Mallen Baker's Blog

Royal Bank of Scotland steps blinking into the sunlight

13 Jul 2009

The news has come out that the CEO of bailed-out bank RBS will be given what are described as "tougher" performance targets next year. This year his rather large pay award, tied mainly to share price performance, provoked some degree of controversy.

Well, it's about time.

Tying somebody's bonus to the share price was always one of the dumbest ideas in management. For a start, short term manipulations can be achieved in ways that are not good for the profitability of the business. And secondly, share prices are often affected by factors completely outside of the management's control.

The rule should be this: A well-run, profitable company is likely to best be placed to give good returns to shareholders. The management should focus on these things.

The alignment of the CEO's interests with those of the shareholders through stock options and bonus provisions managed to introduce perverse incentives and were bad for both parties.

A renewed focus on profitability and sustainability are definitely what's needed. Will this now become the standard, I wonder?

By the way, RBS also produced a very impressive sustainability report in the last few days. It is very frank and open about how difficult the last year has been and why. It struck the right tone of humility, and forward looking determination.

Being the awkward cuss that I am, I prefer to go back and look at what the RBS report said last year. After all, if such reports are of interest to stakeholders, surely it must be because they disclose over the key risks to the business, and to the stakeholders (for instance, employees, shareholders, suppliers) of the business.

The 2007 report is headed 'issues that matter most'.

These ten issues were: Financial crime; Customer service; Selling and lending practices; Employee practices; Environmental impact; Community investment; Global lending and project finance; Financial education; Financial inclusion; Small business support.

And in case you were wondering - selling and lending practices only focused on the bank helping customers to borrow responsibly.

Other than some boasting from now-departed Fred Goodwin about what a good year RBS had had, particularly with its acquisition of ABN Amro, there is little sign of the issues that brought the company to its lowest point.

This year's report of course talks about governance, and pay, and about what the bank has learned.

In particular, RBS owned up to the fact that it kept its capital base too low for the size of its balance sheet. And that the acquisition of ABN Amro made this underlying weakness even worse.

So it's worth pondering, isn't it, that the company's 2007 sustainability report - using the Global Reporting Initiative's guidelines and verified by Deloitte - gave us no insight or clue into such issues whatsoever.

So they weren't on the top ten list of stakeholder concerns.

But they were certainly up there with the top list of basic responsibilities of the company.

Tags: CSR RBS Royal Bank of Scotland financial crisis banks corporate social responsibility reporting GRI Mallen Baker

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