balance sheet.
In the past, we saw the rise of the Industrial Revolution, and banks were seen as a trusted partner in developing that new society. They were also stimulated by politics and respected for their contributions to that new future. Those ambitious politicians could fall back on banks to invest in that new industrial revolution. Today, we witness a similar opportunity: the Green Deal and the fight against the global climate crisis. Would you agree that this is a tremendous opportunity, or will we look back in a not-so-far future saying it was a missed opportunity for the industry?
The switch from slow to fast ESG has already happened, it’s just not everyone has noticed the fundamentals. Let’s be clear: this is a non-linear, disruptive messy change. What did sci-fi author Douglas Coupland say: “The future is here but its not evenly distributed”. The penny has dropped that ESG and sustainability is a strategic driver and there is an obscene amount of money to be made if you get it right, and not just tick box it.
There is zero doubt that this decade ESG will become a hyper competitive field for banks– winning or losing is the playing field, not participating. It’s a transformation and innovation business play. Then we’ll see if fintechs and new entrants from your world, Rik, can win over the traditional banks in this space - hard to predict that. Maybe someone like JPM will just buy the top 20 mutual banks one day.
The market numbers are so huge. The ESG finance market is about 30 trillion, green bonds half a trillion, clean energy is nudging $1.5 trillion and the high CAGR is the metric that they can all read and of course climate will drive the entire global economy in the end. ‘Green greed’ is good of itself - super smart bankers using what they know best – money. However, a purely transactional approach by funding deals and projects leaves a lot of value lying on the ground, especially if you foresee a purpose led approach, centred on people.
For us, and many credit unions, B Corps and mutuals, this is all opportunity and will become much more of a competitive play. We all have what the big banks don’t or can’t do - a profit for purpose model and business structure that is centred on people planet and profit. My bank has been deliberate in honing this natural advantage into a competitive advantage. What’s the point of being labelled a challenger bank if you can’t challenge the competitors? Don’t confuse a purpose approach as some rainbow love-in with a lack of fight - we want to win and we want to lead.
One last question. Do you think the industry needs a new ethos?
Well, I thought about this a lot. And it is a philosophical question. I just read the book “The “Millionaires factory”, all about Macquarie Bank. They’re a famously global aggressive, Gordon Gekko style bank. They pay huge, I mean, the head guy earns about 30 million a year. Good luck to them if they deliver huge green results. Their innovation ethos in green markets is genuinely exciting – can-do chutzpah. We need greedy banks to do the big green deals, I don’t think that has to be squashed given how many trillions is required.
It's much richer than the numbers – the wider purpose, integrity, and social impact has bigger long-term value, and all the structural and cultural attributes required for that which make a good company great – a mixture of passion, vision, and I guess, purposeful intent. And leaders who understand that ESG/sustainability is much bigger than a spreadsheet or a market segment. Those leader banks with purpose at the forefront, will be as big a change to finance as Amazon was to shopping. If you can’t see that, you are going nowhere in banking – the future is ethical and digital.
The planetary balance sheet is in the red and has to be reconciled. And we’re going to need banks to do that – in fact I think, and it’s been said a few times, that the finance sector will save the world in the end. That’s the ethos we need – but you’ve got to build it with your heart and as you say - pathos.