Thursday, February 26, 2009

The downfall of RBS

FT carries a gripping account of the rise and fall of Royal Bank of Scotland under its former CEO, Fred Goodwin. After grabbing Natwest and some lesser financial institutions, RBS launched and won a bid for ABN Amro, deciding to plough ahead even after the onset of the global financial crisis in 2007. That one deal finished RBS. It is now virtually under UK government ownership after having received huge dollops of capital. I just heard on TV that the bank has declared $34 bn in losses in 2008- that's Rs 150,000 crore.

The one lesson from failures such as RBS and Lehman seems to be: when CEOs begin to show clear signs of megalamonia, investors had better watch. Such megalamonia manifests itself not just in a hunger for asset growth but in many other ways:

Within the bank, he fostered an intense management culture that prized discipline and attention to detail. Senior executives were set annual income and profit targets and challenged on whether they were meeting them. The chief executive exercised control through a daily 9.30am meeting where he would quiz managers about their divisions and openly question their competence. One morning he reduced a senior executive to tears. “It wasn’t a positive or healthy atmosphere,” says a former executive. “You have to wonder about the decisions people make in that environment.” ......

The chief’s attention to detail extended to attire and furniture. When RBS presented its results, Sir Fred and team would wear white shirts and matching ties with an RBS logo. The bank shipped chairs and carpets around the world so that each of its offices would have the same interior.

Shortly after the Natwest deal, he started planning a new group headquarters near Edinburgh airport and, former colleagues say, was involved in every aspect of the construction. Modelled on Santander City, the Spanish bank’s head office outside Madrid, the £335m building was opened in September 2005 by Queen Elizabeth in a ceremony that included a fly-past of four Tornado jets from a nearby RAF base.

How do companies and their boards indulge such CEOs?

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