Do the banks need a perspective lesson?

The one-way direction that our banks distribute rate pain makes you wonder about their grip on responsibilities as businesses.

Perspective is a fascinating phenomenon because it results in one entity being seen differently according to the position of the observer.

If I look upon the Sydney Harbour Bridge from my bedroom in Sydney it will appear different to someone viewing it from another location on the harbour. What is beautiful about the bridge and so many other wonderful structures is that it exists in a context, and that context embraces the multitude of perceptions that are experienced, depending upon the location of the perceiver rather than the location of the building. In other words, the bridge is part of its environment.

Businesses are like that, and yet so many people involved in the business don’t recognise the fact and ultimately get into a lot of trouble. Businesses have to be seen in their context of a living, organic structure in the wider community.

For instance, a business has customers and it has suppliers with whom it has direct associations of a commercial nature. It also has wider community responsibilities and relationships that may not be strictly commercial, such as responsibilities not to pollute.

The interaction of businesses with the community is so complex and extensive that it actually becomes part of an organic fabric of which its internal operations are only a part. Many successful managers understand this and see their business as an entity that is perceived differently by different people from internal employees to public servants in the tax department.

Enter the major banks. I never thought that I would see the day when I would give a management lecture to the multi-million dollar employees running the major Australian banks. Recent events indicate that they do not understand the complexity of the perceptions to which they have to respond.

The Reserve Bank puts up interest rates and so the banks quickly follow suit and increase the interest rates they charge their customers. The reason they do it is to protect one segment of “perceivers” called the shareholders. They want to make sure that the shareholder is not disadvantaged by the tightening of the Reserve Bank.

In another sense, they might argue that they are doing their bit to help the Reserve Bank manage the inflationary forces in the economy. The immediate beneficiary is the shareholder and the immediate loser is the customer who perceives the bank from a different perspective. The customers are part of the context and are an essential component of the environment.

What happens here is that the bank has a narrow perspective and sees itself as a closed entity and not an entity in the wider context of the community. The passing on of interest rate rises is essential to protect the inner structure of the bank because management can only perceive that inner structure. It is like the management of the Sydney Harbour Bridge only seeing the bridge as an income generating entity and not a thing of beauty from Cremorne Point or a structure of social utility.

Then the banks mess up and credit becomes tight and expensive. Once again, the response is to see only what we might call the “inorganic” structure of the bank, with its shareholders and internal operations.

Should the shareholders take the hit for the mess up? No, that wouldn’t fit in with the internal perspective management has that its principle responsibility is to its shareholders. So, who pays for the mess up? The customers of course, because they are perceived to be separate from the bank’s structure and responsibilities.

Then the Reserve Bank lowers interest rates. Will the banks pass these reductions in costs on to the public? The reason the Reserve Bank is lowering interest rates is to extend relief to the bank’s customers so that they won’t go belly up and damage the economy further. Management at the bank once again fails to perceive its role in the wider context of the complex environment of a business but simply sees its unilateral responsibility to the shareholder and decides not to pass on the relief to the customer but to protect the shareholder’s investment.

People within the bank can perhaps perceive the wisdom of this approach, but customers and the wider community have a different perception.

Businesses that rigidly focus on the uni-dimensional perception of its role to protect the interest of the shareholders without understanding its wider responsibilities to other stake holders, none the least of which are the customers, put their businesses at risk for two reasons.

The first is that without customers, shareholder funds disappear pretty quickly, and so you don’t continually stick it to the customer, no matter how big you are, because there is always a day of reckoning.

If the customers perceive they are getting a raw deal, history suggests that the outcome is often bad for the business if only because politicians perceive customers as voters and when their patience is exhausted, the hand of government can come into play.

The second is that businesses are not uni dimensional structures but are complex entities in the wider community. Generally speaking there are a lot more customers than shareholders. Once management loses touch with the many stakeholders who have different and negative perceptions of the business, the delicate patch work of the commercial quilt falls apart with damage to all, including shareholders and management.

Louis Coutts left law and became a successful entrepreneur. His blog examines the mistakes, follies and strokes of genius that create bigger, better businesses. Click here to find out more.

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