Background and Scope
The importance of compliance with ethical principles has increased substantially in banking corporations. The purpose of this report is to evaluate the case of National Australia Bank (NAB) to understand the corporate governance policies breached by the company. The corporation has violated various laws implemented on financial institutes by the government to govern their operations in order to ensure that they manage their operations in an ethical manner (Letts, 2017). The scope of this report includes evaluation of the property market scandal of NAB in which the company and its executives failed to maintain a high standard of care to ensure that they comply with appropriate corporate governance policies. This paper will be limited to recent scandals of NAB relating to corporate governance policies. The method of this report will focus on using different theories to evaluate the ethical policies violated by NAB while conducting its activities. In this report, the background of this case will be discussed along with ethical questions which arise in the case. The corporate governance policies will be analysed in the report along with a stakeholder analysis of the enterprise. The principles and recommendations issued by the Australian Securities Exchange (ASX) and various ethical theories will be analysed in the report to provide recommendations to NAB.
After the financial crisis of 2009, the importance of ethical business practices has increased significantly between organisations. The companies have to comply with corporate governance policies to ensure that their conduct their business operations in an ethical manner while focusing on the interest of their stakeholders who are affected by their operations. Banking organisations are criticised for misusing their powers to conduct their operations illegally which adversely affected the whole economy of the country. The federal government is pressures to take action against the banking corporations to establish discipline (Hutchens, 2018). After the formation of the Royal Banking Commission, the mischievous and unethical practices of banks were brought forward. In Australia, banking corporations have paid over $1 billion in fines and penalties, and this number is expected to double in next one or two years (Goncalves, 2018). A good example is the case of NAB which is a leading bank operating in Australia. The company has contributed in artificially influence the property market in Australia by aggressively pushing loans on to customers. In a recent scandal, it was found that the company has inaccurate and incomplete documentation for more than 2300 home loans which it provides to its clients. It was alleged that the company has been giving its overseas investors the option to buy property in red-hot Victorian and New South Wales housing markets without collecting appropriate documents. In the investigation, it was found that this practice was continued by the bank for a period of 12 months (Letts, 2017).
Theoretical Framework: Corporate Governance, CSR, and CSV
The company was selling mortgages to its customers without collecting their accurate information and documentation. It was found that over a third of Australian mortgages are so-called liar loans which are valued roughly at $500 billion (Danckert, 2018). It was found in the investigation against NAB that the loans were given by the staff members of the company, and they were involved in the ethical practices. These loans were given by the staff members of the company between 2013 and 2015 as reported by an “extensive review” of the company (Whalley, 2017). The bank was able to give mortgages to its customers under its program called Introducer program. In this program, the bank pays commission to different real estate and financial planning agencies so that they can refer customers to the organisations who are willing to take out a mortgage on their property. The key ethical question which is raised in this case is that it is ethical for NAB to pay different agencies to find potential customers so that they can push loans on to those customers? Another ethical question is that whether it is ethical for the company and its employees to focus solely on increasing the profitability of the company by increasing the number of mortgages without collecting relevant documentation.
Corporate social responsibility (CSR) is often viewed in the context of legitimacy and stakeholder theories. The legitimacy is referred to a condition in which the organisation conducts its activities while complying with different values, beliefs and norms. The corporation focuses on a larger social pattern in which it focuses on its impact on the community (Laidroo and Oobik, 2013). Corporate governance is referred to a system of rules, policies, and practices which are followed by a company and which direct and control its operations. The objective of corporate governance framework is to create a balance between the interest of different stakeholders of the corporation which include suppliers, management, directors, employees, customers, government and environment. By effectively comply with corporate governance policies, the corporations can ensure that they conduct their business operations in an ethical manner (Font, Guix and Bonilla-Priego, 2016). The key principles of social responsibility of business include legitimacy, public responsibility and managerial discretion. The principle of legitimacy provides that the company will not abuse its power and in case of abuse, the corporation will lose its power.
The public responsibility is referred to the obligation of the company towards the public that is affected by their primary and secondary area of business. Managerial discretion means that the managerial personnel and directors will discharge their duties in ethical way while evaluating their social responsibility towards the society (Stand, Freeman and Hockerts, 2015). The corporate social performance cube is referred to a three-dimensional conceptual model of corporate performance in which one side includes all the stakeholders of the company. Another side defines the actions of management and the board, and the third side define compliance with ethical principles. Moreover, the Creating Shared Value (CSV) concept given by Porter and Kramer has provided that corporations can achieve economic success. As per this model, the company should focus on realigning its corporate budget with profit maximisation while at the same time it should comply with various economic and societal values. As per CSV model, the interest of customers should be prioritised by the company, and it should focus on building strong relationships with them which will assist the company in increasing its profitability (Moon et al., 2011).
Corporate Governance Breach by NAB in Property Market Scandal
In the case of NAB, the company has failed to comply with corporate governance and CSR principles. The company initiated the introducer program in order to push home loans on customers by whatever way possible. The corporation was paying financial and real estate agencies to find potential customers who are willing to take a mortgage. In order to attract these customers, the company was giving them loans without collecting appropriate documents (Peters, 2017). The company also gave home loans to overseas customers without collecting relevant documents from them. It shows that the company violates its corporate governance policies because it solely focused on increasing its profitability rather than achieving sustainable development. The employees and executives of the company were also involved in the process which shows that the culture of the company did not promote compliance with corporate governance policies. Moreover, NAB has not adopted a CSV model while conducting its business because it did not emphasise on increasing economic value of the company while complying the social factors. Rather than prioritising the interest of its customers, the company prioritised profit maximisation. Thus, the corporation has failed to adopt an effective CSR structure which focused on increasing transparency in the workplace (Fontaine, 2013). Effective CSR framework would have also assisted the organisation in ensuring that it fulfils the interest of its stakeholders.
In order to conduct the stakeholder analysis of NAB, there are five questions which will be answered. These questions assist in critically in capturing the essential information which the company needs for effective stakeholder management.
Who are our organisation’s stakeholders?
The primary stakeholders of NAB include business partners, customers, shareholders, managers, employees, local communities and others. The secondary stakeholders include social groups, environment, government regulators, competitors, trade bodies, media and others (NAB, 2018).
What are our stakeholders’ stakes?
In the property scandal of NAB, the key stakeholders who are affecting include employees, customers, and the government bodies. The corporation generates revenue by giving loan to its customers. The company has to ensure that it gives loan after evaluating relevant documents in order to avoid loan fraud. In this case, the company pushed loan to customers by paying financial and real estate agencies to find potential customers and giving mortgage to overseas customers. Thus, the company focused on increasing the profits of the company rather than prioritising customer interest. The employees of the company have a key stake because without them the corporation cannot perform its options (Lienert, Schnetzer and Ingold, 2013). The company has to ensure that it implements appropriate corporate governance policies which focus on the development of employees and ensure that they conduct their operations in an ethical manner. In this case, the employees engaged in illegal practices as well due to the failure of the company to established effective CSR policies. The government has a key stake in NAB because it a major bank which provides services to millions of customers. The government’s stake is to ensure that the company is managing its operations ethically. The Banking Royal Commission highlighted the illegal activities of the company under which it was pushing home loans without proper documentation.
Stakeholder Analysis of NAB
What opportunities and challenges do our stakeholders present to the firm?
Strong and ethical relationship with employees brings new business opportunities for the company based on which the company will be able to increase its profitability. The key challenge is getting correct documents for the mortgages given by the corporation. The number of customers can be reduced if the company continues to operate its business in an unethical manner. The key challenge associated with employees is that their unethical behaviour resulted in negatively affecting the brand image of NAB. The opportunity is that effective CSR policies will assist employees in acting ethically which will increase the profitability of the company and expand its customer base (Missonier and Loufrani-Fedida, 2014). The key opportunity provided by the government is the reduction in penalties if the corporation ethically performs its operations. The challenge is that the government can cancel the license of the corporation if it continued its unethical operations.
What responsibilities (economic, legal, ethical, and philanthropic) does the firm have to its stakeholders?
NAB has economic responsibility towards the government because it contributes to the economy of the country. The liar loans given by the corporation to its customers resulted in adversely affecting the economy of the country. Moreover, the corporation has legal responsibilities towards its stakeholders including customers, employees, and the government. The company has failed to fulfil the legal requirement of customers since it failed to collect relevant documents from them while issuing loans (Fernyhough, 2017). The employees of the company acted illegally because they supported the practise of giving mortgages to customers without proper documents. From an ethical perspective, the operations of the company are wrong because it solely focused on increasing its profitability rather than fulfilling the interest of its stakeholders. The investigation of Royal Commission highlighted the unethical practices of the company which shows that it has violated its responsibilities towards its stakeholders.
What strategies or actions should the firm take to best address stakeholder challenges and opportunities?
The corporation should emphasis on effective compliance with corporate governance policies which will enable it to address the legal and ethical challenges. A CSR structure should be adopted by the company in which it should focus on identifying its key stakeholders and implementing business policies while after determining their needs (Cavaco and Crifo, 2014). It will assist the company in assessing the key opportunities related to stakeholders and the corporation will be able to exploit those opportunities which will result in increasing its profitability. It will assist the company in addressing its stakeholder challenges while ethically conducting its operations.
Recommendations
Lay solid foundations for management and oversight
The management of NAB should lay a solid foundation for effective management practices and oversight of their operations. Due to lack of monitoring practices, the employees were able to give loans to customers without collecting their relevant documents.
Structure the board to add value
The board of NAS should be structured to add value to the company and its stakeholders. In this case, the board were focused on profit maximisation rather than achieving the interest of different stakeholders.
Act ethically and responsibly
The board and employees should act ethically and responsibly while conducting business operations (ASX, 2014). NAB did not act ethically because it provided loans to the customer without getting their documents based on which it has violated its responsibility towards the customer and the government.
Safeguard integrity in corporate reporting
Since the employees of the company were involved in the process, the unethical practices of the company were not reported to appropriate authorities. Although after conduct an investigation, NAB reported to ASIC regarding the whole incident, however, effective reporting policies would have prevented the whole incident.
Make timely and balanced disclosure
Although NAB made timely disclosures to its stakeholders in its annual and corporate governance statement, however, these disclosures are not balanced since they did not consider a balanced disclosure of stakeholders’ internet.
Respect the rights of security holders
The company should ensure that it respects the rights of security holders while taking business decisions (ASX, 2011). NAB did not consider their interest while giving mortgages to customers without getting relevant documents.
Recognise and manage risk
While managing their operations, corporations should recognise the key risks associated with their operations and manage them appropriately. It is risky to give mortgages without documents to local as well as overseas customers, however, NAB failed to manage such risk.
Remunerate fairly and responsibly
It is the responsibility of organisations that they should remunerate their staff members fairly and responsibly. Although NAB paid its staff members fairly, but it failed to ensure that they act responsibly while conducting their operations.
Consequentialist or utilitarian ethical theory is a part of normative ethical theories. This theory provides that the ethical nature of a situation is determined based on consequences rather than the actions taken by the parties in such situation (Broad, 2014). If the consequences of the situation are positively, and they result in bringing happiness to a greater number of people, then the actions are considered ethical. On the other hand, non-consequentialist or deontologist ethical theory provides that a person should not violate his/her duties while taking action. This theory is also a part of normative ethics, and it focuses on the violation of duties rather than consequences of actions. In case a duty is violated by the party while taking action, then it is considered as unethical even if the consequences of such violation resulted in benefiting a large number of people (Shafer-Landau, 2012).
Conclusion
Another good example is Rawls approach which provides that the right of individuals should be protected, and they should have the liberality to speak, practise a religion or own personal property (Moellendorf, 2018). In the case of NAB, the actions taken by the company are unethical as per the utilitarian theory because giving the loans without documents only benefited the company rather than its stakeholders. Moreover, the company violated its duty by failing to ensure that a standard is maintained while giving loans to customers such as the collection of relevant documents. Moreover, the fact that the company pushed customers to take loan cannot be considered as justice, thus, the actions of the corporation are considered as unethical.
- NAB should adopt an effective CSR structure which is targeted on increasing transparency in its operations so that issues such as this did not go under radar. The transparency can be maintained by making continuously disclosures by the company to ensure that it provides appropriate reports to authorities to avoid unethical behaviour.
- The company should implement a system in which another person should check the work of an employee. It would assist the company in ensuring that appropriate documents are collected while giving loans to customers.
- Ethical training should be given to employees since they were the ones who engaged in unethical behaviour by giving loans without collecting relevant documents from customers. The training should assist them in identifying different stakeholders and take decisions while prioritising their interest.
Conclusion
In conclusion, NAB has been involved in a property market scandal in which the company pushed home loans to customers without collecting relevant documents from them. The corporation failed to comply with corporate governance policies since it did not prioritise the interest of its stakeholders. As per the stakeholder analysis, it is determined that the company has failed to achieve the interest of its stakeholders. NAB failed to comply with principles and recommendations issued by ASX. Moreover, its actions are considered as unethical as per normative ethical theories. Various recommendations are given in the report for NAB to conduct its operations ethically such as the implementation of CSR structure, ethical training for employees and a system to check the performance of employees.
References
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