As the Credit Crunch continues to bite, there is seething public anger here in Britain against senior bankers for their apparent professional incompetence and excessive (“fat-cat”) pay. The latest banker to face intense public ire is Sir Fred Goodwin, the former chief executive of the Royal Bank of Scotland (RBS), after it was revealed that he earns a £693,000 per year pension following his early retirement last year. RBS, one of the largest banks in UK, came near to collapse in October 2008 in the wake of the credit crisis, and it has since been effectively nationalised, with the government holding 84% of the shareholding. It seems totally unfair to many people that bankers, such as Sir Goodwin, can be so lavishly rewarded for their seemingly poor performance.
Actually, there is nothing illegal at all with Sir Goodwin’s pension, and bankers have been enjoying fat-cat pay for decades. This thirst for vengeance against bankers is really just a symptom of the current economic situation and the public’s desire to apportion the blame. Senior executives like Sir Goodwin should rightfully take a greater proportion of the blame, for they were responsible for making the decisions that got the banks into this mess, but while the public indulges in a hatred towards a few senior bankers, there are some serious lessons to be learned about the way many companies, in particular banks, have done and how they could perform better.
Dressed in dark suits, white shirts, and red ties, bankers generally give the impression of being extremely dull, conservative characters, but this is all for show. Even before the current banking crisis, there have been a number of instances in which the lending strategies of banks have caused major problems. In 1982, big American banks lost almost everything they had previously made because Latin American countries, to whom they had been lending to, all defaulted on their loans at the same. Then a decade later, these banks again came close to bankruptcy after the property market collapsed, which required a taxpayer-funded bailout of half a trillion US dollars.
Paul Moore, former head of Group Regulatory Risk at HBOS, had warned the board that they were taking undue risk by basing their growth on “excessive consumer credit based on massively increasing property prices which were caused by the very same excessively easy credit”. He was dismissed from his job in 2005 by the CEO, and he was replaced by someone who had no experience of carrying out a risk manager position of any type. In a statement, he compared the CEO of HBOS to an emperor who was blinded by “money, power and pride”, and anyone who stood in his way was labelled a “trouble maker” or “spoil sport”. People who did notice that the emperor was “naked” were too scared to speak up and point out the fact.
The current banking crisis shows what happens when CEOs are driven by just one thing: greed. A certain amount of greed in necessary, but it should not be the overriding concern for a business. Neither should a firm be dominated by a single voice, something which is deeply ingrained in the British civil service. Jack Welch, the former CEO of General Electric (GE), described this single voice as “superficial congeniality”. As CEO of GE, from 1981 to 2001, he went about dismantling this culture of “superficial congeniality” and replacing it with a culture of debate, argument and decentralized authority. GE was the most successful company of the twentieth century, and continues to be the world’s tenth largest company.
Unfortunately, today we are paying for the mistakes of greedy, short-sighted, domineering CEOs of large banks, and the government is yet again using our money to bail them out. This is not the first time this has happened, and it probably won’t be the last. Bankers, after all, are humans and we all have a tendency to increase risk taking when things seem stable, while ignoring the possibility of a crisis that that kind of attitude could produce.