CEO Series: Brian Hartzer – Challenges of Leading Westpac for 6 Years

Bryce Leske: [00:01:47] Welcome to another episode of Equity Mates, a podcast that follows our journey of investing, whether you're an absolute beginner or approaching Warren Buffett status, our aim is to help break down your barriers from beginning to dividend. My name is Bryce and as always, I'm joined by my equity buddy Ren. How are you going? [00:02:02][14.5]

Alec Renehan: [00:02:02] I'm very good, Bryce. Very excited about this interview. I'm loving this video series that we're doing. We are speaking to some great names and this might be top of the list. [00:02:12][10.0]

Bryce Leske: [00:02:13] This is a very exciting episode. We are very, I guess, honored to welcome Brian Hartzer to the studio. Welcome. Glad to be here. Brian is an Australian business executive who was the managing director and CEO of Westpac from 2014 to 2020. He has recently released a book, The Leadership Style A Practical Guide to Building Engagement. So we'll touch on that as well as dig into your time at Westpac and how you're thinking about business leadership, the value of banks, plenty to go through the future of banking. So let's rock and roll. [00:02:45][32.0]

Alec Renehan: [00:02:45] So, Brian, we do like to start these interviews by having the CEOs explain that their companies in their own words. So if you know, you've obviously left Westpac now. But if you think back to your time at Westpac when you were CEO there, how would you have, I guess, described the bank you were leading? [00:03:02][16.9]

Brian Hartzer: [00:03:03] Well, Westpac is Australia's oldest company and a real institution in the economy. It was founded as a Bank of New South Wales in 1817. I have a history degree, so I get pretty geeky about this stuff. But the interesting thing about it is that it was founded by Governor Macquarie specifically to help develop a private economy in Australia. So before that, Australia was basically the world's one of earliest state-owned enterprises. If you think about it that way, and Governor Macquarie thought there was a lot more potential and he thought, well, we need to have a currency. And if and so how do we get a currency? And the answer was, you need a bank. And so Bank New South Wales is set up to give a bit of independence to the economy here. And so all through effectively, the history of Australia's economy is Westpac history. And so the way I thought about it was we are one of the pillar institutions of the economy and our job is to fundamentally support. Consumers support the development of businesses, make the Australian economy thrive, and if we do that, well, then or if we help do that, well, then the company will do well. [00:04:08][65.8]

Bryce Leske: [00:04:09] Yeah, well, so you've had a career that spanned management consulting in the US and banking in the UK and Australia. What have you learned about the differences between these markets? Are there any or what are some of the similarities? And I guess the second part is our US and UK banks as housing-focused as straight as the Australian counterparts. [00:04:29][20.1]

Brian Hartzer: [00:04:30] Yeah, it's interesting. So there are certain aspects of banking that are quite common, which is why you tend to see banking executives can move around the world because there's a lot of things that are pretty common. But there are also are some fairly profound differences. So in the US, the banking market got a lot more fragmented over the last probably 30 years, where you had specialist players get into areas like mortgages, credit cards, and the like. Those markets, the US and the UK are very, very large and that creates an opportunity for niche businesses to pick off bits of opportunity and grow into pretty large companies on their own. Australia is a bit smaller, so the smaller it is in a way, the less opportunity there is for niche players. I would say the Australian and Australian banking system is probably a lot more like the UK. It is derived from the UK. And so there are certain differences in the way products are structured and the like, which is why I'm probably a bit of a rarity in that not that many Americans have actually managed to make the transition to the Australian banking system because it does tend to work a bit differently. Whereas when I went and spent a couple of years in the UK, I found it very familiar. Yeah, coming from Australia, it kind of made sense to me on the housing thing. People are obsessed with housing kind of everywhere. But the housing funding systems particularly, I would say Australia is at one end of that extreme. US is probably the other end of the spectrum where in the US you have lots of specialty providers and people don't necessarily think of going to their bank to get a mortgage. They tend to go to a specialty provider. In the UK. It's probably about halfway in between. So there are more specialty providers. But you still have this sense as you do in the in Australia, that people have one institution that they consider their bank. And when they need something, they tend to go first to their bank. And if they don't get a good answer, then they go somewhere else. And in the US, you kind of start off shopping around for pretty much everything. You get credit cards over here, you get mortgages over here, you get your savings to account over there. It's a lot more fragmented. Yeah. [00:06:29][119.0]

Alec Renehan: [00:06:29] So, Brian, we're all in one way or another, shareholders of banks either through our superannuation, through index funds, or owning the banks themselves for banking shareholders. How would you think about, I guess, the value of banks? [00:06:44][14.7]

Brian Hartzer: [00:06:45] Yeah, well, a really important question. I mean, ultimately, if you're running these companies, you're running a big public company, you've got to think about that. So I tend to have always thought about it as a long-term thing. I was a management consultant in banking and we used to do a lot of our work was around. How do you value banks? How do you generate value? What I came to believe is there's at one level there's a fairly simple formula for valuing a bank, which is that the market to book ratio of the bank is equal to the return on equity, minus the growth rate divided by the required return, minus the growth rate. I'm assuming people are kind of into this stuff in your listenership. And so there's this ratio. Basically what that says is the higher the return is relative to the risk, the higher the premium you get in your market to book ratio. And that tends to work for banks kind of everywhere. Now, when you peel that apart, what that is really saying in English is that that the value of the bank, when you break it down, the dividends are a relatively small percentage of the value that people attribute to the shares of a bank. So I used to when I was talking to our staff, I'd say, look, if you buy a share of Westpac stock, the dividends that you earn on that over the next three years in total might add up to about 15, 16, 18 percent of what you're paying for the stock. So what that really says is that 80, 85 percent of the value is in the future. Now, what drives that value in the future? Well, you go back to the formula that I talked about. It's essentially about can you drive up the return on equity relative to the risk that you take and can you grow the book value of the company? OK, so that's still a bit mathematical. If you turn that into plain English, what you're really saying is why would you have to get a higher return? People need to be willing to pay you more than the commodity rate for something. So why would they do that? Well, they would do that because the service is good. They value the brand and the like. Right. And why would they stay with you longer? The growth rate is going to be new people joining you and people staying with you longer. Why would they do that? Because they value the service that you're giving them. You're finding ways to add value to them over time. What I used to say is, therefore, if most of the values in the future and most of the future value is driven by the quality of the service that you're providing, there is no conflict between doing what's right for customers and doing what's right for shareholders. And to me, that was a really important thing. I had to just the way my brain works, I had to get that working in my brain mathematically to kind of prove to myself that actually doing the right thing was actually doing the right thing. And I think a lot of people perceive and now there are a lot of people who call themselves investors who in my mind are traders. And and and I make them. And I took the view that I'm running the company for investors, not for traders and now the traders. And you can make money being a trader. You can there's lots of analysis wherein the Australian banking market you can trade-in and out of bank stocks because everyone holds some bank stocks. But you can you know, this the next six months. This one's doing better than that one. And people trade in and out. But I've always taken the view that I can't control that. What I can control is building the long-term franchise value of the company. And that's going to be driven by the quality of the brand, the quality of the service and your efficiency, your ability to turn revenue into profit by managing your costs. Well, that's it. So I don't know if that's helpful, but in my mind, it's that the big insight for me, which I always try to reinforce to people, is that this notion when you're running a public company, that you have a choice between doing what's right for customers, doing what's right for shareholders. I think that's wrong. Yeah, I actually think it's mathematically wrong. [00:10:32][226.6]

Alec Renehan: [00:10:32] Yeah, I love that. Love that. I love the fact that you were thinking about long-term investors rather than short term fluctuations. I guess the follow up to that is how often as CEO did you look at the share price? [00:10:42][10.5]

Brian Hartzer: [00:10:44] Not very often. Yeah, and I just didn't I mean, you know, I kind of would keep an eye on it, probably out of curiosity. And it is a bit of a game, but it wasn't in any way what I was obsessed with. My view was we would look at are we growing the tangible book value of the company and are we managing those inputs around the return on equity? Are we growing? The customer base has our retention going. Those are the things that, to me, margin management, cost management. But those are the things I was interested in. My view is we do that. The stock price will look after itself. Yeah. And also, I experienced you know, you hear all these stories about people complaining about the analysts and short-termism and all that kind of stuff. And there's a spread. I mean, there are some fantastic investors, institutional investors, who genuinely are interested in your long-term story. And then there are ones who are at who are just purely mathematical. And what's your margin this month versus last month and so on. But it is really interesting how you can get kind of torn into obsessing about it. But I guess I did see one thing that's maybe worth mentioning is I saw where a storyline would get out in the market and the professional investors would go bananas and your share price would drop. And you'd think you seriously telling me that the company's worth 15 billion dollars less than it was yesterday is just preposterous. You know, it was some of it was just absolutely ridiculous. And it in a way, was depressing because I was a believer in that using doing the math right. And the long-term fundamentals of investing, it used to frustrate me when I would see these ridiculous swings. But on the other hand, I guess four cents for your listeners, the positive is there is room for Alpha because actually, the market does really stupid things sometimes to you know, I mean, we had one experience and one of these that really hurt Westpac during the time that I was CEO was a couple of analysts. And there was really one analyst who was well regarded, just suddenly got this beaners, Bonnett, that the Westpac property portfolio was a bubble and it was all in trouble and it was going to be the big short. And he was going around internationally telling investors that Westpac was the next big short. Well, and which was just ridiculous. And it was all based on this kind of some half-baked audit report that got leaked. That was it was half-baked and it was kind of missing the point, but it was a story. So everyone just went bananas on this and it dragged Westpac stock because we were seen to be overexposed to property investors and so on. Oh, my God, property investors. It's all it's a bubble. The property market's going to burst. And we lost billions and billions of dollars of market value, which came out of the pockets of our shareholders, by the way, which really did frustrate me. And it was all nonsense. [00:13:44][179.9]

Bryce Leske: [00:13:45] When something like that happens, do you internally take an offensive approach and say or pay our team, let's get back out there and try and right the wrong? Or do you just say that's how it is, let's just let our business do the talking? [00:13:58][13.0]

Brian Hartzer: [00:13:59] You certainly would try to correct facts where you could and you would make your case, but equally, you never want to oversell it. I mean, philosophically, we always want to undersell. Yeah, because we'd much rather you get rewarded when you surprise on the upside and you get crushed when you miss by a tenth of a penny. Right. So so the philosophy is always under promise and overdeliver. But when there's something that you think is just fundamentally wrong, you'll try and you'll try and correct it. But in some cases, like the one I'm referring to, the damage was done, you know, because you're how do you disprove a negative, you know, how do you prove to know the property market is not going to blow up? You know, like you can't prove that. You can be you can give all the arguments. But, you know, once the doubt is planted in their head, there's not a lot you can do about it. [00:14:48][49.3]

Alec Renehan: [00:14:48] Yeah, yeah. It's a tough one. And it's definitely a strategy that more short sellers are using these days that release the report, let the market react to it. And then, you know, whatever the facts fall, however, the facts fall. They've had that initial impact from that report that they release. [00:15:03][14.6]

Brian Hartzer: [00:15:03] Yeah, I think there have been examples of that. [00:15:05][2.0]

Bryce Leske: [00:15:06] So, Brian, you guided Westpac through the royal commission into misconduct in the banking, superannuation, and financial services industry. Can you take us into the room at that time? I imagine it was a very stressful time. A lot of media coverage. How are you navigating it? [00:15:22][15.9]

Brian Hartzer: [00:15:22] Yeah, well, it was an extraordinary exercise. I'll just say a couple of things about that. So one was we had over 100 people working on that because the way that it actually works is the regulator or the royal commission hits you with these document requests and gives you no time to, you know, please give us a copy of every file of every customer for the last 18 years who've had this product. You know, how do you do that? So we had a massive team, literally over 100 people, almost all of whom were lawyers, finding documents, vetting documents, preparing things, responding to these. And the requests were just coming in nonstop because a bank is a big conglomerate of multiple businesses. And so and we were getting all these requests across all these different businesses. So it's just the logistics of it were intense. And then for our people who had to testify in the royal commission, there was then this immense preparation that had to go in because they could be asked anything. So they had to go into this incredible boot camp of learning. Looking at that case is understanding the law, the regulations around things to a level that maybe they hadn't needed to know before just so they wouldn't be caught, you know, not being able to answer a question because the whole thing was televised. And so and you've no idea what you're going to be asked. And you've got these guys whose professional job is to tear you apart, to grill you. Right. So and then and then I was one of those. And what I would say about that for me as I genuinely have not worked harder since university than the preparation I did for my royal commission thing. I remember I came into my office one day and they brought in my briefing books and the briefing books were arrayed on a table. And I put them on the floor and made a pile. And the pile was that high was about four and a half, five feet. Wow. Of reading material that I had to go through. And I spent probably well for six weeks. I probably spent the better part of two or three days a week for six weeks preparing for it. It was seriously intense and I mean it was in one way. So that's the personal aspect of it. And then you go in there and it's the best way I can describe it is its Test cricket where you're going in and they are bowling for you, you know, and there are no fours. There are no sixes. All you need to do is not get stumped. Yeah, basically. And there's a lot at most every so often there's a bouncer at your head, so it's a and you're on live TV. So it's a pretty interesting experience personally. But stepping back from that, I think for the industry it was really a great experience because we had to learn our business a lot better and we identified a number of things that really did need to be fixed. And the number one thing is we weren't paying enough attention to the impact of customers in the tail of the distribution. So by that, I mean for most customers, I mean, I used to say to people when they would complain about bank service, I'd say, well, what percent of customers complaining would you think is a good answer is a reasonable result? Most people say, oh, less than five percent. I'd say, well, what about one percent? They say, yeah, I'd say, what, about half of one percent? They'd say, yeah. And I say, good, because that's a number, you know, that the number of people who are actually complaining was very, very, very small. But in that number, there was a further subset of people who had been stuck in the system for a long time and had genuinely terrible results. And we didn't get a high enough level to know about that. And we should have. So what we had to do is go back and change our processes so that when someone has fallen through the cracks or gotten stuck in the system or had a. The particularly egregious outcome, we need to surface that so we can fix it because as soon as we found out about those ones, we were horrified. Well, gosh, let's fix that. And so that was a genuine miss by the industry, not paying enough attention to the vulnerable customers particularly. So I think in that sense, it was positive. [00:19:14][232.0]

Alec Renehan: [00:19:15] Hmm. I know you're not at Westpac now, but if you think about the industry generally post royal commission, do you think a lot of those changes have been made? [00:19:23][7.5]

Brian Hartzer: [00:19:23] I do. I do. Banking big banks are very complex and have old systems, old processes. The regulatory requirements are unbelievably complex and difficult to make sure you comply with day in and day out. At a high level, they sound easy, but in practice, with the number of people and businesses you've got it gets hard. But I can certainly say I mean, I know all the CEOs. I know what we went through. It was very genuine. And in a way, some of the frustration was a number of us, myself included, had actually come into our jobs knowing that the industry needed to change, knowing that we wanted to improve things. And I in some ways feel like, for me, I was kind of like the surfer who started paddling. But still, the wave was moving too fast and I couldn't get in front of it, you know. So it wasn't like we were sitting there in denial that we needed to fix things. We were actually trying to fix things. We just had a huge legacy and we didn't get there fast enough. Mm-hmm. [00:20:21][57.2]

Bryce Leske: [00:20:21] And so after the royal commission, Westpac then got swept up in the AUSTRAC money laundering case where the Aussie regulator cited twenty-three million breaches of anti-money laundering laws. Since then, banks like Commonwealth and financial institutions like State Street have also been caught up in the AUSTRAC cases. What did you learn from this experience and potentially what advice would you have for other banking and finance executives? [00:20:44][22.7]

Brian Hartzer: [00:20:45] Yeah, well, anybody who doesn't think that AML regulations are serious and complex is missing the point. Yeah. Anyone in financial services, this stuff, it's a whole nother level of complexity and expectation and rightly so in terms of what I learned from that experience. The particular issue at Westpac started 12 years ago from a technical error, and we didn't pick it up fast enough. Essentially, what happened and what I've learned about that, I think which is relevant in AML, but probably relevant more broadly, is you have to pay really close attention to outcomes around compliance, not just process. So one of the things that happens in banking is there's so much regulation and often it when it trickles down to the person who has to implement it, they're being asked to do a million things. And so they just fall into this mode of just trying to keep up with it all. And so the danger is you end up focusing on the process rather than stepping back from it and going, OK, what's the outcome that would tell me if this process is working effectively or not? Yeah, and if it's not, who's looking at that and who's intervening to go? Wait, time out. This isn't working. I know everyone's working really hard and I know you're trying to keep up with it all on it. But best efforts aren't enough. You've got to have a layer of that. The other piece of it was sometimes the regulations require lots of different parts of an organization to work together. And if you haven't been crystal clear as to who's doing what, things can fall between the cracks. And so those would be probably the two things that, yes, the Amelle aspect is particularly complex and the penalties are severe if you get it wrong. But I think more broadly for anything, anyone who's in an industry that has a compliance aspect, you need to make sure you're not just going, yeah, we've got a procedure for that. It's like, great, you got a procedure. What's the measure of success? Who's looking at it? What interventions happen when it's it's not happening. So if there's some file that if the standard was that it needed to be dealt with in six months and you've got a bunch of files have been sitting around for 18 months. Well, who's doing something about that? Who's noticing that those are the kind of things that can come and bite you? [00:22:58][132.8]

Alec Renehan: [00:22:58] Yes. So, Brian, we want to talk about the, I guess, future of banking. You know, we're seeing a period of unprecedented disruption or like-new entrants buy now, pay later. All of that. Before we do, we do need to keep the lights on. So we're going to take a quick break to hear from our sponsors. Bryce, you're a man that moves to the beat of his own drum, actually literally moved to the beat of his own drum when you studied drumming back at uni. Yes. [00:23:23][24.8]

Bryce Leske: [00:23:24] Is true. Got booted out. Yes. [00:23:25][1.3]

Alec Renehan: [00:23:26] And after you study drumming, you had a short-lived but highly successful career as a Canberra nightclub deejay. So you're all about moving to your own date. And that's great because our sponsor to kick off today's episode is all about banking to your own beat. And that is Virgin Money. [00:23:45][18.5]

Bryce Leske: [00:23:45] That's right. Ren banking with Virgin money has never been more rewarding. You can earn rewards on your everyday spending and pay zero monthly fees with the Virgin Money Go transaction account [00:23:55][10.6]

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Bryce Leske: [00:24:11] OK, I'm ready to bank to my own Bayit Ren bank to your own Bayt Virgin money [00:24:16][4.6]

Alec Renehan: [00:24:16] terms and conditions and monthly criteria apply. Now let's get into the show. So, Brian, as I said, we want to, I guess, pick your brains on the future of banking, probably no one better to talk to about a bunch of this stuff. I'm we're seeing the traditional banking model face, I guess, new competitors or potential disruptors from all sides, credit products, you know, in the with the by the pilot, a player's savings products from the neo banks, small lending from peer to peer lenders. Let's start, General, and then we can get a bit specific. What do you think the future of the big four banks is? [00:24:52][35.5]

Brian Hartzer: [00:24:52] Well, before I get to that, let me talk about a couple of the macro trends that I think are driving the answer to that question, which is embedded in what you said. So for me, the several big things going on. One is obviously the shift to digital in terms of what's possible with technology and how consumers want to engage with their world through technology. So there's an expectation that everything is going to be as easy as Uber. And so all industries banking, no different need to respond to that. The second thing that's going on is banking has traditionally had lots of cross-subsidies in it, not necessarily for bad reasons, but just because you might give someone a checking account with great transactions and you're effectively losing money at that, but you've got their mortgage. What technology allows new players to do is unbundle those cross subsidies. And so in my mind, the businesses that have been successful, the new entrants are the ones who've gone after a cross subsidy where there's essentially an excess margin if you can find a way to just go after that piece. And that's why in my mind, some of the startups who say are focused on the mortgage business and in a sense, there's nothing new in that Aussie Home Loans going back 20, 30 years ago was, in a sense, doing the same thing, going after an excess margin versus the new banks who thought, right, we're going to start up and we're going to just do transaction accounts and savings accounts. Well, guess what? Those are generally lost leading products. So if you just do that, you know, in my mind, it's no surprise at all where some of the so-called neo banks have ended up. So so this trend about going after cross-subsidies, I think is a big one. The third one that's been relevant for banks is location. So in the old days, you went to a bank to do something, you went to get cash, you went to apply for a loan. Nowadays you can do that financial transaction when you're doing the thing that you actually want to do. So after paying these sorts of things, this is financing at the edge, finance in the moment of what the other thing, because finance is always an enabler of something else. So now you can embed those activities in something else. So that to me, those are the three things in my mind that are fundamentally driving a lot of this now. So do you question the big banks? There's no reason, for the most part, that the big banks can't still be successful in that world provided they adapt their business to that. So are they shifting to digital engagement? Are they finding ways to be where the customer is at the same time, or are they adjusting the economics of their business to unwind those cross-subsidies if they do that? Well, banks actually have a lot going for them. They have a customer base already. They have brands, they have data. They have the ability to invest in technology. So there's no fundamental reason why they can't do it. But if they don't adjust, then they're in a lot of trouble. [00:28:01][188.8]

Bryce Leske: [00:28:02] So while you were leading Westpac, you embraced this disruption and introduced banking as a service to partner with start-ups seeking to embed financial services into the applications. Many of our audience would have heard of software as a service. But are you able to explain what banking as a service is? [00:28:20][17.4]

Brian Hartzer: [00:28:20] Yeah, well, the general idea was that there are a number of businesses out there, fintech businesses and others who have a customer, a digital customer experience and are looking to leverage their brand, leverage their customer base, support what else they're doing by offering payment services or looking for essentially an old fashioned cross-sell of, well, I've got you as a customer, why don't I offer you something else? And my view was that we can't fight that trend that's going to keep happening. But on the other side, there have been lots of examples over time of big brands trying to get into financial services and finding that it was actually really hard and they weren't successful because banking actually is a lot harder than people assume when you particularly when you get into regulation and complexity. Right. So, you know, over the years, Qantas, Woolworths, you know, these guys have all tried to kind of build banks and generally backed off on that. So we thought that, well, we don't exactly know where this is all going to play out. But given that. She is now enabling this stuff, why don't we play in that and use it to our benefit, which is we can say to some of these partners, you don't really want to be a bank, you don't really want to have to deal with APRA and ASIC and all this kind of stuff. You want to effectively capitalize on your brand position and your customer relationship. So why don't we do that together? And we can use technology to make that really quite easy. And hopefully, they go, yeah, that's good enough. Will be we'll be happy with that position. And in fairness, I always think it's important to say I never thought I knew exactly what was going to happen with any of this stuff. But you could see something was happening. And wouldn't you rather be in it and see what's going on, than waking up one day and finding you've completely missed it. And so even with the makings of servicing, I don't know if it's really going to work. I mean, you know, I mean, I know it's going to work technically. Is it going to be a big thing? I don't know. But if it is, when I'd rather be in the middle of it than wake up and go, we should have done that. [00:30:28][128.0]

Alec Renehan: [00:30:29] Yeah, it makes a lot of sense. And, you know, I guess it's early days, but the after pay deal with Westpac is, I guess, sort of proof that the other side of that transaction, as the new fintech, are definitely interested in that model. Yeah, yeah. Yeah. So we would be remiss if we didn't ask you about cryptocurrency. Yeah. You know, as a banking executive between 2014 and 2020. Well, actually as an executive before that and then as the leader of a bank in that time, you would have really seen the rise of cryptocurrencies. You would have seen the bubble in twenty seventeen, the crash afterward. I'm sure there were plenty of conversations about what cryptocurrency meant for currencies and also for banks, I guess. Can you take us into that room, tell us what some of those discussions were? And then now, as a private investor, potentially a cryptocurrency investor, we don't know. How do you think about crypto today? [00:31:20][51.3]

Brian Hartzer: [00:31:21] So I first became really interested in it. About ten years ago. I was at a conference and one of the founders of Coinbase gave a presentation and I thought it really quite intriguing, the way I've tended to think about it. And we ended up investing in Coinbase, which went pretty well, [00:31:38][17.1]

Brian Hartzer: [00:31:42] But in my mind, I always separated blockchain from the cryptocurrency itself. To me, blockchain was and is a really important, clever development that I think is going to transform a lot of processes, including in financial services. I think it's a really brilliant capability. I've never been totally convinced about cryptocurrency and I and I remain a little skeptical. So I think there's something in it. And I think that the use of digital currencies will have a role. My view was always, I suppose, given what I do as a career is, is that the regulators are going to win. Yeah. So I never really bought into this notion that currencies were going to move completely out of government control and that the whole system, all this fragmentation was going to happen. I never really bought that because I think governments are pretty powerful in the end. And so what I liked about Coinbase was Coinbase essentially said, we agree and that that crypto is going to be important, but it's going to happen in some sort of a regulated environment. And so Coinbase built their whole offering around the idea that we're going to be regulated. We're going to need to be able to identify people. We're going to need to be able to track things. And so I took the view that I don't know what's going to happen to the value of Bitcoin or these other things, but I know that there's going to be activity going on in this. And this seems like a good way to get exposure to it. What I would observe about it is that a lot of the promise there's two aspects of the original case that were very exciting, but I don't think have totally played out, at least yet. So one was this whole idea of programable money, which is particularly the ethereal idea, smart contracts, all that kind of stuff. Haven't really seen that happen yet, and it hasn't been for lack of trying. So I'm not saying I'd rule all that out, but I think it's interesting that when you talk to people about these crypto things, they give you a use case and they say it's going to be great and they give you one use case and then you go great. And what's the other use case? And I haven't really seen that happen yet. The other thing I would observe is that the original argument, if you go back to it, was that crypto was going to allow micro transactions to automate your world. I mean, I remember the whole idea that cars were going. Each other to get out of each other's way. You know, that was one that I haven't heard. The idea was you that you were going to have your autonomous car and you were going to be able to do settings where it would have Krypto in it. And so as it passed another car, it could offer it money to get out of the way. But that was one of the ideas that are proof that that was one of the ideas was running around. Now, here's the thing, though. So as everyone's got excited about Bitcoin, what's happening? The price of Bitcoin, it's when it's going bananas, right. And so it's gone from being a transactional currency, which is it was called Bitcoin. Right. Originally, it was going to be a transactional currency. Now it's a speculative asset. And if you've got the speculative asset, it's going to be using that to buy a burger. No, no. Yeah. So doesn't that kind of undermine the whole argument as to why it existed at all? So now you've just got this speculative asset that has no backing other than the fact that everyone believes in it. And I know that the argument becomes well, yes. But, you know, the US dollar isn't backed by gold and so forth. The problem with that argument is, yeah, but the US dollar is backed by the US government, which has a military and the ability to tax. [00:35:36][233.8]

Alec Renehan: [00:35:37] Well, I guess the analogy is more gold like gold is just a group consensus that its [00:35:42][5.2]

Brian Hartzer: [00:35:42] value except gold has actual use. [00:35:44][1.6]

Alec Renehan: [00:35:44] Yeah. Yeah. It's not commensurate to its market. [00:35:46][2.2]

Brian Hartzer: [00:35:47] Wow. Are people still going to want gold jewelry for it. [00:35:50][3.0]

Bryce Leske: [00:35:51] It's so, [00:35:51][0.7]

Brian Hartzer: [00:35:52] so, so your answer is I don't own any bitcoin. Now if I had a huge portfolio that I don't what I buy a bit of bitcoin. Yeah. Probably because who knows. But I tend to try and focus on things I can understand and that makes sense to me and to me as a student of financial history. You know, it's a speculative asset. It's its digital tulips, man. Yeah. Well, you know, so I mean, now I know that there are people who will be very smart people who will tell you why I'm wrong. And I'm willing to admit that maybe I am wrong, but I still don't totally get it. I mean, to me that the legitimate uses of it are not even legitimate. The actual uses of it are OK. If you live in a country that doesn't have a solid central bank and your currency is hopeless, you're in Bolivia or something and you want to buy something, then I can understand why you'd want that. Terrific. The other use seems to be for the crime. Well, you know, is that really what I want to be investing in? No. No. So I get it. Maybe that's I don't know. [00:36:57][64.9]

Bryce Leske: [00:36:57] 50 minutes ago, Elon Musk tweeted that Tesla is no longer going to be accepting Bitcoin because of its fossil fuel use, and its tanked 12 percent. Really? [00:37:06][9.4]

Alec Renehan: [00:37:07] Yeah, Elon Musk [00:37:08][1.2]

Bryce Leske: [00:37:09] just moves markets. It's like in this guy I get off Twitter. [00:37:11][2.5]

Brian Hartzer: [00:37:14] Are you Dogecoin holdings going? [00:37:16][1.9]

Bryce Leske: [00:37:17] Yeah, I'm not. But anyway, let's move on. [00:37:21][3.9]

Alec Renehan: [00:37:21] So when we talk about disruption and I guess innovation in the finance space in Australia, it's hard to go past by now. Please, I think most the most discussed stock in the equity markets community for the last few years has been off to pay and this year it's been Zipp. So I've got to ask you a question about that. So I guess generally, how do you think about by now Pilade like and how do you think it will affect banking? And then specifically, I always have this question and I want to take the opportunity to ask you in terms of pricing credit, we have credit cards that charge 20 percent interest and we have by now highlighted that charge retailers like three percent and don't charge interest except late fees. It feels like the pricing of credit has taken a massive step down, like, well, credit cards just incredibly expensive or a buy now pay later undercharging based on credit risk. Like what's the how is this such a gap there? [00:38:17][56.1]

Brian Hartzer: [00:38:19] OK, well, there's a lot of. Yeah, so so the way I think about by now pay later generally is rather than seeing it as this massive disruption to me, it is a natural reengineering of an old process using technology. I think of it as all they've done is reengineer the Harvey Norman Harvey Norman credit card. Yeah, right. You know, in the old days you went into the Harvey Norman shop, you would buy a fax machine if you remember what that was, and and and you'd fill out a form and someone would go away and fax it around. You go around, look at televisions for 20 minutes and they come back and say, congratulations, you've got this thing. And in a modern digital world, there's a much better way to do that. Plus, you can do that instantly and you can do it online when you're shopping online. So I just think congratulations to them for looking at this aspect of financial service and saying, hey, we can do this a lot better and we can build a brand around that. And I think you've done a terrific job. Now, is the stock are their stocks overvalued? Undervalued, who knows? I think there it's really a question of do you believe the assumptions? I think if they can grow into the US market, then. They can do incredibly well because the US markets enormous. So you just have to and I don't think there has been much in the way of that proposition in the U.S.. So on the flip side, though, in the US, you have much more penetration of credit cards, many of which have lower interest rates. And so does the relative offer to a consumer in the US look attractive? I don't know. But I do think inherently this huge upside for them. Whether that's already priced in or not, I wouldn't have a view. I think the second thing I would say is that and I feel slightly differently about zip and after pay. I mean, let's in my mind, they are credit, both of them. And Zipp is upfront about that. And we when I was at Westpac, we invested in Zipp and did very well out of that. And part of I think we owned 18 percent is it [00:40:09][110.2]

Alec Renehan: [00:40:10] was between Coinbase. You guys did well. Yeah, yeah. [00:40:13][2.9]

Brian Hartzer: [00:40:13] Those were the two cases were actually overruled my s.r.o. to do the next Oh Wow. Story. But, but they did really well. And what I liked about Zipp particularly was that they were saying, yeah, we're doing credit and we don't offer the product unless someone passes a credit test after pay takes a different view. But I think eventually the regulators will require them to look at it that way in terms of the credit card versus buy now, pay later. So credit cards benefit from Ubiquiti. So you can go anywhere in the world and you can use your credit card if your Visa, MasterCard, you can use anywhere in the world. And a lot of what the appeal is, is really the convenience and the ubiquity of that. And I think the now pay later guys are going to have a long way to go to come anywhere near matching the ubiquity for daily transactions, because by now, pay later, by definition, really is about financing a relatively large. The proposition is to find a compelling, a larger purchase. And it's compelling when you're buying something for five hundred dollars or a thousand dollars or ten thousand dollars, when you're buying your coffee, when you already have behind the scenes. So the merchant fee is not really equivalent to the interest rate on the credit card, because what's really going on there is the merchants are paying a merchant fee for a credit card acceptance versus right. So I bought my coffee around the corner. I use my my credit card embedded on my phone, and that merchant will have paid 20 cents or something, ten cents to their merchant acquirer and Visa MasterCard to process that transaction for them. They'd be saying, well, if I want to, why would I accept? What would it pay? Three percent. Yeah. For that for a daily transaction. So I think you could go on about this. But I think they're not really equivalent because the that see, the merchant isn't paying two or three percent for the coffee, they're paying five cents or ten cents or whatever it is. So I think you'll find they'll still be there. I think clearly buy now. Pay later. And this is having an impact. The credit card business is the short answer to why the rates are so high is because not everybody pays interest and yet everybody gets 30 days free. Yeah, financing. So essentially, it's one of those cross subsidies that I was talking [00:42:41][147.3]

Alec Renehan: [00:42:41] to before, [00:42:41][0.2]

Brian Hartzer: [00:42:43] a very, very small percentage of people. And if they're paying 20 percent on their credit card, they're usually only paying that for a month or two. Mhm. Right. [00:42:50][7.1]

Alec Renehan: [00:42:50] So it's not really basically if everyone let their credit cards run longer the interest rates would come down. Yes. [00:42:58][8.2]

Brian Hartzer: [00:43:00] Well yeah in a way. And, and you see that in there are credit card products out there that are targeting people who do carry a balance on a regular basis. You can get a credit card for nine and a half percent if you're going to be carrying a balance. You know, the 20 percent, 22 percent is a convenience offering. It's not designed as a long term financing offering. [00:43:20][19.9]

Alec Renehan: [00:43:20] Yeah. Now, you joked there that that people don't do buy now, pay later for their coffee that I actually did come across a start up recently called Payo. That does it now pay later and finances food purchases in four installments. [00:43:35][14.6]

Bryce Leske: [00:43:36] Where's it going to stop? [00:43:36][0.5]

Brian Hartzer: [00:43:37] Where do I invest? [00:43:38][0.4]

Alec Renehan: [00:43:38] I don't know how well that one will go, but I will say [00:43:43][4.1]

Brian Hartzer: [00:43:43] I like to say that the rules of financial physics will eventually apply. [00:43:46][2.6]

Bryce Leske: [00:43:46] Yeah, I would love to talk about people in culture, but before we do, another quick break for our sponsors. [00:43:53][6.5]

Bryce Leske: [00:45:01] So, Brian, when you took over as Westpac CEO in 2014, one of the first things you said to the press was a big priority for me is that we continue to invest in our people and the quality of our leadership, as we said at the start of this, or maybe it was offline for many of the experts that we spoke to in the investing world, understanding management is an incredibly important aspect for making decisions when it comes to investing in companies. But it's often really hard for retail investors to get that access. So we'd love to pick your brains on how you're thinking about people and culture and leadership. Do you have or did you have a leadership philosophy as CEO? [00:45:36][35.0]

Brian Hartzer: [00:45:37] Well, I don't have a trite statement, but I think it's it's really important. And I do think that in my observation, I've worked in a bunch of different banks and I saw many, many more of them when I was a management consultant years ago. And I really do believe that that is something that's underappreciated about your ability to execute well. Your ability to outperform over time is really driven by the quality of your people and the environment you create for those people to do their best work. So as a leader of a big business, Westpac, when I took over, we had about 40000 people. One of your biggest levers to sustainable success is really about am I creating am I getting the right kind of people in here and creating an environment where they are motivated, engaged, want to go do their best work? So I guess my philosophy is that it's really important and that starts with the CEO and the extent to which they know what they're about and they're able to draw people who want to be part of their team because they feel like they're going to do their best work. They're going to be surrounded by like minded people who are really driven to be successful. And so I guess my philosophy is to start with myself and be really clear on what I'm about, what my values are, what I want to achieve, then create a team of people who share that same motivation, albeit you don't want people who are all minimis. So I think it's really you're creating a team, which means you need different kinds of people who bring different things so that the collective whole compensates for each other, compensates for me and getting that right. And and one of the most critical things that I look for in people in that team is what's their track record of attracting and developing in and engaging people beneath them. So one of the things I usually judge a leader by who who works for them. So if I if I feel like, gee, this person consistently brings great people to the organization and they're really motivated in making a difference, well, that says a lot about the leader. If the people beneath them are pretty average, that tells you something. Yeah, yeah, [00:47:43][126.0]

Alec Renehan: [00:47:43] yeah, yeah. I like that. So then if you think about the institution as a whole, how do you think about building a culture? And I guess especially at an institution as old as Westpac where there's so many like established norms and culture, how do you think about coming in, leading that organization, and building the culture that you want to say? [00:48:02][18.7]

Brian Hartzer: [00:48:03] There's a lot of different ways to think about this. One of the most powerful insights that I came across was the idea that culture really emerges as a consequence of the way people interact with each other. So, yes, of course, at the top end of the house and I can talk about all this, that you've got to establish the context of what the organization is about. You've got to be clear on what the values and expectations are in terms of behavior. You've got to give people a lot of clarity about what's expected of them. And you've got to follow up with that and you've got to reward the right behavior and all that. That's all true. But a lot of it comes down to what happens day to day between two people. And so one of the best ways I've seen to improve the culture is to actually work on training people in how to work more effectively with each other. How do you resolve conflict? How do you build trust? And then have you created a structure and clarity of accountability that means people feel they have control over their environment and they can actually get stuff done. And then when they do need to collaborate that they've got they're the people they're dealing with are on the same page, have the same generosity of spirit, are able to be straight with each other and support each other versus I think some people come in and think, well, it's all about, you know, dog eat dog and let's set up competition internally and let the best man win and all this kind of stuff, which I suppose that works for some people. But to me that that doesn't work for building a long term healthy culture. [00:49:35][92.5]

Bryce Leske: [00:49:37] So you've now written a book, The Leadership Style Practical Guide to Building Engagement, that is all about building high-performing professional teams. So let's start with the world as it is now. What do you think some businesses and leaders are getting wrong when it comes to this? [00:49:51][13.5]

Brian Hartzer: [00:49:51] Well, I think a couple of things. When I reflect on things I've seen, it would be, number one, that people feel like they have to play a certain role as a leader and. To not be themselves, and I think that people can spot a phony and I think authenticity is one of the critical components. And so that starts with getting yourself clear on, as I said earlier, what's important to you? What do you stand for? What do you want to achieve? And being really genuine about that? If it's inspirational enough for other people, then they want to join you. They want to be part of it. So where some people think, you know, I have to be this super decisive alpha male or else a female, and I and I think people see through that. So one thing I think the second thing is people make a bunch of assumptions that other people know what's expected of them. I use the analogy that if you hire a product manager out of Uber and you say, great, you've been a product manager at Uber, now you're a product manager in Homeloans at Westpac, and you don't actually explain what you think that role is. The chances are the person is not going to do very well. So a lot of managers don't take the time to be really explicit about their expectations for roles, for what good looks like, for what great looks like, for what behavior is OK, and what the behavior is not OK. So I think it's that making explicit your assumptions would be another one. And then I think the third thing that people do and it's I start with this actually in my book, that the first thing is really about done you care for people as individual human beings versus some generic. I care about my people. Yeah. And treating each person as an individual because people have choices. And I suppose going back to the question about philosophy, my philosophy is that we are incredibly blessed to live in a country where there's low unemployment, the lifestyle is good and people have choices. And so if you and by the way, talent is somewhat limited. So if you don't take time to make people feel like it is worthy of my time to be here and I'm feeling fulfilled and challenged and rewarded, then they'll go somewhere else. And that is really all about, in my mind, treating people as an individual rather than just assuming that all people are the same and motivated by the same things. [00:52:07][135.4]

Alec Renehan: [00:52:07] So, Brian, we've taken a lot of your time today and we want to really say thank you for giving us your time. We've got one final question. But before we ask that, if people want to read your book, I assume it's available at all good bookstores. [00:52:22][14.5]

Brian Hartzer: [00:52:23] They can go to the leadership Starcom, where it talks about the book. And my one quick plug would be I try to write this as the book I wish I had had 20 years ago when I was starting out as a leader. I don't have an MBA. I was very fortunate someone gave me this job running a thousand-person business and really I had no business doing that because I didn't know what was doing. And I paid attention over the years to the people that were good at it. And I got better at it. And I had the time last year to sit down and try to do this as a way to make a contribution to future leaders, because leadership, I think, is really important. Good leadership is really important. And so my hope is that people will take this book in that spirit that this is hey, guys, here's a practical guide to what you can personally do when you come in on Monday morning and you've got a bunch of people that you're trying to lead and manage, inspire. Here's how I think about it. And a lot of people that I've taught that to have found it really helpful. [00:53:17][54.3]

Alec Renehan: [00:53:18] Yeah, it's my writing process and I slowly building the time here at equity markets. So there's a lot of lessons in there for us. Yeah, terrific. So as I said, Brian, we have a final question. When we have an expert investor on the show, we normally ask them what advice they would give to their younger self when they started out in their investing career. We got a little bit of a twist on it for you, given that we're talking about leadership. When you started your career, what are some of the leadership lessons you wish you knew back then? [00:53:49][31.3]

Brian Hartzer: [00:53:49] The first one, which it took me about 15 years to learn, was that it was so important to separate how you felt about yourself from how you felt about your career success. So when you're young and ambitious and driven, which I was, you inevitably start to assess yourself based on how well did I do in school? What grades did I get? Then it's what job did I get? How much am I getting paid? Did I get promoted? What was my bonus? You know, you start to measure yourself and if that's going well, you think, hey, I'm fantastic. And when that's not going well, you think I'm terrible. And I learned because something went very wrong in my career at one point and I was miserable. And someone pointed out to me that you're miserable because you thought when it was all going so well, you were great. And now that something went not well, you think you're terrible. And in fact, neither of those is true. And you have to separate how you feel about yourself from that. That was to me if there's one lesson I learned that was so powerful because it took an immense amount of stress out of my life and it made me able to be objective in. Whatever situation I came to in the more senior you get, the more you face messy situations where you need to be objective and not worry about what it means for you. And so I was able to go, well, OK, if if I'm working hard, if I am behaving in ways that are consistent with the values that I think are important to me, if I'm treating people well and I'm not ashamed of the decisions I've made or the way I've behaved, then I'm OK. And I recognize that there's a lot of randomness in life and all I can do is all I can do and it'll be what it'll be. And so know. Did I work hard? Am I happy about the way I did it, etc. then I'm OK. And then if it works out great, if it doesn't work out OK, what do we learn from that? And the subtlety of that is it's just as important not to get carried away with yourself when things are going well, in fact is more important than to worry talking yourself up when it's not going well, because I found that by not allowing myself to get carried away with how brilliant I was when things were going well meant that when things were going poorly, I was like, OK, well, you know, swings and roundabouts, baby, you know, so and honestly, that changed my life because it meant that I wasn't on this incredible emotional roller coaster all the time about things I couldn't control so that, you know, you us for several. But I'll give you that one now. [00:56:20][150.5]

Bryce Leske: [00:56:20] That's a great one to finish with. So I'm looking forward to reading the leadership star. Sounds like it's going to be plenty of valuable lessons in there and very much appreciate you spending the time to come on today. It's been a very enjoyable conversation and I know a lot of our audience would take some value for this. [00:56:35][15.6]

Brian Hartzer: [00:56:36] I hope so. Thanks. Thanks. [00:56:36][0.0]

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