Sir Fred Goodwin and the toxicity of guilt

Sir Fred Goodwin’s payoff has filled the Nation’s headlines. Popular opinion in the UK has developed into an outburst of rage against those guilty of triggering financial losses for others and yet who seem to have escaped relatively unscathed themselves. But can guilt and blame be disentangled so simply?

A public fury rages on over fat cats responsible for our economic woes. Someone must be responsible. Someone must be made to pay. A culprit must be found, and quickly to make an example to the others. As Richard Donkin also noted, it was the libertarian philosopher Voltaire who satirised the strategy of finding a culprit for public execution when things went wrong. Candide learned that killing an admiral from time to time is good, ‘pour encourager les autres’. More recently the theme was reworked in an episode of Blackadder, a much-loved TV series in Britain, where a senior officer announces to a hapless aide that the time had come for a futile heroic gesture.

Sir Fred seems a suitable culprit for the moment, although rather like Blackadder, he is understandably reluctant to participate in the gesture. The case for the prosecution before the high court of public opinion runs as follows: Goodwin (almost always referred to at present as Fred the Shred) was in charge of Royal Bank of Scotland (RBS) which carried out a takeover (ABM Ambro) which eventually went very badly wrong. There were financial commentators at the time suggesting it was a risky strategic move. The kindest explanation on offer was that Sir Fred had acted out of megalomania. He was at the time considered a brilliant financial leader a reputation earned particularly during the earlier successful hostile bid by RBS for Nat West (National Westminster Bank).

Hero to zero and leaders we deserve

That was then. Somehow public mood swings have a symmetry to them. The greater the hero, the more a subsequent judgement swings to the opposite extreme. Sir Fred has more recently acquired the epithet of the worse banker in the world. Perhaps worth mentioning. If so, there are very interesting questions also worth considering about how such a specimen went from strength to strength over such a long period of high office.

Tempted though I am, it is too great a leap of explanation to wrap it up in the bald statement that we get the leaders we deserve. On the other hand, that notion makes at least a reasonable point from which to get beyond the assumption that public opinion once duped has now discovered its previous blind spot regarding towering imposters such as Fred Goodwin.

The toxity of guilt

Here’s another idea. It is, at least, a new way of looking at what might be going on. The current explanatory vocabulary of the credit crisis repeatedly relies on the metaphor of toxicity. Like many figures of speech, it helps us dress up a strange concept in familiar garb. Yes, toxicity. That’s what it is. The economic system has gone toxic.

But as with risk, the systemic toxicity is hard to isolate and destroy. It ducks and weaves. It is distributed and embedded in countless subtle ways. Wait a minute – who signed off the loan? Where were the directors. Why didn’t the Government know. And Robert Peston. Surely he must have known. Then there’s Gordon Brown. Not enough, then, to encourage the others in future. We must act promptly. First Sir Fred, but then the others. And (lest I forget) what about all those Business School Professors who taught all those finance courses, and dreamed up the modern theories of derivatives? That’s more like it. Drastic action is called for. How else can we save the body economic?

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HBOS changes: Too little, too late?

This week saw a little-heralded leadership change in the retail division of the financial giant HBOS. When a bank changes one or two members of its management team, it does so to reassure investors of continuity as well as to signal change. Has HBOS been too complacent over its business environment? Are the changes too little, too late?

According to a BBC report this week:

HBOS has announced a revamp of its retail division, including the departure of its head Benny Higgins … finance director Phil Hodkinson will [also] retire at 50 next year, and will be replaced by a former incumbent, Mike Ellis …”The structural changes we have introduced in our retail business are right for the group,” said chief executive Andy Hornby. Mr Higgins, who moved from Royal Bank of Scotland last year to head the retail unit, will leave HBOS at the end of 2007. [CEO] Mr Hornby told the Reuters news agency that Mr Higgins’ departure was not related to a recent 8% drop in profits at the retail unit. The business was hit by a sharp drop in its share of mortgages earlier in the year after a new pricing strategy went wrong, although the bank says its share has since recovered.

So there we are. No change there, then

Banks are as prone to jolts and change as any other business. Arguably they have become as accustomed to dealing with change as companies in many other business sectors. Their corporate advertising increasingly seeks to present images of innovative and dynamic set-ups. Yet, they also work hard at maintaining a corporate image of stability and reliability. Which just goes to show that effective creativity in advertising can be pretty challenging. How would you send out a convincing signal that you are reliable and adventurous, dynamic and prudent?

HBOS doesn’t stand for anything

I think of HBOS as an abbreviation for two big names in Banking after a recent merger, namely the Halifax and Bank of Scotland. Wrong. The (usually) reliable Wikipedia tells me it is an Initialized name. We shouldn’t connect it with some earlier entity or entities. Same with ICI. Not Imperial Chemical Industries. Anyway, that’s going to be another story. Let’s just say that what is now HBOS used to be the Halifax Building Society of Halifax, Yorkshire, and The Bank of Scotland of Edinburgh.

Background to the story

Earlier this year the bank announced satisfaction with its profits.

CEO Andrew Hornby said HBOS was optimistic about the UK economy and growth in its main markets, and that the UK business environment was “generally benign”.

How benign is benign?

Hornby’s view was not widely shared

“Overall the quality of these figures looks poor and the guidance of 2007 on loan growth, margin, costs and bad debt looks disappointing,” analysts at Fox-Pitt, Kelton said in a note

.

AS it turned out, the HBOS retail business environment was to prove far from benign. Over Christmas 2006 there had been unfortunate publicity for the bank’s role in the sad tale of the collapse of Farepak. In 2007 it became clearer that the shared business model of the retail banks was failing. This relied on offering ‘free’ retail banking, partly subsidised by high charges for non-agreed overdrafts. HBOS faces substantial losses. It also proved non-competitive in mortgages, and failed in its retention strategy.

Anatomy of a high flier

In 2005, CEO Andy Hornby was assessed as one of the FTSE’s ‘power players’ for among other things being remunerated with ‘biggest directorship’ of the FTSE 100 at around a £ million sterling for his HBOS responsibilities. The young city high-flier was a former Blue Circle and Asda executive, and could take credit for his part in steering through the merger successfully.

The deal was a coup for The Halifax. However gently the merger was presented, Halifax emerged with the better hand. Hornby became its CEO, and Lord Dennis Stevenson (another Halifax man) became Chairman of the new company. The Bank of Scotland had recently lost out in several take-over bids, including its wooing of National Westminster Bank, when it had lost to its bitter rival, the Royal Bank of Scotland.

What’s going on?

Perhaps researching this blog has made me over-sensitive to leadership battles. But the story leaves me with just that suspicion that there is more to unfold. Has HBOS been complacent over its business environment? The kindest that can be said was that it did not rush into hasty action recently. More unkindly, maybe it could be accused of being too reactive.

I haven’t picked up the signals of stakeholder discontent that indicate real ‘trouble at the top’. No comments about excessive remuneration packages. But those city analysts have already sent out signals suggesting the business environment is not as benign as HBOS would like it to be.

I have a very small shareholding in one of the group’s financial products. I’m not planning on selling. I’m not planning on acquiring any more either. And maybe there will be a business case to invest in, written on leadership style and proactivity.