Royal Bank of Scotland (RBS): Reputational Issues
This case study sets out a brief background around some of the issues which led up to RBS being part-nationalised as a result of alleged mangement failures. Sir Fred Goodwin, the CEO at the time was subsequently criticised for his part in the banks downfall and was stripped of his Knighthood and forced to take a reduced pension. The bank operates in challenging times and continually faces a number of difficult issues.
The background below is largely factual, but the scenario you are faced with is conceptual.
RBS has a long history, but our journey starts in the 1980’s.
In 1985 RBS merged with Williams & Glyn’s Bank to create Britain’s first nationwide high street bank. In the same year, RBS launched Direct Line, a new departure in motor insurance which became a major success, recognised throughout Britain thanks to its adverts featuring a red telephone on wheels. In 1988 RBS bought the American bank Citizens Financial Group.
In the early 1990s the corporate structure of RBS underwent a major reorganisation. The bank refocused on its core business of retail banking, and set about building a platform for future growth. In 1993 it acquired the Edinburgh-based private bank Adam & Company.
In 1994 Direct Banking service was launched, quickly becoming Britain’s fastest growing 24-hour telephone banking service. In 1997, Britain’s first fully-fledged internet banking system was launched by RBS.
Meanwhile a transformational event was just around the corner. In 2000 RBS announced the acquisition of National Westminster Bank, in a £21bn deal – at that time the largest takeover in British banking history. In the first three years after the acquisition, the two banks’ IT systems were fully integrated. The project, the largest of its kind ever attempted, was completed successfully, well ahead of target.
RBS faced then new challenges as it sought to enter emerging international markets. Globalisation meant that the power balance of worldwide economies was changing. In 2007, RBS was part of a consortium which acquired the Dutch bank ABN AMRO. Soon afterwards, a crisis in global financial markets and deteriorating economic conditions across the world weakened many financial services organisations. This situation was made worse for RBS by strategic decisions that were subsequently shown to be bad mistakes. RBS was more vulnerable to the downturn than it would otherwise have been and as a consequence became part owned by the UK Government in 2008. In recent years RBS has worked to rebuild resilience and shareholder value.
The crisis was far more acute than UK regulators thought and RBS continues to be in the media spotlight, generally for all the wrong reasons as it continues its journey of selling assets. In 2012 a mass advertising campaign for Direct Line broke as part of the RBS plan to sell it off.
RBS has countered mass sackings, police raids and zero bonuses, the global banking and markets division (GBM), long the profit powerhouse of RBS, has descended into open civil war as the state-backed lender attempts to radically remould the business and its 19,000-strong workforce. Current and former senior employees in GBM describe an organisation in turmoil, driven by power struggles even as managers are forced to fire thousands of staff.
To the ordinary taxpayers, the spectacle of investment bankers arguing over the spoils at an institution that only survived the financial crisis with the injection of £45bn of public money is unlikely to gather much sympathy.
Since taking over as chief executive in October 2008 from Fred Goodwin, Mr Hester has given up on global ambitions for its investment bank, announcing 3,500 City-style roles are for the axe as it focuses on profitable operations and adapts to regulatory changes.
The latest job cutsin the investment bank – on top of 2,000 in the second half of 2011 – were announced in January 2012 and will take the job cull since Stephen Hester took over to 34,000. Unite, (trade union) at the retail banking arm, believes 22,000 roles have gone in the UK alone.
Under Hester, 10,000 jobs will have been axed from the RBS investment bank – the global banking and markets (GBM) arm that expanded rapidly after the ill-timed ABN Amro takeover – although the scaled-down operation will still employ 13,400 by the end of the latest three-year restructuring.
The fresh job cuts, and the pledge to cut another £120bn from the bank’s bulging balance sheet, propelled the shares higher. Hester has already cut £700bn from the £2.2 trillion balance sheet he inherited. The rise in the shares inflated a potential £4m-plus share-based bonus for John Hourican, who will run the streamlined investment bank, by around £250,000.
Unitebranded any potential bonuses “a disgrace”. The deputy prime minister, Nick Clegg, said: “This is not the time to start paying people lavish bonuses.”
Despite the cuts, the bailed-out bank will continue to employ some big earners. While GBM was to be renamed markets and international banking, it is still involved in some potentially lucrative businesses. The “markets” part will focus on trading debt, currencies and money markets, while GBM’s corporate banking business will be merged with global transaction services to create the “international” arm.
The unprofitable cash equities, corporate broking, equity capital markets, and mergers and acquisitions businesses – part of which is Hoare Govett – will be sold or shut down.
In December 2011, George Osborne told parliament that RBS was embarking on “further significant reductions” in its investment banking arm when he pledged to implement the recommendations by the Independent Commission on Banking. Hester had already signalled further cuts were on the cards in the investment bank as he responded the downturn in activity caused by the eurozone crisis.
The bank has announced that it was in the process of realigning its business to erect the “ringfence” around its high-street business, but provided no more detail.
In 2012, the bank was hit with a severe IT issue which prevented customers from accessing their accounts in some cases for around 2 weeks. This led to substantial compensation paymentsbeing made to customers
Recently the bank has announced to the government it no longer needs to be part of the insurance protection scheme , suggesting a quicker than expected return to the private sector. However, RBS suffered a severe set back over its sale of over 300 branches to Santander which has fallen through at the last minute.
Scenario: December 2012
The bank will be announcing its 2012 profits in February 2013 and early indications are that it will be profitable having turned around significant losses since privatisation.
However, the CEO Stephen Hester has called you as Head of Communication to brief you on some potentially distracting issues.
Answer only one question
1 The bank has made a modest profit of £100m, but another 3000 staff are to be made redundant as the bank decides to close down the insurance side of the business. The job losses are in Bristol (2000) and Essex (1000). The trade union has not yet been briefed.
2 A customer satisfaction index shows that while customers are happier with the service received in branches, there is still significant room for improvement ( RBS ranked 3 out of the top 5 UK banks)
3 The share price has been rising steadily and therefore will trigger an executive bonus, averaging around £300,000 each, for the board of directors. Hester himself will be in line for a £1m bonus which he waived last year and will he will not take this year because of the IT problems encountered.
4 The IT director who was in charge at the time of the technical issues has been fired, but the accounts will show he was paid over £500,000 and received £100,000 for loss of office.
5 The directors eligible for a bonus have indicated they will take it or leave the bank.
6 The US authorities are still pursuing their case for r manipulating the LIBOR rate. The investigation continues, but people will remember the CEO of Barclays resigned over the issue and received modest compensation for loss of office.
It is about 2 months until the accounts are published and you have been asked by the CEO to develop a proposal which seeks to address the issues above. Such is the sensitivity of the issue, you have been asked to set up a project team to deal with this.
What action/activities would you propose to announce to the ‘market’ to mitigate any negativity from stakeholders surrounding the payment of the full bonuses to the directors.
What will be the impact on the corporate reputation of RBS if the payments are made?
The team must make a presentation to the RBS executive board, comprising the CEO and senior directors from the various divisions.
The presentation will take place in week 11, in your usual class. You will have 10 minutes to make the presentation which must clearly set out the actions you propose to address the task with justification.
You must make an actual presentation, in which all members must contribute. Your presentation must be supported by appropriate material such as, handouts including reports/briefing papers, or memorandums produced by the team. Hand- outs to support the presentation should be relevant and professional.
After the presentation the panel will ask you questions concerning your proposal and your response will form part of the assessment criteria.
Clear identification/understanding of the key issues (reputation issues and current issues) and identified stakeholders and engaged with appropriately and also identified the main keys players
The US authorities are still pursuing their case for r manipulating the LIBOR rate. The investigation continues, but people will remember the CEO of Barclays resigned over the issue and received modest compensation for loss of office.