Ineffective decision-making on the part of management is a key culprit in the problems that unfolded at Commonwealth Bank of Australia, says Simon Russell, director, Behavioural Finance Australia.

"CBA is a big and complex organisation. There are no simple answers to these problems. No silver bullets. And, as an outsider, I have no special insights into CBA specifically," he says.

Russell is also quick to clarify that, while he uses the specific example of one bank, "many of the concepts are likely just as relevant for other banks and financial services groups." He points to five key areas where team dynamics have combined with collective decision-making practices to create the eventual problems.

1. Ineffective teams

"APRA's report…[suggested] slow decision-making and a lack of clarity and accountability.

"As a result, poor decisions went un-checked, decisions were delayed, and there was a greater chance of failure to implement agreed solutions," Russell says.

While collaboration can sometimes be a "necessary precondition" to success, it can also be unhelpful. "Sometimes teams are effective, but in other cases individuals with expertise can better making decisions working alone. There is no single best solution, but in light of the evidence, to suggest that a team’s current approach is optimal seems optimistic."

2. Lack of ownership

Russell cites the term "learned helplessness" to describe how many CBA employees felt problems were beyond their control and not worth trying to fix. "APRA reported that employees sometimes demonstrated a willingness to accept sub-optimal outcomes, a tendency to be reactive, and an unwillingness to use their own intuition and insights to solve problems.

"Instead of trying to solve problems, APRA reported that there was too commonly a ‘tick-the-box’ approach, with a focus on following a process, rather than achieving an outcome," he says.

3. Overconfidence

This is a common theme in behavioural finance. Russell suggests the types of collective decision-making structures inside banks, "tend to provide more weight to the diverse expertise of individuals whose views are currently less reflected in collective decisions".

"They also tend to provide more weight to data and algorithmic decision-making processes, both of which are too often over-ruled by overconfident humans," he says.

4. Lack of learning and insight

"Psychological research shows that there can be formidable barriers to effective learning and the building of genuine expertise. For effective learning, meaningful and timely feedback needs to be available," Russell says.

Misleading feedback can add to the problem, with organisations like CBA often relying too heavily on customer surveys. "Customers, like the rest of us, can be poor at understanding their own cognitive processes and motivations," he says, suggesting more weight should be given to observed behaviour.

"Counter to conventional wisdom, sometimes decision-making is improved by more proactively ignoring some information," he says.

5. Poor engagement with risk team

Russell refers to the different levels of language often used within financial services organisations, which differs again to the language used by compliance teams. "If everyone around you is speaking 'finance' you’ll get nowhere by shouting at them in 'risk'," he says.

He argues the banks' internal compliance teams needed to better frame their arguments, to ensure they were adequately understood and acted upon.

The bigger picture

Having looked at the behavioural aspect, it's worth remembering the overall business assessment of the banks – without ignoring the deplorable breaches of trust that have been uncovered by the APRA inquiry and the Royal Commission.

Again using the example of Commonwealth Bank, it continues to hold a four-star rating from Morningstar's senior banks' analyst, David Ellis. "We are confident that appropriate remedial action will take place, and necessary improvements go governance, culture, accountability and customer outcomes will eventuate," Ellis says.

He notes that the bank agreed to implement all APRA's recommendations, and retained the $85 fair value estimate on the bank. Though this has since been reduced to $83, due to an underwhelming third-quarter trading update, it remains undervalued, with a $69.88 closing share price.

 

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Glenn Freeman is senior editor at Morningstar Australia.

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