This is the first time the role of a proxy adviser has come under the microscope at Australia's Royal Commission inquiry into financial sector misconduct, pointing to areas where the interests of bank customers and shareholders clash. Proxy advisers guide big investors on voting on company proposals.

Bendigo's Chairman Robert Johanson testified that the corporate governance firm recommended against the bank's proposal to increase the weighting of a "customer hurdle" in the long-term bonus for its chief customer officer.

"This measure had no direct link to shareholder wealth outcomes," an Oct. 24 letter from ISS to shareholders tabled by lawyers at the inquiry showed.

ISS's advocacy illustrated the pressure banks are under to put short-term profits above everything else and that the interests of proxy advisers were not always aligned with the best interests of customers, Johanson said.

"The proxy advisers, of course, are employed by institutions," he said. "The people who pay the proxy advisers themselves are assessed on, typically, short-term financial outcomes."

Johanson said he had to contact some institutional shareholders directly to explain why they wanted to include measures of customer advocacy into the remuneration structures of the executive.

Representatives from ISS's Australia unit did not immediately respond to an email seeking comment.

Over the last nine months, the Royal Commission has aired wide-ranging misconduct by Australia's banks and wealth managers. It concludes on Friday and could trigger sweeping reform of the nation's financial sector.

(Reporting by Paulina Duran; Editing by Muralikumar Anantharaman)