The Fall of The Royal Bank of Scotland & Fred Goodwin
An Analysis of Culture, Leadership Behaviour, and Unwise Decision-Making
Fred Goodwin served as the Chief Executive Officer (CEO) of the Royal Bank of Scotland Group (RBS) from 2001 to 2009. During his tenure from 2000 to 2008, RBS experienced rapid global growth, becoming the world's largest company by assets (£1.9 trillion) and the fifth-largest bank by stock market value. However, the bank's fortunes reversed swiftly, leading to RBS's effective nationalisation in 2008. Goodwin announced his resignation and early retirement on 11 October 2008, a month ahead of RBS's announcement of a record-breaking £24.1 billion loss for 2008, the largest annual loss in UK corporate history.
Lord Turner’s, FSA Report in 2011 into the failure points to:
"a pattern of decisions that may reasonably be considered poor, at the time or with hindsight, suggests the probability of underlying deficiencies in a bank's management capabilities and style; governance arrangements; checks and balances; mechanisms for oversight and challenge; and in its culture, particularly its attitude to the balance between risk and growth."
The following analysis will explore the demise of RBS from three perspectives:
The Culture of RBS that facilitated Fred Goodwin’s leadership;
HIs leadership behaviour through the Ceannas lenses;
The extent to which he demonstrated ‘wise leadership’.
NB – if you want to find out more about the demise of RBS and Fred Goodwin I recommend Shredded: Inside RBS, the Bank That Broke Britain by Ian Fraser
RBS CULTURAL FOOTPRINT 1992 –2008
MANAGEMENT
The RBS collapse did not come suddenly. It can be traced back to the deregulation of banking through the Banking Act of 1979, under the rule of Conservative prime minister Margaret Thatcher, which removed capital controls and allowed banks to more freely acquire and takeover other lenders.
That meant any bank would be able to begin to offer services, such as investment banking, investment management and other forms of consumer credit.
The bank appointed George Mathewson in 1987 as RBS' new director of strategic planning and development. Mathewson had been an engineer in the US and was known as a ‘macho manager’ who ran the Scottish development Agency from 1981 – 1987.
Unlike the Ontario Teachers’ Pension Plan (see Leadership Unlocked analysis) which responded to deregulation by appointing seasoned professionals to their Board and executive team, RBS appointed executives from other industries, with little or no financial industry experience. This management decision was to have a significant impact over the next 21 years.
Mathewson was appointed CEO of RBS in 1992 and introduced a ‘rank and yank’ system where of his top 300 executives, 100 were fired, 100 were put in notice, and 100 were safe. These management decisions significantly impacted the bank's culture.
It was into this culture that Fred Goodwin joined the Royal Bank of Scotland in 1998 as deputy CEO. Goodwin began his professional life as a chartered accountant and built his reputation as heading up the liquidation of the Bank of Credit and Commerce International, before using this experience to conduct due diligence work for the National Australia Bank as they bought the Clydesdale, Midland, and Yorkshire Banks. Each time Goodwin demonstrated a capacity to ruthlessly take out costs earning him the nickname ‘Fred the Shred’.
LEADERSHIP
The mission of the bank under Mathewson (who became Chairman) and Goodwin was simple. It was about growth and scale. The Board was passive and as the 2011 FSA Report highlights and deficient in governance arrangements, checks and balances, and mechanisms for oversight and challenge.
This left the Chief Executives free to operate as they pleased if they fulfilled the growth promise.
The executive leadership culture was completely different. It was highly controlling, didactic and very much top-down with little or no dialogue about strategic direction or operational matters.
EDGE
RBS had exceptionally high Edge. The focus on performance, numbers and results was unrelenting. But Goodwin took this a step further:
“He regularly lambasted and lampooned colleagues in so-called "morning beatings" and credit committees using a rapier-like intellect to dismantle colleagues who crossed his path or let him down. Sometimes he just singled out people for dressing-downs "pour encourager les autres". Ian Fraser
This Edge permeated the business, with one bank manager recalling how a senior executive called him up and shouted down the phone after he had dared to write an email saying that his branch would recognise the Remembrance Day 2-minute silence.
Added to all this was the fear of one’s employment and the system motivated people to sell more and more, which got "extreme", and encouraged groups to push financial products that would get them "points" on this performance scale.
According to Ian Fraser,
"If you dared to question the bank’s approach, it would lead to a negative mark on your chart. This was irrespective of the long-term consequence of the impact of the financial products."
WARMTH
The Warmth component of the RBS culture was present, but it was highly conditional on performance.
Perhaps the better way of representing this was the transactional nature of the relationship. In 2006 RBS published a fact sheet stating that 112,000 RBS staff were rewarded with profit share of 10% of annual salary for the ninth consecutive year (£2,200 average per person. £242 million in total); 73% of UK staff will get an additional performance bonus averaging £2,600.
At an external level, according to the factsheet:
“RBS invested £1 million every week in deserving causes across the UK – more than any other UK bank; We are largest corporate donor in the banking sector and the second largest in the FTSE 100; by the end of 2007 we should have provided financial education to more than one million people in the UK through financial education initiative Face2Face with Finance; we are the largest corporate supporter of the free independent money advice sector.”
Warmth then was extended outwards and upwards, with the loyalty of staff dependent upon bonus rewards and the ‘comfort’ of belonging to one of the world’s top banks.
ENTREPRENEURSHIP
Throughout this time the bank introduced a huge variety of products which employees were incentivised to push and sell.
However, the real entrepreneurial focus was on acquisition that would allow the bank to grow, expand its reach, and expand into investment banking.
Once again, the focus was on top down, with no space afforded to local or regional managers to operate with any autonomy or flexibility to experiment with new approaches or models of practice.
LEARNING
Learning does not appear to have been a strong feature of the RBS culture then.
Goodwin and Mathewson were both strongly influenced by what had worked for them in the past. There is something here of what Abraham Maslow would have called the ‘law of instrument’ where a leader builds an over-reliance on a familiar or favourite tool,
“If you only have a hammer you tend to see every problem as a nail.”
For Goodwin that hammer was to buy, exploit efficiencies, and move on.
Of course, such a failure to recognise that they might have something to learn would have required some humility. A quality which was sadly lacking in both leaders.
TEAMWORK
Teamwork, or at least teamwork as most other people would define it, was not a cultural focus of RBS. People were cogs in a machine. Replaceable, functional and not interdependent. The executive ‘team’ was a tool which Goodwin manipulated and controlled, but to whom he was never accountable.
The idea that the team would take collective decisions was unimaginable.
Yet Goodwin himself liked to portray something quite different as this extract from an interview with Alasdair Northrop in 2001 suggests:
"We get together each morning on the video and go through that day's issues. It is a very effective way to keep in touch with the important issues, but we also leave the businesses to run themselves within quite tight financial and strategic parameters.”
FRED GOODWIN – LEADERSHIP PROFILE USING THE CEANNAS LENSES
Builder Lens
As alluded to earlier, Goodwin found a technical way of driving efficiencies from businesses.
He applied this model with rigour, incredible attention to detail, and a singularity of purpose that delivered results.
He expected others to follow processes, systems and policies.
This quality became his ‘go to’ leadership behaviour.
Scientist lens
Linked closely to his Builder mindset, was his ability to interpret the numbers, his recall ability, and the use of data to bludgeon those who might stand in his way.
Yet not for him the objectivity of the Scientist. Even his logic departed him later in his time with RBS, overtaken by his personal desire to beat his rival at Barclay’s bank to takeover ABN-AMRO, which proved to be one purchase too many.
Conductor
There was only ever one score, and that was in the possession of Fred Goodwin. He wrote it, committed it to manuscript, and interpreted it for others. Not only that, but he appeared to believe that he could play the instrument of every members of the orchestra better than the specialist musician.
He dictated his expectations of others and left no room for personal autonomy or interpretation.
To some extent he inspired others but only through the growth that was evidenced and the sense of belonging to a behemoth. His personal behaviour or capacity to lift others beyond what they thought themselves capable was dependent on that transactional model referred to earlier.
In terms of mission for RBS there appears to have been only one, which was to grow. Initially that appeared to be connected to improving returns to investors, but it appeared to take on a purpose of its own simply to be ‘big’. Speaking to RBS bank employees from that time it would appear that there was no focus on customers or service, unless it related to extracting revenue.
In our review of other successful companies, such a one-dimensional, quantitative purpose is unusual and certainly not a feature of those organisations which have a long-term track record.
However, despite these observations it’s worthwhile recording the contemporaneous accolades he received for his leadership of RBS:
December 2002 – Forbes (global edition) "Businessman of the Year", which described him as an original thinker with a fast-forward frame of mind who had transformed RBS from a nonentity into a global name
2003 – 2006 – No.1 in Scotland on Sunday's Power 100
December 2003 – "European Banker of the Year" in 2003
June 2004 – awarded an honorary doctor of Laws by the University of St Andrews
July 2008 – awarded an honorary fellowship by the London Business School
Parent
Internally to RBS the human dimension was sadly lacking. There is no evidence of him supporting others to grow and develop.
Yet externally Goodwin became involved in a range of causes, most notably as Chairman of The Prince’s Trust. He received his knighthood for services to banking in 2004. (The honour was cancelled and annulled in 2012).
Villager
The extent to which Goodwin was a Villager would appear to be conditional on what was in it for him. There was little sense of cooperation or mutual benefit within RBS. He did build networks outside the bank but these became more and more connected to celebrity and status as opposed to being related to the benefit of RBS.
Sculptor
There is little evidence that Goodwin was creative or innovative himself. Reviewing annual reports from RBS from that time innovation rarely features as a strategy, never mind the word itself. Everything is about growth through acquisition.
Gardener
Insofar as Fred Goodwin operated as a Gardener it was about making the garden bigger. It is difficult, even with the benefit of hindsight, to see anything that related to the long-term view of what RBS was to become beyond the biggest and most profitable bank.
Consumed by the need to grow and an apparent disregard for risk – probably due to a belief that they were not capable of making mistakes - he used the word sustainable but it was rarely followed up by his actions
WISE LEADERSHIP
Fred Goodwin was not without ability. It would be a mistake to describe him as an incompetent leader. He could make complex decisions, and he could influence people. However, when we match him against the criteria of Wise Leadership we begin to see how it might have been possible to see the seeds of demise in RBS without the benefit of hindsight.
SELF-AWARENESS
Fred Goodwin was blinded by his own arrogance and self-belief. This, combined with his earlier career success, gave him a sense of infallibility which translated into some of his behaviours which demonstrated his lack of humility.
“the reported £100k spent on chauffeurs, the suite at the Savoy complete with personal valet to look after Fred’s clothes, the fruit flown in from Paris, the pies delivered by Yorke’s of Dundee at dead of night during the bank’s “Mess Dinners”, the alleged abuse of the RBS private jet for private shopping trips to Paris by the spouses of certain executive directors, the helicopter flights that Fred Goodwin took with his boyhood heroes Jack Nicklaus and Jackie Stewart to and from the British Open at Carnoustie, etc, etc.” Ian Fraser
ALTERNATIVE PERSPECTIVES:
Goodwin had no need for alternative perspectives. His self-belief led him to regard the opinion of others as unnecessary. He adopted a sycophantic approach towards his Board but did not take any account of diverging opinions, despite the fact that few Board members, if any, ever challenged his behaviour.
The only perspectives which Goodwin seemed to value were those of other chief executives, such as Emilio Butin, the CEO of Santander, who according to one senior RBS executive of the day recalls how his now humbled CEO, Fred Goodwin, was outsmarted by the Spaniard. “Emilio played Fred like a Stradivarius,” says the banker. “He used to put his arm around him and say, ‘Fred, you’re such a brilliant CEO,’ and at the same time, metaphorically, he was picking his back pocket.”
Patrick Jenkins FT 2013
ENABLING OTHERS
There was no attempt to enable others. Despite some of his statements from the time, his record shows a complete inability to give people the means to make decisions for themselves.
In modern parlance, there was no sense of psychological safety. If you spoke up your card was ‘marked’.
In that sense Fred Goodwin lived in a ‘silent world’ where the only voices he tolerated were those which fed his confirmation bias.
MAKING SENSE OF COMPLEXITY
Had banking been a highly technical enterprise then this have might have been Fred Goodwin’s greatest talent. His mastery of detail, his apparent disregard for human impact, his willingness to consider actions that might cause others to pause, enabled him to see opportunity where others didn’t.
His analytical mind saw how the bank could acquire, integrate, and make savings. Unfortunately, his tendency to see every challenge as a ‘nail’, led him to place an over-reliance on his ‘hammer’.
His blindspot was his tendency to see complexity as complication. He seemed to think that any problem could be reduced to a set of processes, that, if followed to the letter, would lead to a predictable outcome. Complicated challenges are technical in nature. They have straight-line, step-by-step solutions, and tend to be predictable.
In reality, wise leaders, understand that complexity involves a set of unpredictable factors that can produce different outcomes, depending on interactions of the elements in the system. As such they require sophisticated judgements that go far beyond the application of a formulaic solution. Perhaps this was a key element in the Bank’s and Goodwin’s ultimate failure?
SEARCHING FOR THE `COMMON GOOD
Despite his work with charitable causes outside work, there is little to suggest that Goodwin had any interest for the common good. Internally he saw the common good to simply equate to financial reward. There is very little evidence that he was interested in benefitting wider society or that he saw the workforce at RBS anything other than a means to an end. This was particularly evident towards the final year of his reign when he went ahead with buying ABN-AMRO simply to prevent it falling into the hands of his rival at Barclays Bank, even when he knew it was putting the long-term sustainability of the bank at risk, along with thousands of jobs.
MAKING COURAGEOUS AND ETHICAL DECISIONS
Goodwin was employed by RBS to be courageous. His predecessor, for all his ‘macho’ spirit hadn’t managed to buy any of the building societies which were converting to banks, e.g., TSB, Cheltenham and Gloucester went to Lloyds.
Fred Goodwin was bold, backed up by his self-confidence, his track record, the lack of any internal, or Board control, he was free to act on his instincts.
However, despite never engaging in criminal activity, Goodwin’s behaviour can never be regarded as wise.
Our definition of wise leadership is to “do the ‘right’ thing, at the ‘right’ time, for the ‘right’ reasons, where ‘right’ is for the common good as opposed to self-interest, sustainable in terms of having positive long-term consequences, and ethical.
Goodwin often did the right thing for the business. He always did the right thing for him. But he rarely did the ‘right’ thing in terms of wise leadership. Had he done so perhaps RBS might still be a force in world banking as opposed to being a brand name for the NatWest Group – a bank which RBS had bought in Goodwin’s first transaction in 2000.
How the mighty have fallen.