The Pursuit of Good Management, Governance and Culture: Lessons Learned from the RBS Failure
Abstract: The failure of the Royal Bank of Scotland (RBS) was undoubtedly systemic. However, poor decision-making by RBS’s senior management and Board during 2006 and 2007 at the height of the crisis were also critical to the bank’s failure. What are the lessons to be drawn from its failure? Is there anything that the RBS Board could or should have done differently to avoid poor or imprudent decision-making? This article critically assesses these questions and sets out a number of practical strategies for company boards and non-executive directors to consider as part of their independent scrutiny and challenge function to advance a more robust and prudent decision-making process.
“Any fool can make things bigger, more complex, and more violent. It takes a touch of genius–and a lot of courage–to move in the opposite direction.” — Albert Einstein
- Introduction
The failure of RBS was undoubtedly systemic. A consequence of unstable features of the entire financial system caused by inadequacies in the global framework for bank capital regulation and the FSA’s supervisory approach.[1] However, poor decision-making by RBS’s senior management and Board during 2006 and 2007 at the height of the crisis were also critical to the bank’s failure.[2] A pattern of multiple poor decisions suggests that there were underlying deficiencies in RBS’s governance and culture.[3] The decision to acquire ABN Amro with a purchase price of €71.1 billion is regarded as the quintessence of RBS’s poor decision-making.[4] The takeover was the biggest in banking history.[5] In 2010, the incumbent RBS Chairman described it as ‘a bad mistake’.[6] It was ‘the wrong price, the wrong way to pay, at the wrong time and the wrong deal’.[7] The acquisition contributed to RBS’s vulnerability, and ultimately, failure. [8]
The FSA Board Report (the “FSA Report”), which investigated the causes of RBS’s failure, identified a number of underlying deficiencies. Those were management capabilities and style, governance arrangements, checks and balances, mechanisms for oversight and culture, in particular its attitude to the balance between risk and growth. It is difficult to make a quantitative assessment of the impact that RBS’s management, governance and culture had upon the quality of its decision-making. The FSA Report broadly acknowledges this. Equally, it is difficult to say with utmost certainty that better management, governance and culture would have prevented RBS’s collapse and kept it as a going concern.[9] Put simply, we will never know.
Shazia Khan Afghan is an LLM Candidate in Banking & Finance Law, Centre for Commercial Law Studies, Queen Mary University of London. She previously worked as a Senior Lawyer at HSBC Global Banking and Markets in the U.K.
