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Doing well by doing good

12 September 2017 |Opinion
Hands holding a graphic of the world with graphic images of people connected by lines

Doing well by doing good

12 September 2017 |Opinion

In mid-September 2017, the FORTUNE Annual "Change the World" List of Companies That Are Doing Well By Doing Good was released, with Bendigo and Adelaide Bank ranked as the top Australian company and second in the world for a commercial bank.

FORTUNE’s annual list of top 50 companies ranks enterprises that have made an important social or environmental impact through their operations and profit-making strategy.  Companies are recognised for, and competitively ranked on, innovative strategies that positively impact the world.

In the category of Economic Opportunity and Financial Inclusion, FORTUNE ranked Bendigo and Adelaide Bank thirteenth globally, taking into account the Bank’s measurable social impact, business results and degree of innovation.   This ranking now sees Bendigo and Adelaide Bank as the leading Australian company on this measure.

Mike Hirst, Managing Director of Bendigo and Adelaide Bank reflects on this outstanding achievement and below is his speech to the Social Enterprise Conference at Swinburne University earlier in the year to help give greater understanding and context as to how Bendigo has achieved  global recognition.

In the speech, Mike gives some personal insights and a potted history of the development of the Community Bank® model, its part in Bendigo’s DNA and the bank’s positioning at the crest of the next major transformative wave of business thinking.

Commenting on the FORTUNE award, Mike said: "Shared Value is a concept now gaining global momentum, although it has been central to our strategy for Bendigo and Adelaide Bank’s entire 160 year history.

"To be recognised among international enterprises committed to strengthening the connection between corporate and community success by addressing social and environmental needs is confirmation that our business model is indeed ahead of its time.

"The success of the Community Bank® model is undoubted and is testament to how business and community can work together in order to create shared value.

"In many locations, it is the Community Bank® that is the most locally connected institution - leading and funding the community in areas of economic and social development on projects that the community itself has identified as important locally.

"Often the funding provided through the Community Bank® is leveraged with funds from the three tiers of government because the community is putting skin in the game through that bank funding. It is amazing to see what some communities have achieved."

Mike’s speech below underscores the important role that the Community Bank® concept has played in helping Bendigo Bank win international recognition for a working shared value model that continues to grow across Australia’s states and territories.

Mike Hirst, Managing Director, Bendigo and Adelaide Bank

Address to the Social Enterprise Conference, Swinburne University, 21 June 2017

Good morning everyone and thank you for the opportunity to speak with you this morning.

My brief today is to provide you with an insight into our Community Bank® business by unpacking the story behind the development of the model.

In doing that I’ll look at things like where the idea came from; how it turned from an idea to what it is today; what were the key moments in its development; what has been the guiding vision behind the Community Bank® model and what the major challenges have been for a private company in creating a social enterprise?

But let’s take part of that last question first. Is Community Bank® actually a social enterprise? To be honest, that question is one that I may not have a definitive answer for, but one that I am happy to explore with you today.

So where to start?

Well, I must admit I’m a bit ignorant of the different nomenclature in this space and the nuances that exist between the various tags - social trading, social impact investing, mutuals, co-operatives and shared value. On a Venn diagram I think there are areas of overlap, but I accept there are also clear areas of difference.

The Social Traders website defines social enterprises as businesses that trade to intentionally tackle social problems, improve communities, provide people access to employment and training, or help the environment.

Using the power of the marketplace to solve the most pressing societal problems, social enterprises are commercially viable businesses existing to benefit the public and the community, rather than shareholders and owners.

In the Australian context, there is no legal structure called social enterprise but social enterprises are organisations that:

  • Are driven by a public or community cause, be it social, environmental, cultural or economic
  • Derive most of their income from trade, not donations or grants
  • Use the majority (at least 50%) of their profits to work towards their social mission

Let’s use these last three points as our measure as I take you through the Community Bank® story.

The genesis of Community Bank® model can be traced to two different times in history.

The first of these is about 160 years ago with the establishment a terminating building society that became the company that is Bendigo and Adelaide Bank today. In the gold rush of Bendigo, miners came together to pool their savings and then draw lots to decide the order in which their houses were built. That initiative was true to the very first purpose of banking: the notion that everyone should benefit from a financial transaction - the investor who provides the funds, the borrower, the bank's shareholders who bear the risk of the borrower not paying, and society itself.

Banks were formed to feed into prosperity this way - to accept cash from people who had excess to lend to people who lacked cash but could add value to it once obtained. The bank charged the borrower a bit more than it paid the investor and returned the risk margin to its shareholders in the form of dividends. Win, win, win. And add to that a fourth win, because the value added along the way was invariably beneficial to society – people gained employment, houses were built, businesses started and public infrastructure funded.

This worked particularly well in early banking for one other reason - banks were formed in villages where investors, borrowers and bank shareholders lived cheek-by-jowl and therefore shared a common interest in seeing their community prosper.

So that time in history provided a purpose for our organisation that still drives us today and proved a fertile ground when the second relevant point in history arrived: the recession of the 1990’s.

That time was very challenging for the banking sector in Australia. The early 80’s had seen a series of mergers as banks sought economies of scale, something that would prove prescient when the Hawke Government deregulated the industry in 1984. The stock market crash of ’87 followed by the recession we had to have challenged the capital soundness of the industry. Given the astronomically high level of interest rates, the raft of corporate collapses and increased competition from international banks and securitisation enabled non-banks, there was a need to tighten belts significantly. That manifested itself in many ways but the pertinent one for our discussion is the closure of bank branches.

In 1991 there were almost 7,000 bank branches across Australia and by 2001 this had fallen by almost 30 percent to under 4,800 branches. Obviously that is a lot of closures but it was the way the branches were selected for closure that both created community angst and sowed the seeds for the creation of the Community Bank®model.

You see it wasn’t done in a way that made economic logic for the communities that lost their branch. Profitable branches were closed along with those that were struggling as banks moved to centralise functions to regional centres and suburban hubs. A branch in a rural town that had plenty of business and made good returns was closed with the business transferred to the nearest regional centre – the thinking was that people would just travel to the nearest branch and be happy to do that. And that might have been the case too (though largely it wasn’t) except that once people started travelling to do their banking they also started to buy their groceries, meat and services in the regional centre as well. Small towns started to die as they lost their commercial hub for a lack of custom.

Two small towns in the Victoria’s Wimmera, Rupanyup and Minyip, were affected in that way. Their town leaders decided that something had to be done. They approached my predecessor at Bendigo Bank, Rob Hunt, and requested that the Bank return banking services to their communities. Rob listened to what they had to say but was reluctant to simply open a branch. If Bendigo was to assist then he wanted to know that the communities would back his investment and not just use it for small change. Reasoning that the best way to gauge whether that support would be forthcoming he visited the towns and held a town hall meeting. When he asked those assembled how many banked with the last bank to leave town about 25 percent of people put their hand up. Well, I’m not coming here to bank a quarter of the town was Rob’s response. If this is going to work for both of us it needs your support and it really needs you to have skin in the game.

From that meeting a working group of community and bank staff developed a model that is essentially the model that operates today. The model is a franchise arrangement where the community have the right to operate a branch in the local area and the Bendigo Bank provide all the central infrastructure. At its heart is a desire to optimise the use of available capital – a scarce resource for the community and the bank.

Communities are required to form a company that is broadly held in the community - usually around 400 individual shareholders - with no individual allowed to hold more than 10 percent of the stock on issue.

The community’s responsibility is to aggregate the banking business of its members and pay the costs of running its branch. For undertaking that, it receives half the income that business generates; Bendigo collects the other half of the revenue for providing banking support and infrastructure. Local profits are split, with shareholders entitled to no more than 20 per cent and the rest being ploughed into community development.

Today, there are 320 of these Community Bank® branches operating across Australia with as many in the suburbs of Melbourne, Sydney and our other capital cities as there are in country towns. Along the way the driver of that expansion changed from a lack of a local branch to facilitating community benefit. That’s what has attracted in excess of $34 billion in loans and deposits and more than 1 million customers. In 19 short years, they have returned $165 million in community grants and paid more than $20 million in shareholder dividends. They have created 1,500 jobs and each year now spend around $50 million in wages and services locally, which has a significant positive impact on these micro economies when you consider the multiplier effect of local spend.

Their profits have been responsible for building community centres and health services; they have bought fire trucks and community buses; funded nursing and student scholarships. Hundreds of sporting teams wear jumpers and uniforms bearing the name of the Community Bank® branch that purchased them. And increasingly governments are lining up to co-fund projects with Community Bank® companies because they know they'll get a bigger bang for their buck because of that sense of community ownership.

The return on equity of the leading Community Bank® companies stand out in any Australian company cohort (including my bank) - as much as 41 per cent, and without any of the consumer backlash that would normally entail. Those community companies are opening new branches, servicing new communities, creating jobs, paying great dividends and funding an ever-expanding portfolio of local projects. Viewed through that prism, the Community Bank® model looks rosy. It looks easy although I can assure you it is not.

But as English novelist Arnold Bennett observed, change is always accompanied by drawbacks and discomforts, and Community Bank® is no different. It is hard yakka for the largely volunteer Community Bank® directors who put in significant hours of work on behalf of their community and our business. Theirs is a difficult task, trying to amass the local banking business within the community for the benefit of community. It’s an odd concept and one that takes lots of explaining.

And in the early years, like any start-up company they wonder if they’ll ever turn a profit. Often in debt, little or no dividends, relatively modest community funding and seemingly little prospect of immediate improvement in their circumstances (although the experience of early underperforming sites suggests they will turn around given perseverance). In some cases, shareholders wanting to sell their shares are finding it difficult although Bendigo is always working to improve liquidity for them.

Critics of our model have invariably focused on those struggling companies while ignoring the successful ones. The truth, of course, is that both comparisons are distortions. The Community Bank® model is not a wonder, nor a blunder. It is for the most part a successful new business model providing solid returns for all parties plus the bonus of great social outcomes.

From Bendigo and Adelaide Bank's viewpoint, it has enabled an expansion of our branch network on a reverse inquiry basis ensuring that there is a base of business demand that might otherwise have taken longer to emerge. That in itself has enabled us to become a meaningful alternative to the big four banks. Community Bank® has allowed us to expand into all States and Territories and even Nauru!

It has differentiated our retail bank from any other, enabling us to grow an identity without the crushing advertising costs that generally preclude small players from competing effectively with the oligopoly. And the Community Bank® model is now starting to deliver Bendigo some reasonable returns, although it has been a long haul to get to that point.

But it is very much a success for us and our community partners. The key measures are:

  • In 90 cases, it is the only bank in town. Say no more.
  • Approximately three quarters are either in profit or close to it whilst the majority of the remaining sites are in the capital drawdown period that characterises a start-up business.
  • Their communities have new skills; their leaders can now run public companies and are adept at tapping into local resources.
  • With those new competencies has come new collaboration; mostly these communities are more united and there are alliances being formed between community groups, not-for-profits and local government that are beginning to create some stunning social outcomes.
  • Communities have renewed confidence and a new sense of purpose.
  • Momentum is building as older sites mature. In 2009, for instance, communities were able to invest $9.4 million into local projects; last year that grew to $21 million. And this, don't forget, during a period where banking margins have shrunk as the impact of the global financial crisis still works its way through.

The final observation I should add, is to reiterate that government now looks very favourably on communities that have shown the drive and wherewithal to take on the Community Bank® model. We have only just started to see how communities can leverage their newfound cash flow to greater effect. Henty in southern NSW, for example, turned $150,000 into a $1.5 million community centre through a judicious combination of capital, debt and matched government funding. In the not-too-distant future, PPP (public private partnership) might well be rivalled by a new acronym - PCP (public community partnership) - as governments and communities increasingly combine their resources to fund local infrastructure.

So how might we evaluate Community Bank® in the context of social enterprise?

Well, at its core, the Community Bank® model was founded on the belief that successful customers and successful communities create a successful bank - in that order. That last phrase is the key, because it returns us to the philosophy on which banking itself was founded - that the bank feeds into prosperity, not off it. Simply put, you can't run a successful company in a poor community, so it makes sense to invest in helping to create a wealthier, more cohesive and inclusive community.

If we go back to the definition I cited at the start of my speech it probably ticks all the boxes:

  • Each branch has been driven by a social and economic cause;
  • Each derives all of their income from trade, not donations or grants; and,
  • They use the majority (80%) of their profits to work towards their social mission
  • But there’s one thing that nags at me in that social enterprise definition – the bit about social enterprises being commercially viable businesses, existing to benefit the public and the community, rather than shareholders and owners.

You see we see the Community Bank® model as doing both those things. It’s not an either or for us or even one over the other. From that perspective maybe it’s more of a shared value concept.

For those of you who aren’t familiar with shared value (and I doubt there’s many in this room in that boat but I have to fill my time in somehow) here’s a little primer.

From the ashes of the GFC there is stirring a phoenix of recognition that there are alternatives to a resumption of big government and global market domination. Harvard economic luminaries Michael E. Porter and Mark R. Kramer envisage a new business world order they have dubbed 'shared value'. It "involves creating economic value in a way that also creates value for society by addressing its needs and challenges".

Capitalism, they argue, is under siege, with companies widely perceived to be prospering at the expense of the broader community". Short-term profit objectives blind firms to the need to nurture the long-term health of the markets from which they draw their revenues. They conclude: "Businesses must reconnect company success with social progress. Shared value is not social responsibility, philanthropy, or even sustainability, but a new way to achieve economic success. It is not on the margin of what companies do but at the centre. We believe that it can give rise to the next major transformation of business thinking."

Community Bank® works as a shared value model precisely in the way in which Porter and Kramer envisage: it creates economic value at the same time it helps communities address their needs and challenges. And Kramer’s view of our Community Bank®model:

"Bendigo Bank is one of those troublesome companies that has been doing Shared Value long before Michael E Porter started talking about it".

Or maybe it’s more in line with what David Cameron's government was pursuing in the UK with his 'big society' in which power is devolved to local communities to determine their own future. Cameron even had the idea for a Big Society Bank, jointly funded by government and banks and charged with providing funds for local social enterprise projects. Launched in 2012, I’m not sure how successful it has been to date but it is probably way too early to pass judgement.

In some ways it is even a model of social impact investing.

Putting aside trying to classify it, I do think it is a great example of what business and community can achieve by working together to solve problems. Its chief imaginer, Rob Hunt, describes it as a commercially oriented, co-operatively spirited business.

And by the way, I could easily have talked today about other models we have that are like-minded - Community Sector Banking, Homesafe and our University Bank model are all initiatives of our bank that share value and/or are aimed at addressing a particular social issue.

Thank you all for listening.

See below how the Community Bank® model is delivering for Australian communities

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