In terms of examples of risk management and corporate governance, UK based banking group Royal Bank of Scotland (RBS) just gives and gives. It’s an unfolding story that continues to grow.
RBS was a big success story in the last decade, showing very fast growth and taking over bigger banks such as Nat West. Its considerable returns appear to have been won, rather predictably, by taking a high level of risk. Previous blog entries have mused on the wisdom of having fired their risk manager.
The banking group was saved from collapse by receiving vast emergency support from the UK government. This was controversial but almost everybody agrees that it was necessary in order to avoid a collapse of the entire banking system. Such a collapse would certainly have made the recession very much worse.
The British public thus became an involuntary shareholder in RBS. Indeed, the UK government now holds a controlling interest in RBS, though it’s been keen to avoid interfering much in the management of the bank.
The image of bankers in the UK at the moment is very tarnished. Most people who have an opinion on senior bank staff have an unfavourable opinion; often seeing them as people who were over-rewarded for taking excessive risks. Many resent having to bail out a bank ruined by unwise risk management.
So it came as a surprise to many when the directors of RBS said that they intended giving bonuses and pay increases to many staff last week. This provoked anger from the government and outrage from the public. The RBS board stated that they would resign if they weren’t allowed to pay the bonuses, as failing to pay people well would result in loss of talented staff.
It has to be questioned whether the board have ever studied stakeholder management and the Mendelow matrix. With 70% of the ordinary shares, the government is a key player; the views of the public must be respected. If that means the synchronised departure of the board of RBS, so be it. Bankers’ salaries and bonuses have been in an inflationary spiral in recent years and some bank must be the first to bring their salaries into the realm of sustainable expenses.
It will be interesting to see if the directors follow through on their threat, back down or are even removed from office by the shareholders (ie the government). Whatever the outcome, their credibility is arguably much tarnished.
https://www.theexpgroup.com/wp-content/uploads/2018/06/styleguide-EXP-4.png00Stevehttps://www.theexpgroup.com/wp-content/uploads/2018/06/styleguide-EXP-4.pngSteve2009-11-29 19:56:102009-11-29 19:56:10RBS directors threaten to resign
I’m a keen concert goer and enjoy listening to all types of music. In my opinion one of the most pleasing sounds on the ear is that of a piano.
Last month, Kemble and Co., the only remaining large scale UK piano manufacturer stopped production in the UK. Its main shareholder Yamaha transferred operations to Asia.
Whilst there is a debate amongst music aficionados around the world as to whether the sound of instruments is different depending on where it was manufactured, what is interesting from a strategy paper point of view is to think about why Yamaha made the decision to transfer production to Asia. There could well be a question in the exam involving relocating production to another country. So why did Yamaha move the production location?
The reason is clearly due to cost savings due to economies of scale, synergies and utilising spare capacity at some of their other production facilities in Asia.
In 2 years time, Kemble is due to celebrate its 100th birthday. It will still celebrate its birthday but they will be blowing out the candles on the cake in Asia and not the UK.
https://www.theexpgroup.com/wp-content/uploads/2018/06/styleguide-EXP-4.png00Stevehttps://www.theexpgroup.com/wp-content/uploads/2018/06/styleguide-EXP-4.pngSteve2009-11-15 19:14:522009-11-15 19:14:52It's music to the ears...
Royal Bank of Scotland (the UK based banking group) has had its fair share of troubles of late. It made some acquisitions that in retrospect were a clear mistake, such as its purchase of ABN Amro. It failed to manage risk properly, having chosen to fire its risk manager; allegedly for making too much noise about the company taking too many risks. The result of this all was a taxpayer bail out and the enforced departure of its chief executive, Sir Fred Goodwin.
At the time it became obvious that stakeholders were going to require a good degree of blood letting at board level, the bank’s chairman discussed the situation with Sir Fred. As a result, Sir Fred chose to resign, taking his right to an annual pension of £703,000 with him. Had he been fired, his pension rights would have been closer to zero.
Much public comment and anger followed, with virtually all of this aimed at the outgoing CEO. But where were the non-executives? The general duties of non-executive director are:
Remuneration: decide appropriate pay (including pensions) for executive directors in the circumstances.
Internal control and risk management supervision. History shows that this is at least questionable.
Scrutinise the executive directors.
Strategy: contribute to strategy.
Sir Fred Goodwin was entitled to his pension. He later voluntarily chose to waive £200,000 per year, but universal legal opinion is that he would have been entitled to the full amount, because the non-executives allowed him to resign.
Perhaps the press and the public are venting their frustration and anger too much at the executive directors?
https://www.theexpgroup.com/wp-content/uploads/2018/06/styleguide-EXP-4.png00Stevehttps://www.theexpgroup.com/wp-content/uploads/2018/06/styleguide-EXP-4.pngSteve2009-11-11 18:50:172009-11-11 18:50:17Royal Bank of Scotland. Where were the non-executives?
Those of you who enjoyed the corporate governance parts of ACCA and CIMA may be interested – or excited, or irritated, depending on your point of view! – to know that the US Congress is considering legislation requiring the roles of the Chairman and the Chief Executive Officer to be split between two people.
This is big stuff. Why, you must be thinking, that is precisely the recommendation (read: requirement, hint, hint) of the Combined Code in the UK, and this feature distinguished it from the American Sarbanes Oxley law, which never mentioned such a split.
The reason is cultural: the Americans have always believed that one guy has to be in charge of a company, whether his name is Jack Welsh (General Electric) or, in an earlier age, Harold Geneen (of ATT).
In his book, “The Age of Turbulence” Alan Greenspan endorses this “John Wayne” approach to management. One guy in charge is the way to go. And now, after all the controversy on corporate mismanagement, bailouts and excessive executive remuneration, Congress is looking at … requiring the separation of the Chairman and CEO roles at US companies.
Watch this space…
https://www.theexpgroup.com/wp-content/uploads/2018/06/styleguide-EXP-4.png00Stevehttps://www.theexpgroup.com/wp-content/uploads/2018/06/styleguide-EXP-4.pngSteve2009-11-04 19:21:022009-11-04 19:21:02Corporate governance across the Atlantic.
You may have heard of easyJet. You may have flown with easyJet. You may be Stelios, in which case the public thinks that you own easyJet, but you actually only own a minority interest. The public also thinks that you’re the CEO, but actually you’re not even an executive director.
What you do own, if you happen to be Sir Stelios Haji-Ioannou is approximately 66 million easyJet shares and the easyJet brand, which you licence to easyJet.
Sir Stelios is the public face of a company that he founded and grew to a state of financial health where it could buy its most bitter rival, list on the London Stock Exchange and generally grow up rather quickly. He resigned as an executive director in 2003, becoming a non-executive.
In 2008/09, he had a major difference of opinion with the executive directors over the strategy of the company. Having been outvoted, Sir Stelios (a non-executive director, remember) sought to increase his equity ownership of the company again to a level where he could appoint some favoured nominees of his own as executive directors; thus giving him (a non-executive director) effective control once again.
Sir Stelios was naturally acting in the best interests of the company as he saw them. The Tyson report lists four duties of a non-executive director (see our ExPress notes if these don’t trip off your tongue! /expand/14-p1_professional_accountant.html) These include scrutinising executives, but not sacking them if they disagree.
It all makes it easier to see why the UK Combined Code requires that non-executives should be paid a basic salary only and have no shares or share options in the company, as well as requiring you to wait at least five years outside the company if you’d previously been a senior executive there!
https://www.theexpgroup.com/wp-content/uploads/2018/06/styleguide-EXP-4.png00Stevehttps://www.theexpgroup.com/wp-content/uploads/2018/06/styleguide-EXP-4.pngSteve2009-10-07 18:51:142009-10-07 18:51:14When is a non-executive not a non-executive? Ask Stelios!
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