Why good people do bad things

Now Therefore We do, by Our Letters Patent issued in Our name … require and authorise you to inquire into the following matter; a) whether any conduct by financial services entities … might have amounted to misconduct … – Proceedings, Royal Commission, Feb 12

Since the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry began in February this year, Australians have learnt a great many things – almost all of them bad – about our banks and financial institutions.

We've learnt that the banks have been charging us – and plenty of dead Australians, too – fees for no service. That they've watched us lose our life savings because of advice they knew was inappropriate, given by staff they knew were incompetent. They've let their employees fake our signatures, allowed their boards to lie to our regulators, condoned their chairmen altering "independent" legal reports, and refused to make changes that would protect us because doing so would put them at a "commercial disadvantage".

But there's one detail the Royal Commission has not – indeed, cannot – investigate. It's a question about people: those bankers, lawyers and board members who have so obviously felt that the normal rules do not apply to them, who have so neatly managed to ignore the most basic principles of right and wrong, good and bad, decency and immorality.

And that question is: what makes those people tick?

Mr Mark Costello, counsel assisting the Royal Commission: You're aware of the fees-for-no-service issues that Commonwealth Bank [CBA] has had?

Executive A of Colonial First State, owned by CBA: Yes, I am.

Mr Costello: And you know that Commonwealth Bank group entities have charged more fees for no service than any other financial services entity in the country; do you know that?

Executive A: I do know that.

Mr Costello: It would be the gold medallist if ASIC [the Australian Securities and Investments Commission] was handing out medals for fees for no service, wouldn't it?

Executive A: Yes.

– Proceedings, Royal Commission, April 18

Illustration by Sam Bennett.

Illustration by Sam Bennett.

The recently released, highly regarded final report by financial-sector regulator, Australian Prudential Regulation Authority (APRA), into the Commonwealth Bank makes scary reading for anyone interested in the psychology of bankers. It found that some employees of our largest bank believed they were "slick" and "world class", when in fact they were operating "well below mature practice".

According to the report, some CBA employees' sense of "chronic ease" was such that they "did not reflect on and learn from experience and mistakes … [there was] a lack of intellectual curiosity and critical thinking … [and] a tin ear to external voices and community expectations about fair treatment". Instead, phrases such as, "It's big and complicated" and "It's not always easy" were used repeatedly as "socially acceptable explanations for sub-optimal outcomes".

Most people don't have much trouble imagining the worst of bankers – even bankers themselves. Anna Smith* is a loans officer in Victoria with more than a decade's experience among the big four banks. In her sector, retail banking, she says, "they'll employ anybody. People off the street. People come from their parents' restaurant, from selling second-hand cars. And that's not necessarily a bad thing. I don't have a uni degree, I grew up pretty rough, I had to take care of my siblings financially. The bank gave me a chance."

Nonetheless, in her opinion, some of her colleagues seem pointedly lacking in any kind of ethical education or moral compass. "Basically, they're just a bunch of dude bros with their dicks in their hands, going 'Duhhhh.' I mean, when I started, people were quoting Wolf of Wall Street like it was the Bible."

Leonardo DiCaprio in The Wolf of Wall Street, playing corrupt US stockbroker Jordan Belfort.

Leonardo DiCaprio in The Wolf of Wall Street, playing corrupt US stockbroker Jordan Belfort. Photo: AFP

The Wolf of Wall Street, starring Leonardo DiCaprio, was based on the memoir of US stockbroker Jordan Belfort, and detailed how his firm engaged in rampant corruption.

"I was like, 'Did you know people killed themselves because of him?'" says Smith. "And they were like, 'But he could sell.' And I was like, 'It's not hard to sell when you're lying, bro.'"

According to Smith, however, these attitudes served the banks' purposes well. "If you want to rip the customer off, of course you can," she says. "The systems don't stop you, the people don't stop you. Nothing will stop you." She laughs at the very idea. "Because as long as the money keeps coming in, the bank does not care!

"It's not that bankers are all [US serial killer] Ted Bundy," Smith admits. "But they have got an element of sociopath about them. And when I say that, I mean it. It sort of destroys the decent people. If you're not super-tough and wily, you just don't survive."

David Murray, head of the 2014 Financial System Inquiry, now AMP chairman.

David Murray, head of the 2014 Financial System Inquiry, now AMP chairman. Photo: Janie Barrett

Smith's judgment is echoed, albeit obliquely, by one of Australian banking's best-known names. David Murray – a former chief executive of CBA, head of the 2014 Financial System Inquiry, and now chairman of beleaguered insurance giant AMP – wrote a paper last year about the failure of trust in banking, in which he acknowledged that even "some CEO appointments turned out to be seriously flawed".

"Mistakes do get made," he says. "But human judgment is all you have: you just don't hire people who are untrustworthy."

Of course it isn't necessarily that simple, as Murray no doubt knows – especially when your applicant pool might contain great strengths, but also significant weaknesses. "I do think industries like banking attract a certain sort of person," explains John Berrill, principal at Berrill Watson, a superannuation and insurance law firm, and a respected former member of the Financial Industry Complaints Service (now the Financial Ombudsman Service). "It's complicated – and context is important. But the truth is, what you see all the time in banking is that macho alpha-male bullshit. These are people who'll step over their own mothers to get to the money."

He sighs. "I mean, I'm a lawyer – and a lot of people think poorly of lawyers, as they should – so I don't want to sound like a wanker. But in my field, in 25 years, I've seen very, very few people who behave like bankers do. But then, we don't have the incentives, the bonuses, the KPIs. So maybe people who are attracted to those things just don't navigate to us."

But material ambition, however unsavoury, doesn't equate to moral bankruptcy. Does it?

"Well, no. But what was it Gough Whitlam said? You always want to back a horse called Self Interest, because you know it's going to go well." He laughs. "In an industry where other people's money is just washing through your hands, look out. Things happen – people's moral compasses slip away. Maybe we're all vulnerable to that to some degree. But the financial services industry is all about that."

Mr Michael Hodge QC, counsel assisting the Royal Commission: Is the reason that you are dissembling in the way you are dissembling, because you are trying to pre-emptively explain why it took [Commonwealth Financial Planning Ltd] more than two years to notify ASIC of its [fees for no service] breach?

Executive B, CBA: I am trying to – yes, I am trying to – sorry, I am just trying to explain to you in this two-year period before we actually identified that we actually had a problem with [ongoing service] as to what we were solving for with information that was in front of us in a broader context of the business.

The Honourable Kenneth Hayne QC, Commissioner: I do not regard that as answering counsel's question. Please ask the question again. I want you to listen to it and I want you to answer it directly as you can.

– Proceedings, Royal Commission, April 18

Michael Hodge, QC, counsel assisting the Royal Commission.

Michael Hodge, QC, counsel assisting the Royal Commission. Photo: Archives

Jeff Morris is many things, but a dissembler is not one of them. A Sydney University economics and law graduate, he was a tax consultant in the 1980s, and a vice-president of Bankers Trust in the 1990s. And then, in 2013, he became banking’s most famous whistleblower, when he exposed the CBA financial planning scandal, uncovering the actions of "Dodgy Don" Nguyen, a CBA financial planner who allegedly forged signatures, overcharged fees and created unauthorised investment accounts for his customers without their permission. Nguyen (who was allowed to resign in 2009 and who, five years later, was still claiming $70,000 a year on a CBA income-protection insurance policy) cost the bank $20 million in compensation to several hundred customers.

Morris recalls feeling "like Alice in Wonderland" within weeks of starting at CBA. "It was this feeling of, 'Am I the only one who thinks this whole thing is just wrong?'" he recalls. "I remember going to my first office Christmas party [in 2008]. It was barefoot bowls, and in the middle of it, the managers started yelling, 'Hey, listen up everyone! Don's done it again! He's got an 86-year-old woman to sign up for $1.6 million and he's charging her 2 per cent up front – $32,000!' This is for a boiler-plate financial plan produced in an hour. 'Where does he find these little old ladies?! Ring the bell!!!'"

Such a scenario is so distasteful, so far from decent behaviour, that it would be tempting to simply abandon these bankers to their own particular Circle of Hell (the eighth, according to Dante, where they're joined by the politicians) and forget the whole affair.

But let's try for empathy – or at least inquiry. Let's try, for a moment, to imagine ourselves in this situation. Imagine you've just made $32,000 for an hour's work, filling out a few forms for an 86-year-old lady. Now – best case scenario – let's imagine that the old lady actively wanted this plan, and that you genuinely believed your advice would be to her advantage. It certainly isn't against the law to charge her this amount; in fact, it's your job. It's supported by your manager, your company, your whole corporate structure: you'll get a bonus and be professionally celebrated for it.

Could you do it? Should you? What would motivate you if you did? Simple greed? Desire to please your boss, impress your colleagues? Fear you'll lose your job if you don't? Personal loyalties – to your family, your mortgage?

None of these reactions is particularly noble, but all seem possible. You don't have to be a sociopath to have them. So what jars here, perhaps, is not so much the individual act (unpalatable as it may be), but the group response. What we find most objectionable about Morris's anecdote is the collective gloating, the shared jubilation at the news of an elderly, perhaps vulnerable, person being exploited.

Society is used to dealing with individual bad behaviour. We have systems – legal, social, emotional – to understand it, punish it, and recover from it. But we're far less certain about how to feel about – and what to do with – group wrongdoing. We know something has gone awry in this story – and with much of the behaviour we're discovering at the Royal Commission – but what? Psychologists, philosophers and ethicists have all sorts of theories. The banks have only one. They call it "culture".

Mr Michael Hodge QC: Have you personally considered the question, [Executive C], of to what extent these emails that we've been looking at reflect the culture of the advice section of AMP?

Executive C, AMP: Yes, I have.

Mr Hodge: And what is the view you formed?

Executive C: I think there are reasons to be concerned. I think they show a culture that's not as robust as it should be.

Mr Hodge: When you say "not as robust as it should be", that really understates it, doesn't it? … What we seem to be seeing is that a conscious decision is made to protect the profitability of AMP at the expense of complying with AMP's licence. Do you agree?

Executive C: Yes, that's – I believe that's what that shows, yes.

Mr Hodge: It's also at the expense of complying with the law?

Executive C: Absolutely. Absolutely.

– Proceedings, Royal Commission, April 17

Rowena Orr, QC, counsel assisting the Royal

Rowena Orr, QC, counsel assisting the Royal
Commission. Photo: Archives

It's widely agreed that there are three fundamental factors contributing to Australian banking culture. The first is size. Australian banks really are big and complicated – some of the biggest, relative to the rest of the economy, and most complex in the world. Which means that most of their half-million employees are far removed from the actual customers they service. Nonetheless, their success is stunning: in 2016, an analysis by the Australia Institute found them to be "the most profitable in the world", with profits equating to a "staggering 2.9 per cent of GDP".

The second is regulation. In recent years, Australian regulators have been criticised for not being tougher on banks and bankers. The banks' own compliance systems have at times been shown to be woefully inadequate, and external prosecutions by regulators like ASIC have been infrequent, fines paltry and criminal prosecutions virtually unheard of. (Thus the consternation evident in investment-banking circles recently at the news that six senior Australian bankers have been personally charged with criminal cartel activities.)

The third is motivation. Australian banks today are powerfully profit-driven. Everybody, from teller to CEO, is motivated by and rewarded with money. If you're a personal banker such as Anna Smith, and you don't sell enough "products" (which means getting customers to open new accounts, buy insurance, invest their savings, increase their mortgage and the like) to make your bonus, your bank manager may well not make his or her bonus, and the regional manager might not make their bonus, and so on up the chain. It's a classic carrot-and-stick scenario, in which everyone both eats the carrot and wields the stick. As the Royal Commission has discovered, the power of this incentive system has often overridden other considerations: of legality, customer wellbeing and basic moral behaviour.

Margaret Moore* worked in retail banking for more than 20 years, "from the days when tellers had guns" until earlier this year, when she was forced to retire due to a health condition exacerbated by stress. She recalls the moment when she had to start calling the branch she worked in "the store". "I think it was to remind us all that we were there to sell stuff," she says. Then came the whiteboard (what Jeff Morris, subject to the same system at a different bank, calls the "whiteboard of shame"), publicly tracking every employee's sales performance via two staff meetings daily. And slowly but surely, her branch – sorry, store – went from being a "place where I had friends, people I really liked, to this dog-eat-dog atmosphere: 'What can I do to grab that customer before that person does?'

"I'd overhear the banker in the next office selling a customer a credit card, and she'd say it was a condition of eligibility that the customer had to purchase insurance. Or she'd open a bank account for someone, and she'd say, 'Well, this is actually a package deal, so you have to have these other two accounts as well.' It was all lies, total lies. But that's what you were supposed to do. She was a star of the region, winning awards, getting big bonuses."

As scrutiny of banks increased prior to the Royal Commission, several banks stopped this blatant financial inducement to sell, sell, sell. "But what they've done instead is introduce a kind of 'balance scorecard'," says the national secretary of the Finance Sector Union, Julia Angrisano.

"So only 50 per cent of an employee's performance, say, is judged on sales, 50 per cent on customer satisfaction. But our members tell us that managers just rebadge that customer satisfaction into sales. The culture hasn't changed. In fact it's worse, because previously it was open – 'We've got the leaderboards, here they are' – but now it's kind of underhand. It's implied."

So these are the foundations of Australian banking: enormous size and success, an all-powerful profit motive, and under-resourced regulators. Which means the question is this: how does belonging to a huge, wildly successful, profit-driven, poorly regulated organisation affect the ways individual bankers think? Does it explain – and can it excuse – their behaviour?

Ms Rowena Orr QC, counsel assisting the Royal Commission: I want to put to you squarely, Executive D, that the system failed, because your system was to review four files each year for an adviser, and the adviser could receive subpar results on the majority of those files and still not end up with any increased supervision or even any reduction in their bonus payments?

Executive D, BT Financial Group (Westpac's advice subsidiary): Yes, I agree.

– Proceedings, Royal Commission, April 19

The banking culture "encourages a very narrow focus", says Simon Longstaff, executive director of The Ethics Centre in Sydney.

The banking culture "encourages a very narrow focus", says Simon Longstaff, executive director of The Ethics Centre in Sydney. Photo: Steven Siewert

Dr Simon Longstaff is the executive director of The Ethics Centre in Sydney. He was mentioned in testimony before the Royal Commission as an independent ethics observer at Westpac, and he's spent three decades speaking to people who have committed some kind of ethical failure – including many bankers who were involved in the antecedents of the GFC. "What you find when you speak to these people," he explains, "is that when they look back at what they did, and the implications of it, most are quite horrified. And what they tell you with total sincerity is, 'I didn't see it.' And when you ask them why not, their most common response is, 'Because everybody was doing it. That's just the way things were done.'"

Such unreflective practice, he continues, "is a form of conditioned blindness. You lose the ability to think critically about your actions." But how, precisely? Do you just wake up one morning suddenly believing that it's okay to charge fees to dead people?

The reality is exactly the reverse, suggests Elisabeth Shaw, chief executive of Relationships Australia (NSW) and a clinical psychologist with 25 years' experience as a counsellor and lecturer in professional ethics. "It happens very gradually. It's called 'moral fading' – a kind of dilution of moral sensitivity that occurs over time. We can be genuinely good, morally sharp people, but over the course of our lives things take a toll. Life events like divorce, alcohol, mental illness can have an impact – even just exhaustion and habit. And certainly, being in one professional culture for a long time is a real factor. It all combines to blunt our moral radar, so we no longer notice, if you like, when things start to get a bit dodgy."

In an organisation such as a bank, moreover, it's easy to lose the reference points that might help you realise such fading is occurring. "You're in a world that encourages a very narrow focus," continues Longstaff. "The only questions that are encouraged are: 'Is what I'm doing good for my company, my group, my tribe?' Nothing else matters. Things like 'Is it legal? Is it ethically right?' are simply not on the agenda."

Added to this is the collaborative, collective culture encouraged by banks. This seems like a positive thing, but as Shaw explains, "that collegial feeling can easily become collusive. You go to your colleague and say, 'Gee this place is pissing me off. And my boss is corrupt!' And then you feel a bit better because you've got it off your chest. But there's evidence that the more debriefing we do, the more it gets in the way of acting [on problems]." Shaw calls this impediment to action "a failure of moral courage".

Collusive culture can also be intimidating. Recently, one of loans officer Anna Smith's colleagues, a very young woman, refused to break lending laws for an applicant who was a personal friend of their regional manager. The manager threatened the young banker via email, then sent a senior staff member to the branch to apply pressure.

"I literally stood between my colleague and this guy, who was three pay grades and 20 years above her," recalls Smith. "And I said to her, 'If this loan goes wrong, this guy and [our boss] will not support you.'" The young banker refused the loan, as did loan officers at another branch. But the young employee has, says Smith, been subsequently blackballed for other positions in the bank.

Conditioned blindness, narrow focus, moral fading, collusive behaviour. All of these concepts are connected to an overarching idea – a classic of psychological theory – that attempts to explain collective behaviour. It's called groupthink.

Groupthink is related to various other psychological concepts that also seem relevant to banks, namely situationism – in which external factors, rather than inherent character traits, are seen as the drivers of behaviour – and the bystander effect, where individuals are less likely to take action (offer help to a victim, for instance, or respond to an emergency) when other people are present. But groupthink is a more accurate and comprehensive descriptor of banking behaviour. First defined by psychologist Irving Janis in a seminal 1972 article as "a mode of thinking that people engage in when they are deeply involved in a cohesive in-group", groupthink refers to the "deterioration of mental efficiency, reality testing, and moral judgment that results from in-group pressures".

It's almost terrifyingly easy to see how this applies to bankers and banking culture. The complacency engendered by the dominance, success, and apparent lack of constraints on Australian banks (the APRA report into CBA uses the word "complacency" 27 times) led to a powerful group feeling, among bank staff at all levels, that their actions and decisions were demonstrably right, and they need not test or question them. Effectively, the entire industry was under a “spell of impunity”, as New York Times journalist Brook Larmer put it.

Groupthink, alas, is not unique to bankers – in many ways it's the rather humdrum reality of what happens to most of us when we find ourselves in gatherings of people with whom we share interests, ideals or goals. Indeed, you could argue that as a species, our ability to align ourselves within a group is one of our deepest instincts, and the root of our greatest successes. It's also the source of some of humanity's most incomprehensible tragedies.

Commissioner Kenneth Hayne, QC.

Commissioner Kenneth Hayne, QC. Photo: AAP

The Honourable Kenneth Hayne QC, Commissioner: Would you accept that the culture of an organisation is affected by what those at the work face see as being valued by those higher up the chain?

Executive D, BT Financial Group: I would.

– Proceedings, Royal Commission, April 19

In the early 1960s, a Yale University psychologist, Stanley Milgram, performed an infamous series of tests. The "Milgram experiment" involved volunteers administering electric shocks to an unseen person on the orders of a white-coated scientist. (Unknown to volunteers, neither scientist nor shocks were real.) In his most notorious results, Milgram found that a full two-thirds of volunteers persisted in administering the shocks even when they appeared to be torturing, perhaps actually killing, the unseen person.

These experiments did not set out to prove anything about group culture. Milgram was trying to explain the Holocaust via the principle of blind obedience to leadership: he believed his results showed that the average person would obey authority figures even when the orders were abhorrent. But in recent years, his results (which have many inconsistencies and ambiguities) have been reconsidered. Dr Alex Haslam, a professor of psychology at the University of Queensland, is a leader of this rethink.

Haslam believes it's not blind obedience that compels behaviour, but powerful in-group motivations. "It's a question of identification," he explains in an email from London, where he's been speaking at a conference about corporate corruption. Psychologically, behaviour like bankers' wrongdoing is driven by "engaged fellowship. Harm-doing flows from engaged identification with an authority and an associated belief that their enterprise is worthy."

This is, of course, an example of the classic "the end justifies the means" excuse for unconscionable behaviour. And, equally obviously, this process is possible in any group. The “Dieselgate” scandal at Volkswagen, for example, was in part prompted "because [engineers] were highly identified with the company and its mission," says Haslam.

In this case, according to journalist and author Jack Ewing, "Many [engineers] truly believed they were environmentally virtuous. They told themselves that higher nitrogen oxide emissions in diesel motors were an unavoidable trade-off in order to achieve reductions in climate-changing carbon dioxide."

Another example is the ball-tampering scandal in Australian cricket, where team loyalty and desire for success "at all costs" overwhelmed more abstract theories about rules and fair play. And the recent revelations involving Australian special forces soldiers in Afghanistan appear to show the dangerous power of a hierarchical authority, whose own in-group mythology has allegedly been used to replace any sense of a universal moral compass and justify reprehensible behaviour.

In similar ways, Haslam suggests, bankers have reoriented their own moral judgments, because they feel their behaviour serves some higher purpose. Several senior executives at the Royal Commission have claimed "acting for shareholders" or even "maintaining the stability of the Australian economy" as reasons for not reporting misconduct.

"I think a belief in the inherent worthiness of their enterprise … led to disregard for customers and regulators," writes Haslam. "I suspect too that … the perpetrators were 'working towards their leaders' and doing what they believed their bosses wanted them to do."

The notion of trying to please one's boss is widespread – and, arguably, a vital survival skill in modern life. But how much power do banking leaders actually have?

An enormous amount, according to AMP's David Murray. "Leaders' behaviour sends symbols through the organisation," he says. And for this reason, he's unsympathetic to the argument that modern banks are too big and too complex for individual leaders to be held responsible. "If you really believe that the business is too complex for you, if you can't run your systems and behaviours and leadership properly," he says evenly, "I would say to you, 'Well, sell it to someone who can.'"

Too many banking leaders have failed this test – especially when it comes to ethical boundaries. And this has spelled disaster, suggests Dr Malcolm Sparrow, a Harvard University professor and international leader in regulatory control.

"Leaders who turn a blind eye," he writes from an Australia and New Zealand School of Government conference in Melbourne, where he's speaking about effective risk control, "may encourage employees to discount potential damage, assume their behaviours will not be detected, hide behind ambiguity about the rules, and [assume] that the organisation itself 'doesn't want to know' how they meet performance expectations."

This is exactly what former banker Margaret Moore experienced when she tried to talk to her manager about the colleague who was lying to customers. "I was told, 'Keep your mouth shut. What we don't know won't hurt us.'"

Similarly, when former financial planner Don Nguyen was interviewed in 2014, he claimed that no manager at CBA had ever said to him: "Don, this is too much, don't do this." And whistleblower Jeff Morris agrees that when he tried to talk to his boss about Nguyen's activities back in 2008, "he just said to me, 'You don't understand the culture here.' End of story."

Executive D, BT Financial Group: Unfortunately, I don't think I can control away inappropriate advice in every instance. Some people, the minority, may, for whatever reason, be dishonest, put their own interest before others. I can't control that away."

– Proceedings, Royal Commission, April 20

Whistleblower Jeff Morris.

Whistleblower Jeff Morris. Photo: Brendan Esposito

In some lights, the arguments of people like Haslam, Sparrow and Murray seem almost too simple. Forget culture, focus on individuals. "Trust, respect, courage, honesty, fairness," says Murray. "These things should be in humans generally." But are such qualities even possible once you put such individuals into big group cultures, like those of banks?

The answer is yes. Groupthink is certainly powerful. But it isn't irresistible. In a banking context, the best proof of this comes from employees themselves, from the individuals whose "personal convictions and values enable them to resist", as Sparrow puts it.

All my life, right from school, I've hated to see people get picked on," says Jeff Morris. "I could never stand seeing the little guy get done over. Added to which, I grew up with an old-school banker for a father – he had a code of conduct that was very important to him – and I'd worked for a top investment bank [Bankers Trust]. So I could see these CBA guys were frauds. And then, you know, seeing elderly, vulnerable people have their entire life savings vaporised and then being stonewalled by the bank. They would come in and just break down in my office. I just couldn't be involved in any system that did that. At the end of the day, I have to be able to look at myself in the mirror."

Mark Costello, counsel assisting the Royal Commission

Mark Costello, counsel assisting the Royal Commission Photo: Eddie Jim

Margaret Moore, for her part, sometimes wondered if she should just go along with her colleagues; succumb to the lure of the money and the approval of her superiors. "But I couldn't. I just couldn't! I think it was the way I was raised," she says. "My dad was a veteran, and we used to go and visit his mates out in the bush, take them food and blankets and stuff. They were living in little humpies, some of them – it was terrible. And Dad would say, 'You've got to take care of your mates. You've got to look after people.'"

But even without such powerful personal examples, resistance to unethical behaviour is still possible. Banks, for instance, can decide to spend the time and money teaching their staff to do the right thing. As researcher Dr Matthew Hollander wrote of the Milgram experiments in the British Journal of Psychology in 2015, "the ability to disobey toxic orders is a skill that can be taught like any other – all a person needs to learn is what to say and how to say it."

Mr Mark Costello, counsel assisting: Executive E, I put it to you that it is Orwellian to describe this as a client-protection policy.

Executive E, Dover Financial: I agree with that. And this, of course, has been changed.

Mr Costello: It is entirely misleading, isn't it?

Mr McMaster: Yes.

– Proceedings, Royal Commission, April 20

The inquiry into the Space Shuttle Challenger disaster examined the ideas of individual and collective responsibility.

The inquiry into the Space Shuttle Challenger disaster examined the ideas of individual and collective responsibility. Photo: AFP

What should society do about the misconduct being discovered in the Royal Commission? Blame collective culture? Or hold individuals accountable?

Perhaps the most famous study of individual versus collective responsibility began on the morning of January 28, 1986, when the Space Shuttle Challenger exploded 73 seconds into its flight, instantly killing all seven astronauts.

The cause of the explosion was clear: a faulty seal in a rocket booster, which allowed a stream of flame to escape and ignite an external fuel tank. This fault was common knowledge within NASA and among its partners: the very night before Challenger's launch, a handful of engineers – experts in the seals – argued for hours with NASA's high command that it was too dangerous to launch. But their efforts were unsuccessful and the launch was approved by a larger collection of people: groupthink at its most damaging and tragic.

Six months later, however, the Presidential Commission on the Space Shuttle Challenger Accident, while praising the engineers, refused to lay blame on those who approved the launch. Commissioner Richard Feynman said: "I don't think it's correct to try to find out which particular guy happened to do what particular thing. It's the question of how the atmosphere could get to such a circumstance that such things were possible."

This is, almost exactly, what the banks are saying when they blame "toxic culture" for their manifold faults. Everyone is responsible – which means, effectively, that no one is.

In 1990, however, a famous article in the Journal of Business Ethics used the Challenger disaster to claim that such thinking is not only flawed, but dangerous. As authors Russell Boisjoly (one of the engineers who argued against the launch) and academics Ellen Curtis and Eugene Mellican wrote: "One of the most pernicious problems of modern times is the almost universally held belief that the individual is powerless, especially within the context of large organisations."

This is wrong, they wrote. The truth is that the very power of such organisations means that the acts of individuals within them are more important than ever. "It is vital to reclaim the meaning and importance of individual responsibility within the diluting context of large organisations," they concluded. Blame should be laid on individuals, however complex the process of untangling their culpability. Otherwise, society as a whole is inviting an accountability vacuum, with ethical chaos the result.

Ms Rowena Orr QC, counsel assisting: And after that time, Mr Smith was employed by Westpac?

Executive D, BT Financial Group: Sorry, Ms Orr, this is very inappropriate, but I need to go to the toilet.

Ms Orr: Yes?

Executive D: Can I please go to the toilet? Sorry.

The Honourable Kenneth Hayne QC, Commissioner: Nothing worse than sitting there in a rictus of agony.

– Proceedings, Royal Commission, April 19

Let's not forget: bankers are real people. And there have been moments in the Royal Commission where these particular real people have looked as if they're waking from a dream. It's as if they've suddenly returned, after a long journey, to the everyday world – a world in which, one hopes, the basic values of right and wrong, good and bad, legal and illegal still have some power.

"In that moment, you can see the deeper morals of society smashing up against this fantasy," says Simon Longstaff. "Just imagine what it must feel like! That moment when you first have to say out loud, in front of the real world, 'We're charging fees to dead people.' The fact that you have to utter it! Any myth that you might have told yourself about it; all those defences you have and conditioning you've undergone not to see it – all those scales fall from your eyes. In that moment you see it for what it is."

*Names have been changed.

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