The Leadership Style at the Royal Bank of Scotland - Essay Example

?Analysis of the Leadership Style at the Royal Bank of Scotland Executive Summary The objective of this report is to analyse the leadership approach being implemented in the Royal Bank of Scotland Group (hereinafter referred to as RBS). The RBS is a three-centuries-old financial institution which has suffered adverse effects from the financial crisis of 2008 due to a failure of leadership, and was only saved by a multibillion-pound government bailout. The government now owns more than 80 per cent of the bank, and RBS is currently implementing measures partially imposed by the bailout plan and partially conceived in its strategy formulation, that are expected to lead it towards recovery and privatisation. To meet the demands of its strategic plans, RBS has instituted the Leadership Development Programme (LDP) to establish a new leadership culture and practice that are intended to instil a higher level of competence, skill, discipline, and effectiveness to sustain the bank after its transformational process. The LDP serves the long-term goals of RBS and to some extent its short term objectives, employing in combination the various leadership styles and theories that have been reviewed. A set of recommendations are suggested in conclusion. Background on the RBS Royal Bank of Scotland The Royal Bank of Scotland was established in 1727 by Royal charter. Since then, the bank’s history had been inextricably linked with the history of Scots and also of Britain herself. From its original place of business in Edinburgh, RBS eventually opened branch offices, beginning with the prospering city of Glasgow and spreading to other cities. RBS provided financing that was in demand for trade, capital investment, and the growth of manufacturing during the industrial revolution (RBS Group,2013c). In the intervening years, the bank grew and evolved with the changing economic environment. The RBS opened savings accounts for small-scale savers in the 1920s, and pursued its large-scale interests with the acquisition of London merchant bank Glyn, Mills & Company in 1939. It survived through two world wars, and in the 1950s to the 1960s it introduced new services, including mobile and drive-in banks, personal loans, savings stamps, and a precursor to the automatic teller machine. In the 1970s, RBS became the first British clearing bank to offer a house purchase loan scheme to customers, and also the first to have all its branches connected online in a central computer system located in the head office (RBS Group,2013b). Presently, RBS has approximately 700 branches, mostly in Scotland but also throughout England and Wales. Its business strategy, in effect from 2009, is two-pronged: (1) to stabilise the company, eliminate risks and make it safe to eventually exit the government bailout; and (2) to focus its energies on serving customers well. To achieve this strategy, RBS aimed to become a “much smaller, more focused and stronger bank” by restructuring its operations (RBS Group Annual Review 2012). Its efforts are being rewarded with renewed profitability in the amount of ?1.37 billion for the first half of 2013, compared to a loss of ?(1.68) billion in the first half of 2012 (RBS Group,2013c). Leadership and leadership styles There are an indeterminable number of successful leadership approaches because successful leaders all incorporate elements of their own individual styles into the general approaches. However, a review of the types of leadership styles is helpful for prospective leaders to strategically plan how to approach a specific leadership situation. A cursory review of the major leadership approaches is shown in the table in Appendix A, to provide a bird’s eye-view of the historical development of leadership theory. There are a number of contemporary leadership theories which have been grouped by Bolden, et al. (2003) into five categories: The Trait Approach to Leadership – Derived from the Great Man theory, the trait approach seeks to identify those principal characteristics possessed by successful leaders, implying that people who possess such attributes could be recruited to occupy leadership positions. However, a great many number of virtuous traits have been identified as leadership traits, that no one “list” has proven to be effective in leadership selection. The Behavioural School – is posited on the ground that certain behaviours are thought to characterise the successful leader. The two more popular behavioural theories are: McGregor’s Theory X and Theory Y – This theory states that leadership strategies are influenced by a leader’s assumptions about human nature. The theory is summarised in the following table: Theory X management approach approximates the autocratic style of leadership which adheres to centralised decision-making, while the Theory Y management approach operates similarly to that the democratic style of leadership, where people are empowered to participate in decision-making. Blake and Mouton’s Managerial Grid – The managerial grid shown below frames five basic leadership styles as a combination of task production and employee orientation. According to Blake and Mouton, Team Management is the most effective leadership style, maximizing both task and people orientation. Source: Bolden, et al., 2003, p. 8 The Contingency or Situational School – this theory concludes that there is no one leadership style that applies to all situations. The appropriate choice of leadership approach is determined by the situation with which the leader is confronted. Fiedler’s Contingency Model – postulates that the solution to a managerial task is defined by any three conditions: Leader member relations, how well they get along Task structure, the degree to which the managerial task is highly or fairly structured Position power, the authority the manager possesses Adair’s Action-Centred Leadership Model – theorises that the action-centred leader gets the job done through the work team, fellow managers and staff. The action-centred leader must: Direct and structure the Task, Support and review the Individual people doing it, and Co-ordinate and foster the work Team as a whole (Bolden,et al.,2003). The Relational Approach – models using this approach explore the dynamics between leaders and followers. Servant Leadership – a practical philosophy that emphasises the leaders’ duty to serve their followers. Servant leaders enable their persons to grow as persons, improve in life and become more autonomous followers (Bolden, et al.,2003). The Following-Part-of-Leading (Katzenbach & Smith,2005) – consists of behaviours such as asking questions instead of giving orders, providing opportunities for others to lead you, doing real work in support of others instead of vice-versa, becoming a matchmaker instead of a ‘central switch’ and seeking common understanding instead of consensus. The indicators are summarised in the table following: Team Leadership – According to Belbin (2012), there are “Solo” and there are “Team” leaders: Solo leaders best conform to the typical image of one person leading a team of followers; such a leader is advantageous during urgent situations where quick and decisive action is required. However, in complex jobs of a discontinuous nature, as most modern work is, team leadership is more suited (Bolden, et al.,2003) Transactional and Transformational Leadership – First advanced by James MacGregor Burns, transforming leadership is a relationship of mutual stimulation where followers and leaders elevate each other in terms of motivation and morality (Covey,2009). Dispersed Leadership – Also referred to as “informal” or “emergent” leadership, dispersed leadership is a less formalised leadership model wherein the role of the leader does not merely proceed from his/her position in the organisation. Leadership is differentiated from authority; every member of the organisation can be a leader and exert influence over their colleagues and throughout the organisational structure (Heifetz,2009). The structure of the business The organisational structure has profound implications upon the type of leadership style which shall prove effective. In the case of the RBS Group which is a conglomerate of several businesses, the structure is implied by its divisions, namely: UK Personal Banking – covers retail and commercial banking for individual and small UK business customers, through its ATM network which is one of the largest in the UK. UK Corporate Banking – provides services for UK corporate clients including specialist finance, sector expertise, business support and innovative commercial banking products. Wealth (Private Banking) – offers banking, investment services, portfolio management, tax, trust and estate planning, and stockbroking to wealthy private and business customers in the UK and worldwide Markets and International Banking – the investment banking arm of the RBS Group, it targets major corporations and institutions, providing global financing, international transaction services, risk management, debt capital markets, foreign exchange and rates, and balance sheet advisory and structuring. Ulster Bank – provides comprehensive financial services throughout the Island of Ireland; serves 1.9 million personal and business customers through a network of 214 branches worldwide. US Retail and Commercial Banking – ranked the 13th largest commercial bank in the U.S based on deposits, the RBS Citizens Financial Group has more than 1,400 branches and 3,600 ATMs in 12 states, and has non-branch retail and commercial offices in more than 30 states. Direct Line Group – RBS’s insurance company which was established in 1985. Direct Line is the largest motor insurer in Italy and the third largest in Germany. However, RBS group was mandated by the EU under the terms of its state aid to divest of Direct Line Group. Majority stake shall be sold by the end of 2013; Direct Line Group shall be fully divested by the end of 2014. Aside from the business divisions, there are two functional divisions: Business Services and Central Functions – Business Services supports the entire Group by providing Technology Services, Group Operations, Group Property, Security and Risk, and Procurement. Central Functions include Group Communications for media and public affairs, Group Economics for market and economics research, Group Customer Relations, Group Human Resources, Group Strategy, Global Restructuring Group, Group Risk assessing credit, market and regulatory risk, Group Legal & Secretariat, and Group Finance which is comprised of 10 specialist teams each focused on specific areas of accounting and finance.. Non-core Division – plays “a key part in restoring RBS Group to standalone financial strength” by managing the divestment of assets and businesses which were identified as non-core during the 2009 Strategic Review undertaken by RBS Group. Non-core assets have been reduced from ?258 billion in 2009 to ?96 billion in 2011. Analysis of the leadership situation in the RBS Among Time Magazine’s 25 People to Blame for the Financial Crisis, Fred Goodwin of RSB came fourth in a list topped by Jimmy Cayne of Bear Stearns, Iceland’s Prime Minister David Oddsson, and Sandy Weill of Citigroup. Goodwin was notorious among RBS investors as a megalomaniac because of the rapid succession of 20 takeovers and acquisitions from his assumption of control in 2000. Commentators have dubbed him “the world’s worst banker” because he became “the face of over-reaching bankers everywhere” (Time,2009) and a symbol of the greed of banking executives. Even when the financial system was showing symptoms of collapse in 2007, Goodwin still brashly proceeded with a $100 billion takeover of ABN Amro, thereby straining RBS’s capital reserves to the maximum. As a result of these decisions, the 2008 losses of RBS were the biggest in UK corporate history, necessitating a $30 billion bailout by the British government, to the detriment of the taxpayers, to save the bank from the brink of bankruptcy (Time,2009). The bailout has repercussions for RBS, since it resulted in an 81 per cent government stake in the bank. As a condition for receiving taxpayer funding, RBS is obliged to sell off more than 300 of its branches (Allen,2013). The bank is also subject to the British government’s policy, which in this case was ambivalent and, in the words of Labour politician Chris Leslie, a “shambolic and uncertain approach” to directing RBS (Scott & Werdigier,2013). The new leaders of RBS would need to oversee the whole of the privatisation process. It poses a significant challenge to the bank to competently and confidently navigate the continued restructuring and political pressures facing RBS. It must address the pressures of increasing the share value of the firm that is 80 per cent owned by the British government, and the political interference that attends its ownership. Presently, shares are priced at 40 per cent lower than the break-even price at which taxpayers will not incur losses on the bailout price (Scott & Werdigier,2013). The bank will also have to contend with the exodus of senior managers who planned to leave RBS before privatisation commenced. Presently, RBS has already laid off 40,000 employees and divested ?900 billion of its assets since the start of the financial crisis (Scott & Werdigier,2013). The shrinking and divestment, particularly related to non-core businesses have been to an extent strategically undertaken; by doing so, RBS reduces the amount of capital required to be retained, freeing up capital to lend to customers. It also reduces the need for short-term funding, improving financial resilience (RBS Group,2013a). There are five priority goals identified by the bank wherein RBS faces its toughest challenge. They are (1) privatisation, (2) possible bank split (core vs. non-core), (3) sell-offs of assets and business units; (4) treasury relations; and (5) corollary matters that are relate to the past leadership, including its collection of bad loans, poor trades, and litigation of claims related to Libor-rigging after the bank’s admission on its role in the scandal (The Telegraph,2013). In order to achieve these goals, RBS established the Leadership Development Programme (LDP) whose primary objectives were: Equip the bank leaders to understand, execute, and sustain the strategic plan at both group and divisional levels; Provide an opportunity to challenge the business plan and build ownership and accountability in its delivery; Develop leaders’ analytical skills and their ability to think strategically Promote disciplined and effective collaborative working across the group to improve business performance; and Establish and reinforce common leadership language and behaviours (Global Focus,2011). From the very objectives of the LDP, it is apparent that the company has chosen to address both short-term and long-term strategic goals with a long-term perspective. The five priority goals are evidently short-term; privatisation, for instance, has to be resolved as soon as possible because it is not sustainable to remain 80 per cent owned by the government, as its own mandate is public service, not private profit generation. The bailout was considered a temporary measure, not a long-term investment. The bank will not have full strategic control of its own operations while the government exercises 80 per cent voting rights. The decision to split bank operations between core and non-core and the sell-off of assets and business units may both have long-term repercussions, but it should be decided soon in light of the recovery directions of the bank. Applying the Contingency theory of leadership, it is apparent that two different leadership approaches will be appropriate over time, a stronger, more decisive leadership style in the short-term, and a more stable, participative approach in the long-term. Short term leadership style. Given the mismatch between the immediate concerns and the LDP, the current RBS leadership must for the current transition period employ elements of McGregor’s Theory X management because of painful but necessary decisions to be reached, such as during the sell-off of assets and business units. The decision to sell-off may require to some extent elements of Belbin’s solo leadership style, but only to the extent that divestment requires. In Blake and Mouton’s grid, leadership should in the short term place itself somewhere closer to Authority/Obedience because of the immediate need to raise share value. Share value increases with earnings per share, so if the firm aims to recover its 40% share price drop from where taxpayers bailed it out, it has to show earnings recovery to justify the return of its share price. Only when the taxpayer’s bailout price would be recovered could the bank expect government to unload its shares, a requirement for regaining privatisation. The decision as to the separation of core and non-core businesses is a strategic one, with implications on the style of leadership. Where business operations are divergent, as in the case of core banking and non-core activities, the tasks involved will necessary require divergent leadership styles – banking strictly adhering to regulatory frameworks, and non-banking allowing for a more fluid, market-oriented and dynamic leadership approach. Adair’s action-centred leadership model, with its emphasis on task structuring and direction, support of individual initiatives and coordination with the managerial team, would apply particularly in the non-core organisational unit. Divestments did not only pertain to non-core business units, however, but also includes the sell off more than 300 of its branches as a condition for receiving taxpayer funding (Allen,2013). This explains the short-term nature of the decision to divest. Long-term leadership style. As of this writing, the LDP has been in implementation for four years. By the end of July 2011, more than 1,100 executives had already undergone the programme in the RBS Business School in Edinburgh. Aside from them, other managers involved RBS’s global operations had the benefit of the programme modules delivered through two RBS academic partners, the INSEAD campus in Singapore and the Wharton Executive Education in Pennsylvania. Therefore, the seeds have been planted through the past four years that have spawned a generation of RBC executives who have attained the primary objectives, in which case the quality of leadership should by now be elevated to some degree in terms of managerial competence, analytical skill, and a deeper understanding of RBS’s transformational strategic plans. In an evaluation conducted on LDP alumni, more than three of every four executives who completed the program reported that they are currently applying the key concepts learned in the programme. An independent inquiry has also highly scored the LDP above the benchmark for relevancy, personal impact, and “likelihood to recommend.” Furthermore, more than 84 per cent of the LDP participants have indicated significant improvement in their leadership abilities. Given this understanding, the RBS executives trained under the LDP may be expected to exercise self-direction and self-control, and because of the skills acquired will be capable of a high level of creativity and ingenuity in solving organizational problems; with thousands being thus trained, it is expected that competent leadership capability has been widely distributed throughout its divisions and organisational units. Theory Y management becomes applicable, based on McGregor’s requisites. Likewise, the use of Blake-Mouton’s team management would be effective, rather than Belbin’s solo leadership approach, which best suit the short-term, because effective management teams may be formed out of the pool of trained managers and participation would be enhanced. Applying the Contingency school, both Fiedler’s and Adair’s models indicate that the result of the LDP would favourably support a more leadership style closely approximating the dispersed leadership approach for the long-term. The RBS background information shows that each of the functional division, although their tasks may be classified as core activities, are heterogeneous as to customers (private individuals or corporate), service (savings, credit extensions, trust and asset management, or financial consultancy), or expertise (consumer banking, commercial banking or market-oriented investments banking). This necessitates task definition and structuring, individual support or enhanced leader-member relations, and a designated leader who may be supported by a management team. Finally, the short-term requirements of RBS may not have much application for the relational approach because particularly for units or branches to be separated, the very relationship of management and employees will be severed; however, the relational models will be vital in the long-term. Conclusion and Recommendation The leadership approach adopted by the Royal Bank of Scotland Group is principally define by the Leadership Development Programme, which upon examination, proved to favour the dispersed leadership by strengthening leadership at all levels and in all divisions; it is more relational because it tends to strengthen leaders’ supervisory discretion over their employees, and contingent because the same discretion exercised by well-trained leaders more effectively applies to divergent situations that develop throughout the organisation. The strength of the training provided by the LDP is clearly its embodiment of transformational leadership, because of its objectives to change and enhance the leadership skills and competencies of its participants to in turn effect the same transformation upon their respective followers. These and the preceding observations support the favourable assessment of the LDP as an excellent programme to usher in a transformed leadership to ensure RBS’s long-term recovery and rehabilitation. There is concern, however, that the short-term requirements of RBS – mainly, to increase share price, to effect privatization by exiting the government bailout, to reduce risk by selling-off assets and improving capital structure, and reinforce leadership accountability. These short-term targets were identified in the foregoing discussion, but re not addressed by the LDP objectives. Based on RBS’s short-term objectives which are necessary to position it for success in the long-term, a more urgent, direct and decisive leadership style is required to effect the turnaround. This will necessitate elements of autocratic leadership, since the terms of the turnaround are dictated by the terms of the bailout, the necessities of addressing the adverse repercussions of the 2008 financial crisis, and the systemic weaknesses that led to it. The measures are imposed on the organisation as a response to contingencies, and financial regulations mandate the restructuring of operations and assets. There is therefore the need to also choose executives with strong leadership traits, with long experience and expertise in banking, strong decision-making capability, ability to command the respect of internal and external stakeholders, and familiarity with RBS operations. With the recent resignation of former RBS CEO Stephen Hester, the reins of the organisation have been entrusted by the board to Ross McEwan, former chief executive for UK Retail. With a proven track record of over 25 years in banking, McEwan has proven his laudable leadership traits since his assumption of duties at Retail, assuming a major programme of investment across retail banking, strengthening bank operations, and significantly enhancing profitability in this division in the past year (The Telegraph,2013). Together with the shift to strong and decisive leadership in the short-term, other courses of action the bank is recommended to take are the following: (1) Assemble a core leadership team headed by CEO McEwan and the top executives of the divisions, who are presumed to have undergone the LDP course, to comprise the bank rehabilitation team. It is likely that one has been assembled under the former CEO, but McEwan, having been recently named and who is slated to take over in October 2013, should be given a free hand in choosing his members. The team shall move quickly in arriving at decisions on restructuring, divestments, and compliance, which shall be implemented as soon as the board has given its approval. (2) The importance of good corporate governance shall be impressed upon the current leadership. It was noticeable in the principal objectives and description of the LDP that mention of good governance was conspicuously absent. The debacle of the financial crisis as it affected RBS and necessitated a multi-billion pound bailout was due to excessive risk-taking and greed on the part of the former leadership; it thus becomes necessary to ensure that this trend is weeded out of the present corporate culture, particularly at the executive levels. Corollary to this the four-year-old LDP program should undergo constant updating to include the more recent developments in bank regulations and best practices, including good governance. (3) A major organizational restructuring should include a definition of strategic goals, and the divestment of non-core activities that do not support the realization of these goals. Excessive and poorly considered acquisitions have created inefficiencies that will hinder the bank from realizing its much needed earnings targets build up its share value; failure to reach the level of the government’s entry price will delay the privatization of RBS. Resources should therefore be concentrated on creating value for the core business. (4) With the continued success of the LDP, a more diffused leadership style should be adopted to at least the top executive levels in each division, to allow flexibility and accountability of command. Depending upon the situations in each division and organisational unit, the executive for that division should be prepared to adopt the leadership style that they deem best serves the type of function the unit discharges and the contingencies therein developing. 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Retrieved 15 August 2013 from http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/10218052/McEwans-in-tray-Fighting-on-five-fronts.html Appendix A Review of Leadership Theory (Bolden, Gosling, Marturano & Dennison, 2003, p. 6) Appendix B Types of Leadership and Patterns of Management Source: Schmid, 2006, p. 187 Appendix C An Integrated Model of Leader Traits, Behaviours and Effectiveness (De Rue, et al., 2011, p. 10) Appendix D Simplified Organisational Chart (Moody’s Investor Service Credit Analysis, 2010, p. 2) Read More