Saturday, December 24, 2011

How RBS failed

Royal Bank of Scotland was among the notable failures in the sub-prime crisis. The UK's FSA has published a comprehensive report on the failure. The acquisition of ABN Amro was an important cause as was the bank's dependence on wholesale market funding, and its plunge into certain risky assets. The report lists other factors as well. I was drawn to the analysis of the governance issues in the report, whether there were any conspicuous failures on the part of the board.

It turns out that there were none for which legal action can be taken against the board. The acquisition of ABN Amro, being a hostile acquisition, was not done with the necessary diligence but it had the board's approval. I read the section on governance carefully, and I find that the only thing the FSA can pin on the board is that it did not question or challenge the CEO strongly enough on this and other issues.

If that is a failure, then the vast majority of boards would be guilty of it. Those who talk of the board challenging or opposing the CEO have no clue about the culture that permeates boardrooms. In this culture, any sort of serious questioning of the CEO is a no-no. It is a very cheery, backslapping culture in which nobody makes wrong noises. If we want bank boards or any board to be more active and more questioning, we need to revisit the issue of independent directors and bring in people who are not appointed by management. Then, we may get a vestige of independence on the board. Today's independent directors can only collect their fee and commission and enjoy their lunch and drinks. Bank boards can't prevent bank failure, only stringent regulation can. More in my ET column, Boards and bank failure. 

The Telegraph carries an investigative report on the RBS failure. 


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Anonymous said...

If the veterans & Independent Directors like you view Governance as nothing more than Backslapping...I am afraid but more Satyams, RBS, Enrons are bound to happen. Independence is not a merely a subject of law that you can have by providing in form of codes & acts, but it is more a State of Mind and an individual attribute. That's precisely the reason why highly qualified, experienced & reputed candidates are preferred for this position against any Tom, Dick & Harry. But if you guys yourself want to flatter the CEo and don't have guts to challenge him, its better to have any Tom, Dick & Harry. Or the best option is not to have ID anymore.

Sad to see that ID like you (from whom the industry & academia expects an iconolast trajectory) perceive Governance from spectacles of normal IDs.

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