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Big bad decision makers

When boards reward the wrong results, consumers lose out.

November 2016

The past few years haven't been great for corporate behaviour. We have seen established global firms doing things that should see them closed down, for good.

Volkswagen was caught selling vehicles that contained a 'defeat device' – or software that allowed them to detect when they were being tested and change their performance to produce better results in emissions tests. This was no small matter – VW has admitted that the device is fitted in about 11 million cars worldwide.

And then Samsung launched the Galaxy Note 7 smartphone on 19 August, beating the latest iPhone to market. Within less than two months, at least 35 of the phones had exploded while being charged, resulting in a global recall.

While CHOICE has rightly made a lot of noise about Samsung's incendiary toploader washing machines, the Galaxy Note 7 debacle was on a whole other scale, involving an estimated 1 million handsets.

Samsung didn't come to this recall easily. When phones first started exploding and CHOICE encouraged consumers to demand a refund, Samsung sent in the lawyers, arguing that we should tell consumers they could take a replacement handset instead. Those replacements are now being recalled after reports that some also exploded.

You've got to ask how mistakes on this scale can be allowed to happen. There have got to be senior people who were involved in these decisions and were at least wilfully blind to the risks to which they were exposing consumers.

The answer is that people are paid to make decisions like this. Maybe not directly, but senior executives receive incentives based on sales volumes, profit growth and share price. As long as these metrics are moving in the right direction, nobody questions them.

We've seen exactly the same problem close to home. The recent ASIC investigation of the life insurance industry found that some insurers were declining as much as 37% of total and permanent disability insurance claims (compared to an industry average of 16%).

While a bad insurance policy won't cause a house fire, we'd say that if insurance premiums are eating away at your super with little chance that you'll ever see a benefit, then the insurance policy is an unsafe product.

The executives overseeing those insurance businesses were no doubt being feted for the spectacular results they were producing. Hopefully they are now scrambling to clean up their act before they are named by ASIC.

But we shouldn't have to wait for a scandal for consumers to be treated well. CEOs and boards should reward executives for performance that achieves sustainable growth, by looking after customers.

Positive customer outcomes can be measured and rewarded, but this will only happen if boards decide that this is as important as the bottom line.

Alan Kirkland, CHOICE CEO
Twitter: @AlanKirkland