Comment: A closer look at Stephen Hester’s RBS exit
Stephen Hester was hailed for saving RBS but his exit may be down to political expediency, write Terry Murden and Martin Flanagan
THE writing was on the wall for Stephen Hester almost two weeks ago when Sir Philip Hampton, his chairman at the Royal Bank of Scotland, picked up the phone to three senior government figures playing a key role in determining its future.
The RBS board was becoming increasingly aware of Chancellor George Osborne’s determination to start selling the taxpayers’ stakes in the two part-nationalised banks in the hope of it giving him a boost in the polls ahead of the 2015 general election. Sir Philip knew the pressure was on to be prepared. But he was facing one big conundrum: who would lead the bank?
Although it claimed last week that Hester would not commit to another four or five years, there had been a growing feeling on the board and in the Treasury that, in any case, it was time for a change at the top. If he stayed on it would mean him being in his post for a decade, a tenure considered too long for a job on this scale and which he admitted last week had been “bruising”.
The RBS chairman called the Chancellor as well as Robin Budenberg and Jim O’Neil, chairman and chief executive respectively of UK Financial Investments (UKFI), the semi-quango overseeing the taxpayers’ interests. He informed them of the board’s view that a replacement for Hester had to be found.
As it turned out, Sir Philip was pushing at an open door. The UKFI duo agreed with the RBS board’s reasoning, though some commentators questioned the need for an incumbent chief executive to sign up to a job for several more years. Some felt a commitment of 18 months from Hester would have been sufficient, allowing him to complete his turnaround programme.
But when the board met last Wednesday afternoon Hester’s fate had been sealed. The decision to ask him to step aside was rubber-stamped and made public at 5:12pm. The markets had closed at 4:30pm so were unable to react, but that evening the news of his resignation sent shockwaves across the country.
It had been known the board was considering the succession. But the timing of the announcement was a surprise. It was described as a resignation “by mutual consent”, but during a conference call with the media 40 minutes after the announcement Hester said he would have been willing to stay on to see the bank through privatisation, a clear indication that he had not volunteered to leave.
Some analysts were beginning to wonder if he had the stamina, though it soon emerged that there had been other issues at play in his exit, namely conflicts between Hester and the Treasury over the shape of the bank and the privatisation programme itself. The conspicuous absence of a successor in the announcement only fuelled suggestions of a hurried and bungled departure.
The question on everyone’s lips was whether Hester had gone willingly or whether he had been pushed and as more details emerged fingers were pointing at Osborne as the instigator.
With RBS preparing itself for a return to the private sector critics of the decision thought the board and the Treasury should have insisted he stay on, at least to brief investors and take it through the first phase of any sale of shares. Losing the man at the helm without a successor in place affects confidence at the best of times, but when the markets opened on Thursday they delivered a punishing verdict on RBS, marking the shares down by more than 6 per cent at one point during a frantic morning session and wiping out a lot of the gains in recent weeks as they had crept a little closer to the important break-even price.
One thing on which most were agreed was that Hester had done a good job. He had joined the board in October 2008 and took over as group chief executive from the disgraced Fred Goodwin a month later. In a memo sent to staff last week announcing his resignation he revealed how RBS “came close to the point of collapse” and “nearly died”.
In four-and-a-half years he has wiped £900 billion from its balance sheet, largely by selling unwanted businesses, and returned the bank to profitability. There have been casualties, including 40,000 job cuts. The investment banking division, deemed the villain of the piece by many bank critics, has seen its payroll cut from 24,000 to 9,000. Morale last week after the latest jobs cull was said to have hit rock bottom with some key staff fleeing to join rival firms.
Hester is thought to have been at odds with the Treasury over the savage nature of the cuts which threaten to leave the bank unable to compete with its global rivals. He wanted the bank to retain an international perspective, enabling it to continue offering the biggest clients the full range of services. Osborne and Business Secretary Vince Cable are determined to see RBS become a UK-focused retail and business bank with greater efforts made to lend to households and businesses to support an economic recovery.
The difference in viewpoint has not gone unnoticed. Hester’s approach has veered from cautious diplomat to outspoken critic. He has certainly been unafraid to challenge those in power where he felt the bank’s interests were being compromised.
But his record spoke for itself and won him supporters inside and outside the company. He has overseen Britain’s biggest ever corporate restructuring, shrunk its so-called “casino” banking operations and floated the insurance company Direct Line. The disposal of assets has helped raise much-needed capital to restore a balance sheet bruised by the reckless expansion of the previous regime.
His task was not made easy by being constantly confronted by what he referred to as “landmines” – unexpected scandals such as the Libor rate-fixing episode and the mis-selling of payment protection insurance, and the IT glitches that angered the bank’s already unhappy customers.
Despite these setbacks he believed it was coming good and that behind the headline crises there was a good bank trying to be noticed. He had to face calls for the bank to be split up or turned into a business bank and was said to find such demands unhelpful in trying to revive what remains a big business. The constant criticism did nothing to help it hire the best talent, a frustration made worse by the pressure to cap salaries.
He will leave having earned £14 million over the five years in charge, though he could have received £40m if all his bonuses and incentives had been paid. He volunteered to forfeit bonuses due to him in acknowledgement of the bank’s and his own shortcomings.
Even so, he suffered in the general backlash against banker pay and his loose tongue and well-heeled lifestyle often got him into trouble. He admitted his parents thought he was overpaid and his participation in fox hunting while spending time at his 350-acre Oxfordshire estate gave him the unenviable reputation of being someone out of touch with austerity Britain. He also has a home in London’s swanky Holland Park.
He has rarely been seen on the business circuit in Scotland, an issue that irks many used to their senior leaders being more visible. But he has toured the bank’s outer network and has come to share an affinity with the ordinary staff whom he regularly thanks for their efforts in the recovery.
He clearly had ambitions to see the bank back in private ownership but privatisation may have been the issue that prompted his exit. The government’s timetable differed from his own as the bank’s recovery and its share price was moving more slowly than ministers were hoping. For Osborne it was more about getting the monkey off his back. He and his government colleagues are said to live in fear of the annual bonus round and how ministers were tainted by the public anger over banker pay.
As such the privatisation, while likely to follow a similar form to those of the 1980s, is not being instigated for ideological reasons, merely to wipe the banks from the public accounts and get them off the political agenda.
The issue now becomes one of timing. Lloyds is trading around its break-even price, but RBS at 316p is well below, even on the government’s own preferred measure of 407p. To launch a share issue now would mean the taxpayer losing around a quarter of the £45 billion pumped into the bank. Should Osborne press the button on a sale of RBS shares it would merely confirm that political expediency had taken over from commercial logic.
Stewart Hosie, the SNP’s Treasury spokesman, said: “It is said Osborne is incredibly keen to get a deal done before the next election, maybe involving some sort of giveaway of shares to the public.
“But we need a chief executive who would stand up to inappropriate political pressure. A privatisation must be structured to guarantee taxpayers get their money back.”
Some argue that the taxpayers should not expect to get their money back, pointing out that the bail-out was to rescue the bank. It was never intended as an investment with any intention to break even or make a profit. However, the US government has by and large got its money back through a process of issuing shares in tranches which have created a demand, allowing the price to rise. A concern for Hester, however, is that trying to offer shares in RBS to investors before it is properly healed would be a difficult sell.
One insider at UKFI said: “I think Hester is up for the privatisation, and wanted to see it through even though he is aware the bank has undoubtedly become a political plaything. He made clear that if RBS was being touted to investors in a privatisation as a shadow of its former self this would make it a far less attractive investment proposition.”
RBS is now stuck with what is effectively a lame duck chief executive who has said he will leave in December or sooner if a successor is found. A Unite spokesman summed up the feeling that RBS has been left in limbo. “Hester’s departure will create a lot of uncertainty among staff about what will happen next, both to the bank and them and their futures,” he said.
“But, to be honest, morale has been a big issue for a number of years now at RBS. The staff that are left are under tremendous pressure.”
The search for his successor has begun and a list of candidates is said to include David Roberts, the Lloyds Banking Group deputy chairman, Richard Meddings, finance director of Standard Chartered, and Nathan Bostock, who is due to take up the same post at RBS. Outsiders include Justin King, who has turned around Sainsbury’s and Benny Higgins, chief executive of Tesco Bank who is a former RBS and HBOS executive.
Whatever happens next, RBS will be returned to the private sector, but without the man who saved it. «