RAE WALKER. Is the Banking Royal Commission Australia’s Canary?

Jul 14, 2018

Falling levels of trust in Australian institutions is frequently raised in the media and other public discussions as a serious concern.  Reports from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry is providing an astonishing insight into the experiences of citizen and business customers of these institutions and the corporate values and management that facilitates the untrustworthiness commentators are concerned about.

Distrust of the finance industry has been well earned over many years of scandals.  But what is happening beyond the finance industry, to trust in Australian institutions?

The Edelman Trust Barometer[1] provides a general assessment of 25+ national populations’ trust in selected institutions (namely government, business, media and non-government organisations) repeated annually for 10 years. Over the last five years aggregate levels of trust has risen in some countries (eg China), has fallen sharply in others (especially the US) and been static or declined steadily in others (eg Australia) (Edelman 2018:58-59).   In Australia the level of aggregate trust over the last 5 years has fluctuated but the 2018 results describe a general population (85% of total population) distrusting these institutions and an aware and informed business-oriented population (15% of total) that is trust neutral (Edelman 2018).  The vast majority of Australian citizens are experiencing, or perceiving, increasing untrustworthiness (that is, institutions failing to meet expectations or adequately fulfil their role in society) in the  Edelman survey institutions, but an informed ‘business-oriented elite’ tends not to.

Since 2011 Essential Media has included, on one or more polls a year, a question about respondents’ level of trust in 15 Australian institutions[2].  If we select five of the 15 institutions most similar to those in the Edelman Barometer we find that the only institution that has arguably not experienced a substantial fall in public trust (between 2011 and 2017) is the national broadcaster, the ABC.  The trustworthiness ranking of the other institutions from most to least trusted, are: charitable organization, Commonwealth public service, Federal parliament and business groups (Essential Media 2018).

The low level of trust in business has the Australian Institute of Company Directors (with a membership from the private and not-for-profit sectors), amongst others, concerned about challenges to the corporate social license to operate in Australia (KPMG and AICD 2018)[3].  Company directors recognize that trust in their company is an important issue (KPMG and AICD 2018). However, less than 40% of respondents said their Board was working to build key stakeholders’ trust in the company.  In the current context this proportion looks disturbingly low but is probably consistent with the Edelman Trust Barometer finding that the informed business-oriented population in Australia is not too concerned about trust in institutions.

Why does trust matter?   Trust is a quality of relationships between people, social groups and social structures in a society. In complex modern societies institutions have increasing influence and even control over citizens’ wellbeing.  If citizens are to willingly cooperate with institutions, or with each other through them, they need to trust those institutions will act with integrity and not intentionally harm them.  When trust falls to low levels citizens feel unsafe because the institutions with the capacity to harm them are no longer reliable.  The greater the distrust of particular institutions the more institutions in general are distrusted.  Widespread distrust in social institutions is a threat to the social fabric of a community.

Currently, citizens are confronted with evidence of untrustworthy behavior from multiple institutions including (but not limited to): banks and other financial institutions; energy retailers gaming the market to increase profits at the expense of citizen and business consumers; private hospitals taking kickbacks from medical device manufacturers that increase the price of health care for patients; water theft and other dishonest behavior by major irrigation companies in the Murray Darling Basin that threatens the viability of other water users; non-payment of superannuation and wage theft by franchisees and in the hospitality industry; and failure of multiple regulators to enforce existing laws and regulations.  As a result, community trust is declining but it can be addressed by building and enforcing trustworthiness in our institutions.

The key feature of institutions, relevant to trust, is the articulation and enforcement of rules, laws, social norms and customs that support integrity in behavior and stakeholder protection from misbehavior.

To deal with trust issues we need to understand: those taking the risk to place trust in an institution (the trustor), for example the expectations, intentions, perceptions of Indigenous people or farmers; be able to assess the trustworthiness of who or what is being trusted (the trustee), for example the rules and norms that shape institutional members’ behavior towards those who have put trust in them; and the key features of the context in which trustor and trustee are embedded, including laws and their enforcement, and environmental forces impacting both trustor and trustee.

There is not a lot of research that has closely examined changes in institutional systems over extended time periods.  Scott et al (2000)[4] is one such study that analysed change in the San Francisco Bay Area health system over a 50 year period and examined the ways three linked institutional components shaped the changing health system.  The components were: institutional logics (dominant belief systems and associated practices), institutional actors (individual and collective actors ‘who produce, embody and enact’ the institutional logics), and governance structures (normative and regulative structures that oversee and enforce compliance with dominant beliefs and practices) of the health system (Scott et al 2000:170-174).  Because these findings from Scott et al’s very detailed longitudinal study of a health system are about explaining institutional system level changes and their consequences they are likely to be among the key issues to be examined in any other institutional system.

Generally, in times of change, new ideas become widespread forming new institutional logics.  The Royal Commission has revealed an institutional logic in the banks that values profit increases above all else and justifies this as ‘standard business practice’.  This logic is used to justify a remuneration system that encourages dishonest, even criminal, behaviour.  It encourages and supports dishonesty.  If it is standard business practice, as claimed by one bank, we need to formally examine the logic and remuneration practices of all the other institutions caught behaving dishonestly.

In times of change new social actors take the new institutional logics and translate them into organisational structures, practices and relationships. Management structures and practices need to be included in a formal examination of untrustworthiness in institutions.

Finally, governance structures adapt to accommodate new logics, structures and practices.  Boards, regulatory agencies, institutional representative bodies need to have their approach to trustworthiness examined.  There need to be changes to regulatory agencies, institutional representative bodies, Boards and senior management that can enforce trustworthy institutional logics, decision making structures and practices.  This may require significant changes in personnel at regulator, Board and management levels.

Rae Walker is an Emeritus Professor at La Trobe University.  She has a research background (that includes studies of trust) and governance experience in the health sector but a much broader interest in institutional and community change.

[1] Edelman Trust Barometer is administered annually, in 28 countries including Australia, as an online survey in which respondents are asked to rate their level of trust in four national institutions – government, business, media, and non-government organisations.  For each institution a list of expectations or responsibilities that describe each institution’s role was developed. Trust is assessed by asking respondents to rate on a 5-point Likert scale how well each institution is fulfilling its role.  Edelman work has a strong business ethos.

[2] Essential Media undertakes weekly national polls of Australian public opinion.  Each year it includes, at least once, a question about trust in 15 nominated institutions. They are asked: How much trust do you have in the following institutions and organisations?  They respond on a five-point Likert scale.  The Total Trust score reported is the agregate  of “A lot of trust’ and “Some trust’ scores.

[3] KPMG and AICD (2018) Maintaining the social license to operate. 2018 KPMG-AICD trust survey.  KPMG Australia, Sydney.

[4] Scott WR, Ruef M, Mendel PJ, Caronna CA (2000) Institutional change and healthcare organizations. University of Chicago Press, Chicago.


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