“Corporate Governance and Business Ethics
Order Description
This is a topic on corporate governance and business ethics.
The aim of this coursework is to test your understanding of the application of corporate governance and ethical issues and application to business situation and your
ability to select relevant information and present arguments in clear and logical manner. It also aims to test your ability to relate a case scenario to appropriate
regulatory requirements and make an initial evaluation and provide recommendations.
Read the provided case study below carefully. Then consider the questions provided at the end of the article when preparing for your presentation and writing your
report. You are required to discuss the main reasons behind the failures of RBS and to explain to what extent the practices that were followed (governance and ethical)
were responsible for these failures. Finally you need to explain how this failure could be avoided.
In presenting and writing this report you can use information and references (preferably academic ones with implications for corporate governance and business ethics)
that are relevant to the case study (RBS). The assessment of the coursework will depend on to what extent youll manage to integrate the corporate governance and
ethical principles and practices into your analysis for the case study (RBS).
Royal Bank of Scotland (RBS)
The Royal Bank of Scotland was an ancient institution with roots in the 18th century. Under the recent leadership of Chief Executive Sir Fred Goodwin the company
pursued a growth and acquisition strategy. The board chaired by Sir Tom McKillop accepted their Chief Executives growth strategy which included the acquisition of
National Westminster Bank in 2000 when Sir Fred axed some 18000 jobs earning himself the in-house title of Fred the Shred. But subsequent investments in American
sub-prime loans and the acquisition of Dutch Bank ABN Amro for 10 billion in 2007 proved disastrous. Although it should be said that the acquisition of ABN Amro had
a bright side: the group included Hoare Govett: one of the City of Londons most successful brokers
In 2007 the market valued the bank at some 75 billion (6.02 a share). But by early 2009 the value had fallen to less than 5 billion (10p a share) even though it
had received at least 37 billion from the British government in October 2008. Subsequently the government provided more funds to keep the bank afloat taking its
equity stake to 58%. The government also agreed to guarantee some 325 billion of RBSs toxic loans in a government-backed insurance scheme. In February 2009 RBS
reported a loss of 24 billion a record for the UK.
Sir Fred Goodwin 50 was described by friends as modest man without airs and graces and a strong sense of responsibility. He was a close ally of British Prime
Minister Gordon Brown. But another perspective suggested extravagance mentioning the Falcon 900 executive jet with a car park space close by to save him walking far
and office wallpaper at 1000 a roll. Matthew Oakeshott a member of the UK Treasury Select Committee which grilled Sir Fred said that the profligacy reminded him of
Enron and that the waste and greed would shame a medieval monarch. The auditors and non-executive directors he added were well-fed lapdogs round the throne .
Sir Fred resigned in November 2008 and was replaced by Stephen Hester.
But anger at Sir Freds retirement package which included a pension equivalent to 703000 a year for life raised huge public ire with cries of reward for failure
the British tax-payer pays him 15000 a week whilst shareholders lose their savings and employees their livelihood continued to reverberate. As a Times leader
wrote: It is a public scandal that while his business decisions have incurred immense social costs his compensation packages confer huge personal benefits.
Another key player in the RBS saga was Lord Myners the government Minister responsible for orchestrating the RBS rescue. Myners who had significant experience in
finance and had written a report on corporate governance was a key figure in prime-minister Gordon Browns economic revival team. But his agreement to Sir Freds
bonus led to calls for his resignation. He was also criticized by a UK Treasury Select Committee for failing to check the extent of Sir Freds pension rights
apparently leaving the details to the RBS chairman and remuneration committee. It was subsequently claimed that he had misled MPs about Sir Freds pension. Further
criticism of Myners followed his promotion of a government plan to wage war on tax avoidance through overseas tax havens when it was disclosed that until 2007 Myners
had been chairman of Aspen Insurance Holdings a company operating out of the Bermuda tax haven.
The collapse of RBS proved a catastrophe for the banks former chief executive chairman and directors particularly the independent outside directors. Class actions
were launched by disgruntled pension funds private investors and various shareholder representative bodies including the pension funds of local councils in the UK
and state public employee pension funds in the United States. Actions were brought in US courts which are typically cheaper and more flexible than UK procedures and
avoid the danger of being awarded the other parties costs. These actions sought compensation for the losses alleged to have resulted from the actions of RBS Sir
Fred and other directors who falsely assured investors about the banks financial health. In addition to civil claims for damages investigations by the financial
regulators could lead to criminal charges
The RBS case highlighted the roles of the chairman of the board and independent non-executive directors in monitoring and if necessary challenging executive
management. After all the non-executives were well-respected businessmen including Peter Sutherland (the Chairman of BP and Goldman Sachs) and Sir Steve Robson (a
former Treasury top civil servant). It has been suggested that Sir Fred wielded considerable power over the board. Some suggest that there may have been an element of
complacency; others allege that some outside directors might have been intimidated by threats to their re-appointment if they failed to concur with management.
The role of the UK financial regulatory system also came under the spotlight in the RBS case. Prior to the financial reforms introduced by Tony Blairs new-labour
government and led by Gordon Brown who was then Chancellor of the Exchequer the Bank of England supervised and regulated British banks. This role was passed to the
newly created Financial Services Authority who seemed unable to withstand industry pressures. For example some RBS institutional investors wanted to vote Sir Fred
out but found that directors re-appointments were staggered and his renewal was not due for some years. So they proposed a shareholder motion that all directors
should stand for re-election at the same time. This proposal was blocked by the Financial Services Authority. The Treasury Select Committee commented that the FSA was
responsible for supervising ten big banks and allowing five of them to collapse.
RBS Remuneration Committee report 2009
The 2009 RBS Remuneration Committee report which included Sir Freds 700000 a year pension was rejected by 90% of shareholders voting at the AGM. Questions about
the remuneration of Stephen Hester the chief executive who had replaced Sir Fred also emerged. PIRC an institutional shareholder lobby group called for the
remuneration committee report to be rejected alleging excessive pay awards and insufficient disclosure of the related performance targets. Standard Life a major
institutional investor complained about rewards that relied solely on share price movements.
Hester was paid a salary of around 12 million plus a bonus tied to a rolling three-year incentive plan over 2010 2012 based on share price performance. In the
light of public criticism Hester waived his right to 16 million bonus for 2009. In April 2010 RBS chairman Sir Philip Hampton admitted to shareholders that the
bonus scheme had priced the share options too low. In future the company would consult with leading investors and UK Financial Investments the organization formed to
oversee the UK Governments stake in RBS.
The Financial Services Authority (FSA)
The FSA was set up by the UKs labour government under Prime Minister Gordon Brown and Chancellor of the Exchequer Ed Balls. The Bank of England was stripped of its
previous powers to regulate the financial sector. The regulator with offices in Canary Wharf (nicknamed Wall Street on Thames) was separated from the day-to-day
operations in the City money markets. The governments intention was to regulate the financial sector with a light touch in the belief that the classical boom and
bust economic cycles had been overcome. It proved to be a disastrous policy.
Following the collapse and government bail-out of RBS the FSA launched an inquiry. Its report went unpublished for two years. Sir Freds lawyers sought changes and in
the final report Sir Fred was mentioned only twelve times. He along with the chairman Sir Tom McKillop and other board members escaped censure or any punishment.
Under pressure from the media the House of Commons Treasury Select Committee and the newly-elected coalition government the report was finally released in 2011. It
laid bare a raft of management shortcomings including excessive risk taking and disastrous unrecognized bad-debts. Sir Freds domineering management style had
apparently been recognized as a risk much earlier. Incompetent due diligence in the take-over of Dutch bank ABN Amro led the FSA chairman Lord Turner to write in the
foreword to the report: the RBS board had done due diligence amounting to two lever-arch files and a CD on the 49 billion deal that made the British banking systems
legs buckle. .
The former Prime Minister Tony Blair and Ed Balls were lambasted in the report for urging the regulator then the Bank of England to leave RBS and other banks alone
Regulatory failings the result of the governments light touch were also apparent.
The FSA which employed several thousand people admitted that the number of staff responsible for RBS was severely deficient. At one time only one person was
responsible for overseeing RBS now one of the worlds largest banks and Barclays investment company.
The next steps
Commenting on the losses incurred by shareholders in RBS and the need for a government bailout Lord Oakeshott a leading spokesman for the coalition government
said: the Royal Bank of Scotland was a monster too big to control too big to fail driven by greed and ruled by a tyrant. The head of the UK Serious Fraud Office
Richard Alderman said: if you are running a bank and you run it recklessly and you run out of money and you cant pay your depositors or have to be bailed out by the
taxpayers I reckon thats reckless and the company and the individuals should end up in jail. You cant do that at the moment. But I think its what the public wants
to see. He added that people such as Goodwin and Adam Applegarth of the collapsed Northern Rock bank (see case in this collection) had to be given a real incentive to
make sure they didnt turn a blind eye.
Knighted in 2004 for services to banking eight years later in 2012 his knighthood was rescinded and Sir Fred Goodwin became plain Mr. Goodwin again. In January 2012
Sir Fred Goodwin was also told that he was to be barred from holding any senior position in banking in future.
In 2013 the FSA is to be split into two new regulatory authorities despite some legislative delays. The Financial Conduct Authority (FCA) will be a government agency
to regulate financial services firms that provide services to consumers both retail and wholesale to maintain the integrity of the U.K.s financial markets. The
Prudential Regulatory Authority (PRA) to be put back inside the Bank of England will contribute to the stability of the UK financial system both banking and
insurance. According to the Bank of Englands web-site it will have a single objective to promote the safety and soundness of regulated firms and will meet this
objective primarily by seeking to minimise any adverse effects of firm failure on the UK financial system.
(http://www.bankofengland.co.uk/publications/Documents/other/financialstability/uk_reg_framework/pra_approach.pdf )
Please also refer to Chapter 1 and 6 in Crane and Matten
Discussion questions
1- Provide a profile for RBS and highlight the key financial regulatory and governance facts. (20%)
2- What are the underlying corporate governance and ethical issues that contributed to the collapse of RBS?
(40%)
3- How could RBS avoid this failure reflecting on the best practices?
(40%)
To answer the above questions you may need to touch on the following points:
If you had been advising the British government instead of Lord Myners what actions would you have proposed?
What do you think is the most appropriate relationship between the Chairman of the board and the companys chief executive?
If a financial regulator is to do a competent job it needs to be staffed by people with extensive experience in that industry. But then they are likely to identify
with the industry accepting its norms and culture. How can a regulator avoid becoming captured by its industry?
What is your opinion of Sir Freds annual pension and Stephen Hesters remuneration package?
Do you think the new regulatory structure with the FCA and the PRA will work any better than the FSA?
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