“We financed ourselves in an unstable way, we were too leveraged, the strategy wasn’t clearly focused on the things we were actually going to be good at, risk controls were poor, management process was a bit dysfunctional, and we were driven too much by profit expansion without thinking about the inputs.”
Such is the description that Stephen Hester, the man who in 2009 succeeded the disgraced Fred Goodwin as head of the bankrupt Royal Bank of Scotland (RBS), gave of the bank’s performance in the run-up to the 2008 banking crisis. Hester was the man put in place to announce RBS’ catastrophic $40 billion in losses for 2008, most of it from real estate and investment banking.
This quote is taken from Making It Happen, a recent work by Scottish journalist Iain Paisley that chronicles the rapid growth of a provincial Edinburgh financial institution into one of the world’s largest banks, and its subsequent collapse. It also details the rise of Fred Goodwin from his obscure position as a Touche Ross accountant to Forbes magazine’s “Businessman of the Year” in 2002 (following the RBS acquisition of NatWest in 2000) to his sudden fall in 2008, the ignominy of which included being named the “World’s Worst Banker” in Slate and having his knighthood revoked by the Queen.
By the time he was stripped of his knighthood and forced to give back much of his pension and bonus, Goodwin had become a lightening rod for criticism and a focal point of what the Sunday Times described as “payback time for a culture of greed.”
Goodwin’s arrogance, his hubris and his ability to terrify subordinates are all documented in this book and elsewhere. But I thought there were a number of interesting dimensions or lessons to the story of “Fred the Shred” and RBS that bear sketching out.
These lessons are as follows:
- The CEO must understand the business in full. Goodwin was an accountant by training, not a banker, and he seemed remarkably incurious as to the nuts and bolts of the banking business. Multiple anecdotes in the book reveal him focusing on branding and other secondary details (e.g. he insisted company cars be painted “RBS blue”, rather than Mercedes’ standard shade), even while huge bets were being taken with company assets.
- Leaders must lead. Goodwin seemed content to let certain parts of the business run themselves, at least as long as they were making budget. This was the case with the RBS investment banking unit under Johnny Cameron. Speaking to one of Cameron’s subordinates, Goodwin referred to the unit as “your money-making machine,” as if it operated somehow distinct from his leadership.
- Class matters. Not only did Goodwin fail to understand the investment banking business, or event seek to engage with it, he seemed completely unable to provide direction to the upper-crust Cameron. As a subordinate of Goodwin put it, “Fred was completely incapable of bossing Johnny,” the implication being that Goodwin, with his working-class Scottish roots, felt thoroughly intimidated by his Harrow- and Oxford-educated subordinate. While the circumstances here seem particularly British, the dynamics at play here seem universal.
- Watch out for personal vanity. Goodwin’s focus was on expansion to the detriment of internal process and organic growth. The lavish headquarters he had built for RBS at Gogarburn near the Edinburgh airport was symbolic of this goal. The book notes Goodwin’s obsession with eclipsing archrival Barclays, and even though he’d been asked by the board to rein in expansion, he pushed ahead with the purchase of the Dutch bank ABN Amro, possibly the worst possible acquisition at the worst possible time.
- Encourage a culture of questions. Goodwin had little truck for abstractions or ideas, despite his sharp mind and the talents that had propelled him to the top of RBS. The result, as one direct subordinate put it, was that “ you proceeded mainly according to the goals and targets that were set for you and tried not to get tripped up, rather than thinking of the bigger picture.”
This latter anecdote reminds me of an article I once read on Steve Ballmer’s management style, in which the Microsoft CEO ridiculed an employee who asked (well before the launch of the iPad) at a company Town Hall meeting if the company shouldn’t develop a consumer tablet. Ballmer responded in a scornful tone that no one would use such a device.
The rest, as they say is history, and so is Ballmer. Hopefully the Microsoft leader will work to do away with the silos, risk-averse culture and bureaucratic processes that have left the tech company—and more than a few banks—stuck in gear.