Required reading for the directors of all large companies: the chapter headed “Management, governance and culture” in the Financial Services Authority’s report on the failure of the Royal Bank of Scotland. What this tells us is that the collapse was not just the result of buying ABN Amro at the wrong price and the wrong time, disastrous though that was. Rather, this bid was just one of a whole series of bad boardroom decisions which taken together point to substantive failures of board effectiveness at RBS. And the lessons from what went wrong are relevant well beyond the banking system.
On the face of it, the RBS board’s composition and formal processes met acceptable standards. Sir Tom McKillop, the chairman, had familiarised himself with the bank’s business, made sure that everyone had a chance to speak their mind and improved the transparency of the chairman’s committee. And although Sir Fred Goodwin, the chief executive, was a forceful and sometimes terrifying figure, the FSA concludes that the picture was “clearly more complex than the one-dimensional ‘dominant CEO’ sometimes suggested in the media”.
So why were things allowed to go so badly wrong? The answer is that the bank only did what most of its competitors were doing at the time, but took its excesses to greater extremes. The RBS experience shows yet again what madness it is for banks to focus on the returns on equity, rather than on their overall assets. Continue reading »