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Royal Bank of Scotland. Where were the non-executives?

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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?

Corporate governance across the Atlantic.

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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…

When is a non-executive not a non-executive? Ask Stelios!

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!

A strategic alliance with local farmers.

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I always tell my students that they need to look around at their surroundings to see what is happening and see if they can link it with the  syllabus in any way. Doing this will make it easier to remember concepts and ideas.

I was lucky enough to visit Germany recently to do some work. I noticed an unusual vending machine and it made me think of strategic alliances.

Strategic alliances can come in a variety of forms including the very large formal Joint Ventures such as Sony Ericsson (a 50:50 JV between Sony and Ericsson) and co-operation agreements such as the airline alliances of Sky Team and Star Alliance.

What was unusual about the vending machine that I saw? The thing that caught my eye was that the vending machine sold fresh farmers produce such as milk, eggs and sausages rather than the typical selection of snacks that you would find in vending machines.

Farmers are facing a tough time at the moment. Distribution channels can be a problem for farmers. If they sell through the large supermarket chains they can end up in a weak negotiating position. Selling direct to the customer is something that a lot of farmers don’t have the skills or facilities to undertake.

Some further investigation found out that a number of farms have collaborated with a vending machine manufacturer to stock these machines in several towns in Germany. This alliance is helping both parties. The farmers for example now have a great new distribution outlet. The customers also appear to be pretty happy as they get fresh local produce in a convenient location. The fact that the “middle man” is removed also means that the produce is priced very competitively.

Will we see this expanding to other items and other parts of the world?

Iceland, Computers and PESTEL Analysis

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One of my best ever trips was when I visited Iceland. It is a fantastic country with some great people and some truly dramatic scenery. There are also some very large whales and some very cute puffins!

Their financial crisis has been in the headlines over the last year or so but there was an interesting piece of news that was recently reported. Iceland has a year round cool climate and chilled fresh water. At the same time the number of computer servers that are needed around the world to store the ever increasing amount of data that the world is generating is growing rapidly.

A key component of data storage is to keep the servers cool. With Iceland’s below average temperatures it means that the cost of cooling servers is significantly less than in other countries with average or above average temperatures. Some businesses are now putting the cool Icelandic climate and the increasing server storage demands together and data parks are being designed and built in Iceland.

The cool temperatures and developed business environment in Iceland make it an ideal place for such a scheme to work.

Now, back to the exams. What exactly does this news have to do with exam? Given the exam is just around the corner I’m hopeful that I don’t need to explain what PESTEL analysis is and I’ll leave it up to you to decide which out of P, E, S, T, E and L the cool climate of Iceland relates to!

Not-for-profit organisations face several challenges.

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I had to recently go into hospital for a minor operation on my knee. The nurses and doctors were fantastic there and thankfully everything is now fine with my knee.

The hospital I was in was a classic not-for-profit (NFP) organization and during my time there it really made me appreciate the challenges that NFPs face when setting objectives.

Hospitals have a significant number of stakeholders with a high level of interest. Patients like me are stakeholders with an obvious high level of interest in matters. Other local individuals who are not patients are also interested in case at some stage they need to use the hospital. The doctors, nurses and admin staff are also stakeholders with a keen interest in the activities and the government is another stakeholder interested in the hospital.

In summary, NFPs are different from most other organizations when it comes to stakeholders in that there tends to be a wider range of stakeholders with a high interest in a NFP organization than compared with other organizations.

Another issue that occurred to me during my stay was that there are a number of objectives that the hospital needs to balance. Two obvious ones are the quality of care given to a patient when he’s in the hospital versus treating more patients.

A final area I thought about was the classic finance term of Cost Benefit Analysis. Costs within hospitals are easy to measure but the benefits can be inherently difficult to measure. For example, how would they measure the benefit of reducing the waiting time for a knee operation by one month or 6 months?

You are not necessarily expected to be able to provide all the answers to the challenges of running a hospital in the exam but it is important to have an understanding of the challenges that a NFP organization faces when running its business.