The Royal Bank of Scotland Case
Nicole Kraemer (413991)
The rise and fall of the Royal Bank of Scotland is characterized by poor corporate governance which allowed for the complete dominance of the executive management over the board of directors and a massive principal-agent problem. Positive social dynamics and the power of weak ties allowed for compliance while intimidation and bullying tactics silenced questions, concerns and opposition. The board’s utter compliancy and borderline negligence enabled rampant, unchecked empire-building at the cost of shareholder value and led to a spiral of unaccountability and gross incompetence. Stakeholders’ loss of confidence from misinformation and misdirection was an inevitability that sealed RBS’s fate. The Royal Bank of Scotland (RBS) Group is a publicly traded firm that began its ascension as a global banking entity under the leadership of Sir George Mathewson1. In 2000 RBS was able to secure a hostile of the National Westminster Bank2,3 leading Mathewson to seek a successor to lead the integration of NatWest. He found one in his then-deputy CEO Fred Goodwin. There are two main corporate governance issues associated with this turnover in leadership. First of all, the issue of succession. The board is responsible for appointing the CEO4, yet it is obvious Mathewson had significant influence in the decision5. The board exists to avoid principal-agent problems and appointing a value-creating CEO is an important task yet here we see them taking an auxiliary role in the succession process. This was not immediately problematic as Goodwin seemed a reasonable choice however it set the tone for the firm’s dynamics early on. The second and more concerning corporate governance issue was Mathewson’s transition to chairman of the board. As CEO the firm had Goodwin, a hand-picked similarly-expansion-minded6,7 successor to Mathewson, being monitored by Mathewson himself as chairman8. The board’s ability, or perhaps desire, to curtail the actions of executive management was severely impaired with this decision. The takeover enabled RBS to overcome their dependence on the relatively small Scottish economy and enter the international market9. Goodwin began on a rapid string of acquisitions to enable even further expansion10. In 2004 however, the Charter One acquisition troubled shareholders who felt Goodwin overpaid and suspicion that Goodwin valued size over shareholder value took hold11. During this period Goodwin also opened a flashy new headquarter building in Edinburgh, bought a private jet for senior executives, and threw champagne parties which drew further criticism from shareholders12. Empire-building and lavish managerial spending are precisely the type of activities that the board is supposed to prevent in order to protect shareholders. However here we see no effort on behalf of the board to reign in their CEO. This could be because of couple reasons. Firstly, Mathewson and Goodwin of course have close ties because of the predecessor-successor relationship but there is also the strength of weak ties within the board itself. Board members have probably worked with both Mathewson and Goodwin for many years and these repeated interactions have lent a feeling of familiarity to their exchanges which may lead to hesitancy in saying “no” to either of them. There is also the threat of authority looming over board members’ heads. While Goodwin was efficient and smart, he could be a bully, according to a BBC documentary on RBS13. “He manufactured fear,” said one article of Goodwin14. This could have led to reluctance on the part of board members to speak up and voice their oppositions or concerns. To slow down on acquisitions yet retain profit growth, Goodwin turned to the highly complex but highly lucrative business of mortgage trading and by 2005 two-thirds of all RBS’s profit came from this sector15. In 2007 Goodwin entered a consortium to buy ABN-AMRO in a hostile takeover16. The...
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