Last week must have been a terrifying wake-up call for Australias ruling class not just our politicians, but also the chief executives and directors of our big corporations, both publicly and privately owned.

_If theyre half as smart as theyre supposed to be after all, were told they got their jobs on merit their performance of their duties will be much improved going forward.

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The problems at the ABC managing director sacked and chairman resigned in the same week and the problem behaviour of our banks are very different, but they have one thing in common.

Members of the ABC board were made aware, if they hadnt already known, of the chairmans alleged interference in the day-to-day running of the corporation in a way that endangered its independence from the elected government, but chose to do nothing. Until that knowledge became public and the publics horrified reaction obliged it to act.

The directors of our big banks presided for many years over a system of remuneration incentives from the chief executive down that rewarded employees for putting profit before people.

If the directors didnt know this was leading to bank customers being mistreated, regulators misled and laws broken, it can only be because they didnt_want_to know.

Well now, thanks to the royal commissions shocking revelations, all of us know the extent of the banks misconduct. And the directors have nowhere to hide.

See the link between the two cases? When youre on a board, its easy to see how things look from the viewpoint of the insiders the people in the room, and on the floors below. Whats harder to see, and give adequate weight to, is the viewpoint of outsiders.

But thats the board members duty, statutory and moral: to represent the interests of outsiders, including the shareholders, but also other stakeholders. To view things more objectively than management does. To avoid falling into groupthink. To rock the boat if it needs rocking.

A good question is: how would it look if whats now private became public? Because thats what happened last week. And now a lot of executives and directors are viewing the consequences of their acquiescence with fresh eyes and are not proud of what they see.

The ABCs governance problems, we must hope, will be fixed relatively quickly. The misconduct of the banks is a much tougher problem.

The interim report of the banking royal commission carried a wake-up call also for the financial regulators particularly the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority, but also the Reserve Bank and Treasury.

Allow yourself to be captured by the people youre supposed to be regulating, and one day your failure to do your duty according to law will be exposed for all to see. How good will you feel?

Get too cosy and obliging, and the banks take advantage of you behind your back. Conclude from things they say - and the way they keep cutting your funding that your political masters want you to go easy on their generous-donor mates in banking and, when the balloon goes up, the pollies will step aside and point at you.

Since you did neglect your duty to protect the_publics_interests, you wont have a leg to stand on.

Some people were disappointed the interim report contained no recommendations no tougher legislation, no referrals to the legal authorities but I was heartened by Commissioner Kenneth Haynes grasp of the root cause of the problem and the smart way to tackle it.

Too often, he found, the misconduct was motivated by greed - the pursuit of short-term profit at the expense of basic standards of honesty . . . From the executive suite to the front line, staff were measured and rewarded by reference to profit and sales.

Just so. But what induces seemingly decent people to put (personal) profit before people? Thats a question for psychologists, not lawyers. Were social animals with an unconscious, almost irresistible urge to fit in with the group. A tribal urge.

Most of us get our sense of whats ethical behaviour from the people around us in our group. If what Im doing is no worse than what theyre doing, thats ethical. Few of us have an inner moral compass (set by our membership of_other_tribes religious or familial) strong enough to override the pressure we feel under from what our bosses and workmates are saying and doing.

Sociologists call this norms of acceptable behaviour within the group. When regulators first said that banks had an unhealthy corporate culture, business leaders dismissed this as soft-headed nonsense. Now, no ones arguing.

But, were told, how can you legislate to change culture? Passing laws wont eliminate dishonesty.

Fortunately, thats only half true. Rationality tells us peoples behaviour flows from their beliefs, but psychologists tell us its the other way round: if you can change peoples behaviour, theyll change their beliefs to fit (so as to reduce their cognitive dissonance).

Hayne says much more often than not, the conduct now condemned was contrary to law, which leads him to doubt that passing new laws is the answer.

So what is? His hints make it pretty clear, and I think hes right. Make sure everyone in banking knows whats illegal, then_police_the law vigorously with meaningful penalties. Fear of getting caught_will_override greed, and a change in behaviour will be reinforced by an improvement in the banking culture.

Ross Gittins is the_Heralds_economics editor.