Banks continue the soul searching in search of boring credibility

September 12, 2012

In a speech to The Scottish CBI, Lloyd’s banking chief António Horta-Osório took another step to redefining banking culture. In his new model, boring, is a virtue alongside trustworthiness and transparency

Speaking to the Scottish CBI, [September 2012] Mr Horta-Osório argued that:

The banking industry has done itself no favours. Issue by issue and scandal by scandal, the faith and trust in our industry has been eroded. The industry must change. We must recast the banking model … retail and commercial banks should be simple and they should be boring.

His own bank is moving away from bonus schemes which have been seen as encouraging mis-selling, and focused too much on sales targets. In future, pay will be “increasingly linked to the long-term performance of the bank … and capable of being clawed back where decisions turn out to have damaged the bank’s performance or adversely affected customers”.

Such a customer-orientation is becoming more widely-accepted. Yet more than rhetoric is needed. Bob Diamond was calling for better citizenship before he was forced to resign from Barclays.

Actions not rhetoric

Mr Horta-Osório outlines practical steps he is introducing to move towards such a culture so that past mis-selling such as Personal Protection Insurance schemes [PPIs] will be “proactively” addressed [not waiting for legal claims to arrive]. However, he stops short at the other current candidate for change, the splitting of banks into lower and higher risk corporate identities.

Background

We reported earlier on other unusual aspects of Horta-Osório’s recent career. The Telegraph [in December 2011] also commented on his return to work from a stress-related illness.

The Telegraph article pointed out that he had recently purchased a holding in Lloyds equivalent to 600,000 ordinary shares, for $226,962 (£146,606). Is this to be taken as a signal of support for his Bank, or a self-interested gesture?

This is not intended to challenge Mr Osario’s competence or his integrity. He has waived his most recent bonus arguing it was unacceptable in the current financial circumstances But it does illustrate the difficulties arising when we seek to explain the behaviours of our leaders in black and white terms, and their nature as heroes or villains.


Barclays in a spin. Bob Diamond goes, Marcus Agius comes back

July 3, 2012


[Update] In twenty four hours, the LIBOR scandal at Barclays bank results in exit of Marcus Agius as Chairman. Then CEO Bob Diamond quits, and Mr Agius returns as Executive Chairman through the revolving door of fate

Yesterday LWD noted the departure of Mr Agius, and speculated on the future of Bob Diamond. Diamond Bob had gone out of his way to reassure significant financial individuals in and outside Barclays that the story would fade away leaving financial institutions relatively unscathed.

Within twenty four hours, the matter had become the centre of a political as well as a financial storm. It seems that the establishment of parliamentary enquiries to investigate the LIBOR affair had resulted in a decision by Mr Diamond to quit immediately [BBC’s financial sleuth Robert Peston, 8.30 am, July 3rd 2012, shortly after the announcement was made public]

I speculated yesterday that Mr Diamond was a financial asset whose value could fall as well as rise. The fall was more rapid than I could have imagined.

A storm brews

The story is escalating as quickly as any I have followed over many years. In 24 hours there have been debates in the House of Lords and House of Commons. http://www.bbc.co.uk/news/uk-politics-18702653. Those impacted include very senior civil servants, the head of the Bank of England, the fomer head of Barclays, John Varley, high-profile political figures such as George Osborne [who seems to have some part to play in any political story in the UK at present]. Oh, yes, and various financial executives at Barclays and elsewhere who found yesterday a good day for resigning their posts.

Update [6th July 2012]

The Diamond performance to the commons committee attracted widespread attention. The opinions varied from ’10 out of 10’ [for avoiding any ‘confessional’ statement that might be held against him ], to much lower ratings for failing to convince the committee of his integrity [laughter at his perceived obfuscations], and an error of judgment in trying to be too familiar [use of first names . The committee was also rated in some commentaries, but I couldn’t find any assessment that was positive.

I urge students of leadership to get hold of a full copy of proceedings. Also note that for MBA business presentations (not to mention for Newsnight’s Jeremy Paxman) the interviewee would certainly be more promptly advised to deal directly with a simple question (but that’s a bit more advanced than media training 101)


Marcus Agius falls on his sword

July 2, 2012

Marcus Agius is ‘Liborated’ as chairman of Barclays

Barclays faces serious charges over the fixing of the London Inter-Bank lending rate (Libor). Its chairman, Marcus Agius resigns. Will Bob Diamond, the bank’s most valuable player (MVP), also be forced into premature retirement?

Acceptance of disgrace and retention of honour

It as ancient symbolic gesture for a leader to fall on his sword, the ultimate gesture of acceptance of disgrace and retention of honour. The gesture is sometimes made with a little help from others. A modern version is the loaded pistol provided to the exposed traitor. The Telegraph reported the resignation [Monday 2nd July, 2012]:

Barclays was fined a record £290m last week for attempting to manipulate the interbank lending rate, Libor, between 2005 and 2009.

Mr Agius, chairman for the past five years, said on Monday: “Last week’s events – evidencing as they do unacceptable standards of behaviour within the bank – have dealt a devastating blow to Barclays reputation. As Chairman, I am the ultimate guardian of the bank’s reputation. Accordingly, the buck stops with me and I must acknowledge responsibility by standing aside.”

A metaphoric pistol?

Maybe Mr Agius was handed the metaphorical equivalent of a loaded pistol after being cornered by his enemies. His gesture of self-destruction is something out of the last scene of a spy-thriller. It also appears consistent with his reputation of conducting business in an honourable way. There’s Mr Agius for you. But then there’s his CEO, the finance superstar and controversial Mr Diamond.

Then there’s Diamond Bob..

The impact of the Libor wrongdoings will have further repercussions Mr Aigus and the Bank’s CEO Bob Diamond were expected to receive an invitation to spend a little time with members of Her Majesty’s Select Finance Committee after their next meeting [Tuesday 3rd July 2012].

Now Mr Aigus is gone. But Diamond Bob is a quite different figure. His reputation as a successful financial leader was reflected in his reputation and glittering remuneration year by year. But this is the year of the stakeholder spring. Mr Diamond is no longer described primarily as a generator of wealth and employment, even in the generally admiring pages of the financial press. Despite the recently-imposed fine on Barclays of £291 million, as well as Revenue and Customs tax settlement fine of nearly twice that amount, Mr Diamond may still be seen as a valuable (if somewhat diminished) asset by some of Barclays’ the big stakeholders.

That’s the thing about financial assets. They tend to go up and down in value.

To be continued

The Libor affair is capturing the headlines this week. We examined Mr Diamond’s spectacular knack for making money and generating public enemies in an earlier post.


Diamond Bob bags bumper bonus

April 3, 2008

bob-diamond-barclays.jpg

Bob Diamond, head of Barclay’s investment banking division, earned £21m ($42m) in pay and bonuses last year. His basic salary was about 1% of this. Tim Harford shows how rational expectations theory can be used to explain the process

In the popular reports, Bob Diamond’s recent remuneration has been contrasted with Barclay’s drop in profitability. However, as President of Barclays PLC, and Chief Executive of Investment Banking and Investment Management, which was the most profitable part of the company, Diamond Bob can make a case for being its highest earner, if not the highest among executives in the FTSE 100 this year.

Where’s the logic of it?

Don’t ask me. Rather, take a look at Tim Harford’s analysis in The Logic of Life. The intrepid Undercover Economist is, as ever, elegantly pungent. Particularly relevant is the chapter entitled Why your boss is overpaid

According to expectation theory, It’s partly a matter of the cost of hard-to-obtain information. In business life

…it is hard to pay people as much or as little as they deserve [p89] …

Added to which is the assumption that the human inclination for players within any system is to achieve stated criteria in order to maximize personal reward. This is an inconvenient point for remuneration specialists.

He illustrates how very large leadership rewards can be explained ‘rationally’. He takes the case of Michael Eisner and his $800 million acquired in his thirteen years as CEO of Walt Disney. Was is a good deal for Disney?

According to Harford, the golden carrot might not have been one open to precise calculation, but it might still have been cost-effective, assuming the Company had been unable to find merit in seeking a lower CEO compensation deal.

He outlines the incentivisation arguments for linking the CEO’s pay to share price, and therefore to monster stock-options. The deal he secured did not need even to motivate Eisner directly.

‘ …if Eisner’s pay motivated his underlings to add more than the $ 800 million [of value], then it would have [still] been rational for Disney’s shareholders to pay Eisner …to spend all day with his feet up on his desk watching Tom and Jerry’.

The ingenious Mr Harford goes on to outline how competition, so beloved an element in economic theory, can lead to game-playing directed against internal rivals. So Watching Tom and Jerry, and acting as a figure head, are rational things for a CEO to do.

Harford draws on high-profile intellectual bodyguards to provide him with further sophistications (‘suspicious aspects’ [p106]] of reward schemes. He concludes (more gloomily than elsewhere in his lively book) that there is great encouragement for boards of directors to pay up, as long as they ‘avoid provoking shareholders too severely’ [p108].

[M]ost CEOs are “paid for luck”, skimming hefty bonuses that are due not to their own efforts but to external factors.

It’s a hard life at the top

Meanwhile, Diamond Bob has to suffer whatever discomfort he receives from criticisms of his compensation package, comforted only by the hundred-fold bonus to his basic salary.

Note: See Tim Harford’s website for more about the celebrity journalist and his latest work.

For an earlier analysis of rational expectations and much more beside, see Matthew 25:14-30.