LeadershipinBankingDuringtheFinancialCrisisin2008

BachelorThesisforObtainingtheDegree

BachelorofScience

InternationalManagement

SubmittedtoDr.DimitrisChristopoulos

VivianTsolakis

1321012

Vienna,11June2016

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Affidavit

IherebyaffirmthatthisBachelor’sThesisrepresentsmyownwrittenworkandthatI

haveusednosourcesandaidsotherthanthoseindicated.Allpassagesquotedfrom

publicationsorparaphrasedfromthesesourcesareproperlycitedandattributed.

The thesiswasnot submitted in the sameor ina substantially similar version,not

evenpartially,toanotherexaminationboardandwasnotpublishedelsewhere.

Date Signature

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Abstract

This thesis analyzes the topic of leadership and management styles which were

appliedinUKbanksduringthefinancialcrisisin2008.Thepurposeofthestudyisto

determinealeadershipstylewhichiseffectiveandleadstobeneficialoutcomesand

even success for a bank. The actions taken by the leadership of two UK banking

institutionswillbesubjecttoacriticalanalysistoassistinthedeterminationofthe

ideal leadership style. Primary and secondary data was collected to ensure a

comprehensive amountof high value information. Theprimarydatawas collected

during interviews with employees in senior management at RBS (Royal Bank of

Scotland) and HSBC (Hongkong Shanghai Banking Corporation). Four participants

were interviewed, two for each bank. The conclusion of the case study is that an

authoritarianleadershipstyleleadstoahostileandunproductiveworkenvironment.

On theother hand, a delegative leadership style empowers employees to takeon

more responsibility and fosters a productive and inclusive work environment. A

participativeleadershipstyleisalsoanoptionifone'spurposeittoleadsuccessfully.

There is no ideal leadership style in general, therefore it should be chosen

dependingontheneedofthebusiness.Thisthesisisbeneficialtoleadersinbanking,

but especially to RBS and HSBCwhose leadership andmanagementwas analyzed

extensively.

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TableofContents

Affidavit......................................................................................................2

Abstract......................................................................................................3

TableofContents........................................................................................4

ListofFigures..............................................................................................5

ListofTables...............................................................................................5

1 ExecutiveSummary..............................................................................6

2 Introduction.........................................................................................8

3 LiteratureReview.................................................................................8

4 TheFinancialCrisis.............................................................................18

5 BankingRegulations...........................................................................21

6 Methodology......................................................................................24

7 CaseStudy..........................................................................................26

8 DataAnalysis......................................................................................33

9 Conclusion,RecommendationsandLimitations..................................40

Bibliography..............................................................................................43

Appendices...............................................................................................47

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ListofFigures

Figure1:RBSEarning/losspershare(GBP)................................................................28

Figure2:RBSIndustryrisk2008-geographicalanalysis............................................29

Figure3:HSBCEarning/losspershare(USD).............................................................32

Figure4:HSBCTotalAssets2008...............................................................................33

ListofTables

Table1:Two-DimensionalModelofSubordinateParticipation................................11

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1 ExecutiveSummary

1.1 ResearchObjectives

Theaimofthisthesisistounderstandtheleadershipandmanagementstyleinthe

UKbankingsectorduring the financialcrisis in2008andcompare it to thecurrent

statusoftheindustry.

The specific research questions which are the foundation of this thesis and were

aimedtoanswerarethefollowing:

1. What impact did the financial crisis in 2008 have on the leadership and

managementstyleoftheCEOsandtheboardofdirectors?

2. What differentiated the leadership andmanagement style of bankswhich

didrequireabailoutfrombankswhichdidnotrequireabailout?

The results of this thesis can be used as a guide for seniormanagers in banks to

reflect on their own leadership style, and how it can be improved, to achieve the

mostsuccessfuloutcomepossible.

1.2 StatementofMethod

To give an extensive analysis of the thesis topic the research approachwhichwas

selectedforthethesisisthequalitativemethodsapproach.

The research design will use case studies which help to provide a more in-depth

analysis of leadership in banking during the financial crisis. Interviews will be

conductedtogiveacomprehensiveunderstandingofthedevelopments inbanking

leadershipduringthattimeframe.

The data on which the conclusions in the thesis are based on are primary and

secondary data, including but not limited to interviews with industry experts,

academicpapersandarticlesfromadiverserangeofmediasources.

The timeframeof theanalysis isa comparisonof the situationduring the financial

crisis in 2008 and the current situation regarding this topic in the UK banking

industry.

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1.3 CaseStudy

Forabetterunderstandingoftheresearchtopicacasestudyisprovided.Inthecase

studytwoUKbanksarecomparedandthedifferencesintheircorporateleadership

andmanagementstyleisanalyzedcritically.Thebankschosenforthecasestudyare

Royal Bank of Scotland Group PLC (“RBS”) and Hongkong and Shanghai Banking

CorporationHoldingsPLC(“HSBC”).Thecriteriaforchoosingthesespecificbanksare

thefollowing:

• management, leadership and corporate governance before and during the

crisis

• management, leadershipandcorporategovernancechangesinresponseto

thecrisis.

RBSwillbeusedastheexampleofabankwhichperformedpoorlywhilstnavigating

thechallengesofthecrisis.

WhileHSBCalsoperformedpoorly it is neverthelessoneof the largebankswhich

performedbetteracrosstheUKsector.Duetothis,HSBCdidnothavetobebailed

outbytheUKgovernment.Additionally,HSBCissimilartoRBSinsize,structure,and

business model. This makes the easily banks comparable to each other and

representativeoflargeUKbankswhichdobusinessglobally.

Inparticular, the case studydealswith thebehaviorsandactionsof theCEOsand

Boardmembersbeforeandduringthe2008crisisandcomparesthemtothecurrent

situation.

1.4 KeyFindings,ConclusionandRecommendations

Thekeyfindingof this thesis is thatanautocratic leadershipstyle inbankinghasa

destructiveeffectonabankand itsbusiness.Furthermore, iswasestablished that

there is no one best leadership approachwhich can be generalized for thewhole

banking industry. To select the best practice, it is recommended to analyze the

situationofthebusiness.

Asmentionedbefore,thefindingsfromthisthesisarevaluabletoseniormanagers

inbanking. Itexplainswhich leadershipstyles leadtopositiveoutcomesandwhich

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lead tonegativeoutcomes.Furthermore, itexpandson theeffectsofapplying the

incorrect leadership style, which partly was the financial crisis but largely the

aftermathcausedbyit.

2 Introduction

Thefinancialcrisisin2008ledtothecollapseofglobaleconomies.Thecauseswhich

lead to the crisis were the systemic failures of the industry which had been

perpetuated over the years, as there was no real oversight and there were only

looseregulationsinplace.

The first step in deregulating the banking system was caused in 1998 when the

Glass-Steagall act was repealed during the Clinton administration. This allowed

bankstousedepositors’moneytomakeriskyinvestmentswhichinturnhelpedthe

banks grow more quickly. Over the years the deregulation continued and banks

exploitedtheseopportunities(Swift,2011).

The systemic risk in the banking industry, low capital requirements, and the

inclination to invest into non-core businesses and products were causes which

contributed to the financial crisis.Thesecauses, combinedwith thebonusculture,

the “too big to fail” mentality of the bankers, and their leadership style and

managementpracticescontributedtothecrisis.

InthisthesistheleadershipstyleandmanagementpracticesoftwoUKbankswillbe

analyzed to determine the extent to which these factors influenced their

performanceduringthefinancialcrisis.

3 LiteratureReview

3.1 Leadership

3.1.1 Definition

Therearealargenumberofdifferentdefinitionsforleadership.Thereasonforthis

isthatleadershipasatopichasneverbeenanalyzedcompletelybutratherpartsof

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ithavebeenresearched.Tofindanencompassingdefinitionof leadershipWinston

and Patterson (2006) from Regent University researched 160 articles and books

whichcontaineddifferentinterpretationsofthesubject.Thisresearchwasusedasa

basisforanintegrativedefinitionofleadership.WinstonandPatterson(2006)state

“A leader isoneormorepeoplewhoselects,equips, trains,and influencesoneor

more followers(s) who have diverse gifts, abilities, and skills and focuses the

follower(s) to the organization’s mission and objectives causing the follower(s) to

willingly and enthusiastically expend spiritual, emotional, and physical energy in a

concertedcoordinatedefforttoachievetheorganizationalmissionandobjectives”.

InthebookBehaviorinOrganizations-TenthEdition,JeraldGreenberg(2011)gives

a similardefinitionof leadership. Theexplanation cited for the term isone that is

accepted by many experts researching the topic. Greenberg (2011) writes,

“leadership istheprocesswherebyoneindividual influencesothergroupmembers

towardtheattainmentofdefinedgroupororganizationalgoals”.Thedefinitionsare

verysimilar;thedifferenceisthatthefirstonecapturesalldimensionsofthetopic

leadership. For a better understanding of this thesis the second definitionwill be

usedas a referencewhendiscussing theunderlying issuesof the topic leadership.

Nevertheless, theexplanation includingall relevantdimensionsof thewordshould

bekeptinmind.

3.1.2 Characteristics

Therearethreemaincharacteristicswhichcanbeattributedtoleadership.Thefirst

oneisthatleadershipinvolvesnoncoerciveinfluence.Thismeansthatsubordinates

follow their leader, due to the fact that they respect, like, or have admiration for

him/her. The next characteristic is that the influence deriving from leadership is

goal-oriented. Leaders influence their followers to control and direct their actions

towards the achievement of a certain goal. The last characteristic of leadership is

that it requires followers. This statement seems very clear, yet it may need

clarification. What it implies is that leaders have the ability to influence their

followers. The principle also applies in the opposite direction, meaning that

followersinfluencetheirleader(Greenberg,2011).

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3.1.3 Theories

Thegreatperson theoryassumes that leadersarebornandnotmade.Thismeans

that an individual possesses certain traits that make him/her different to other

individuals.Additionally, thesespecial traitscontributetothereasonwhyaperson

holdsaposition inpower,authority,and leadershiproles.Thespecific traitswhich

thesepeoplehaveareasfollows;leadershipmotivation(meaning,thedesiretobea

leader), flexibility, focus on morality, and multiple domains of intelligence

(Greenberg,2011).

AccordingtoWinstonandPatterson(2006)thereisanothertheory,thetraittheory.

It takes characteristics into account which can be measured, including but not

limitedtogender, race,heightappearance,cognitive factors,psychological factors,

efficacyfactors,andemotionalfactors.

Both,thegreatpersontheoryandthetrait theorysolely focusonthe leaderasan

individual.Itispossiblefortheretobemorethanoneleaderworkingtogetherand

thereforecomprisinga leadership team. In this case the trait theorywould stillbe

applicable.However,itremainsunclearifthegreatpersontheorycanbetransferred

tothemodelofaleadershipteam(Winston&Patterson,2006).

Afurthertheoryisthatofcollectiveleadership.Theleadershiptheoryisalsoknown

assharedordistributedleadership.Collectiveleadershipiscreatedinformallybythe

exchange between a leader and his/her team. The assumption hereby is that

leadershiprolesareallocatedaccordingtotheamountofknowledgeapersonhas.

Leaders are thengiven responsibilities is their areaof expertise (Friedrich,Vessey,

Schuelke,Ruark&Mumford,2011).

3.1.4 BehaviorsParticipativevs.Autocratic

Theautocratic-continuummodeloutlinesthatleadersallowtheirfollowersdifferent

degrees of decision-making power. The range of this power reaches from an

autocratic leadership style, to a participative leadership style and finally to a

delegating leadership style. An autocratic leaderwillmake all the decisions alone,

tell his/her employees exactlywhat to do andmonitor their performance closely.

Theparticipative leaderwill ask forhis/heremployeesopinionsandconsider their

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opinionswhenmakingadecision.Apersonwithadelegatingleadershipstylegives

his/her employees more responsibility and self-initiative to make their own

decisions(Greenberg,2011).

Theautocratic-continuummodelpresentsaverybasiccategorizationofthedifferent

leadership styles. Therefore, scientistshavedeveloped the two-dimensionalmodel

ofsubordinateparticipationtobeabletofurtheraddresstheparticipationofleaders

inthedecisionprocess.Thefirstdimension,calledtheauto-democraticdimension,

showstheextenttowhichaleaderallowshis/heremployeetoactivelycontributeto

a decision. The second dimension, known as the permissive-directive dimension,

shows the extent to which leaders direct and control the work activities of their

employees.Theautocraticextremeismarkedasnoparticipationandthedemocratic

extremeismarkedashighparticipation.Whentheauto-democraticdimensionand

the permissive-directive dimension are put together, there are four possible

outcomestodescribealeader(Greenberg,2011).

Table1:Two-DimensionalModelofSubordinateParticipation

Are subordinates permitted to participate in making

decisions?

Are subordinates told

exactly how to do their

jobs?

Yes(Democratic) No(Autocratic)

Yes(Directive) Directivedemocrat Directiveautocrat

No(Permissive) Permissivedemocrat Permissiveautocrat

ThistableispresentedbyGreenberg(2011)andexplainsthecompositionofthefour

dimensionsinthetwo-dimensionalmodelofsubordinateparticipation.

There is no “ideal” leadership style, as these four styles all have advantages and

disadvantages.Thesuccessofacertainleadershipstyleisdependentonavarietyof

factors, such as the internal and external conditions and challenges in an

organization.Nevertheless,tobeabletoapplythebeststyletoaspecificsituationit

iscrucialtoknowthedifferencesbetweenthefourleadershipstyles.Furthermore,it

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is vital to be capable of choosing the correct leadership style for a situation and

adoptingitinaneffectiveway(Greenberg,2011).

3.1.5 LeadershipinaCrisis

There are two phaseswhich have to beworked throughwhen leading a business

through a crisis. The executive has to navigate the business and its employees

through theemergencyphaseand theadaptivephase. Thegoal in theemergency

phase is to stabilize the crisis situation and buy as much time as possible. After

achieving those objectives, the adaptive phase commences. In the adaptive phase

theleaderhastomakeadaptivechangestotheorganization,itsstructure,andwork

processes. These changes may be met with pushback from employees, but this

should not hinder the person in charge to lead with authoritative certainty

(Grashow,Heifetz,&Linsky,2009).

When confronted with a crisis the people who hold powerful positions in an

organizationoften“hunkerdown”.Thismeansthat theywilldefault tosolving the

problems of the business by using short-term fixes. These short-term measures

oftenincludetightenedcontrols,across-the-boardcuts,andrestructuringplans.The

problem which leaders are currently facing is that organizations do not have the

abilitytocreatemajorchange.Theresultisthatshort-termadaptationsareusually

insufficient,whichleadstocompaniesnotjustbeingunsuccessfulbutevenhavingto

find themselves fighting for survival after a crisis. There is an even greater risk of

consistent failure if the conclusions drawn from the recovery after a crisis are

incorrect.Theonlywaytoensurethatthisdoesnothappenistopracticeadaptive

leadership.Peoplewhohavetakenonthisleadershipstyledonothunkerdownina

crisis. Instead the crisis situation is used to create a strategic advantage and

importantchangesaremade intheorganization.Theadjustmentswhicharemade

in thecoreof theorganizationandareoften small,buthavea rippleeffectwhich

hasamajorimpactonthewholebusiness.Theapplicationofthisleadershipstyleis

thepossibilitywhichismostlikelytosafeguardandreinventanorganization.Some

areas of an organization will have to be eliminated, as they are not able to

contribute to the survival andultimately to the success of thebusiness (Grashow,

Heifetz,&Linsky,2009).

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Traditionally the skillswhich are required for effective leadership areproficiencies

like analytical problem solving, crisp decisionmaking, and the articulation of clear

direction.Clearlythesecontinuetobevitalskillswhichaleadershouldpossess.To

be able to lead through a crisis new leadership practices are necessary. These

includefosteringadoption,embracingthedisequilibrium,andgeneratingleadership

(Grashow,Heifetz,&Linsky,2009).

Oneofthegreatestchallengespresentlyfacedbyexecutivesisthattheyhavetobe

capable of applying the best practices today, while simultaneously thinking about

the development of the best practices for the future (Grashow, Heifetz, & Linsky,

2009).

When faced with a crisis it is important to embrace change. This is often very

difficult,becausecertainpracticeshavetobeeliminated.Todothiseffectivelythe

leader has todifferentiatebetweenwhat is essential for thebusiness andwhat is

expendable to the business. In order to build the adaptability of a company,

experiments should be run and theories should be tested. By trying different

practices and using the process of elimination one can then clearly see which

measureswereadvantageousandwhichmeasureswerelessprosperous(Grashow,

Heifetz,&Linsky,2009).

Tostarttheprocessofchangeacertaindegreeofurgencyisneeded.Thismaycause

employeesofthecompanytobelessproductive.Theleaderhastomanagethezone

of disequilibrium carefully. If the exerted pressure from the leadership of an

organizationistoolow,employee'sproductivitywillbelow.Ifthepressureputforth

fromtheleadershipofanorganizationistoohigh,employeeswillstarttopanicand

hunker down. To balance the disequilibrium at the right level a leader should

depersonalize the conflict. The goal hereby is to center the disagreement on the

issuesathand,insteadoftheinvolvedparties.Itisimportanttorememberthatthe

issues are predominantly connected to people’s core competencies, loyalties and

directstakes.Thisiswhyitisimperativetolookbeyondtheissueandactpolitically

as well as analytically whilst demonstrating emotional intelligence. In the time of

change every matter has to be discussed and analyzed, especially the difficult

subjects.Moreover, it isanadvantageifasmanypeopleaspossiblespeakup.This

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creates an open environment where different points of view can be contrasted

(Grashow,Heifetz,&Linsky,2009).

To achieve corporate adaptability many small adaptations, have to be made

throughouttheorganizationandthedifferentenvironmentswithin.Theadaptations

aremadebyemployeesoftheorganizationiftheyarerecognized,empowered,and

feel acknowledged for their actionsby their leaders. This ishow leadersempower

their employees which in turn develops the employees into leaders of their own

microenvironment in the business. By distributing the leadership responsibility

executiveshavemoretimetofocusonthenextchallengesconcerningthebusiness.

Another benefit is that employees are encouraged to solve problems,make their

own decisions and share their know-how with colleagues. To ensure the

maximization of innovative ideas and the new leadership generation a diverse

workforce isof theutmost importance.Diversitywithinanorganization fosters an

enrichedworkenvironment(Grashow,Heifetz,&Linsky,2009).

In a crisis an executive should not lead authoritatively and he/she should be

optimisticaswellasrealisticaboutthepotentialoutcomesthebusinesscouldface

afterthecrisis(Grashow,Heifetz,&Linsky,2009).

3.2 Management

3.2.1 Definition

Management is a necessity in every organization, no matter the size. It is what

makesabusinessoperate smoothlyand thereforemangersareessential (Drucker,

1974).

3.3 TypesofManagement

There are different levels of management, based on hierarchy, scope of

responsibility,andtypeoffunctioninanorganization.Thevariousconceptsaretop-

level management, middle-level management, frontline management, functional

management, generalmanagement, andmanagementof for-profit, non-profit and

mutual-benefitbusinesses(Boundless,n.d.).

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3.3.1 Top-levelManagement

Senior managers have the obligation to control the overall business. It is their

responsibility to form corporate goals, a business strategy and company policies.

These tasks determine the direction and ultimately the success or failure of a

business.Additionally, top-levelmanagershave toanswer to shareholdersandare

accountable to all stakeholders involved with their business (Bantel & Jackson,

1989).

Itisvitalthatapersonholdingsuchanimpactfulpositionhasthecorrectexpertise,

experience, and skills. Usually every department of a business (such as, finance,

operations,marketing,etc.)hasamanagerwhosolelyfocusesonmakingtheirarea

of the organization as efficient as possible and producing the best results for the

specificdepartment(Bantel&Jackson,1989).

3.3.2 Middle-levelManagement

Amid-levelmanager answers to a seniormanager and supervises the operational

staff in his/her department. The responsibilities of a mid-level manager primarily

includetheexecutionoforganizationalplansmadebyseniormanagement.Another

important function is the provision of data and information so the high-level

employees can create attainable strategies and goals for a company (Floyd &

Wooldridge,1992).

3.3.3 FrontlineManagement

Frontline managers are in the first level of management and are in charge of

organizationalwork groups. They are at the lower spectrum of the hierarchy, but

neverthelessveryimportantastheyareresponsibleforproductionoversight.Their

contributioniscriticaltothecompany'ssuccess,becausethefrontlinemanagerhas

toensureefficientproductionprocesseswhile tryingtokeeptheoperationalcosts

ataminimum.Interpersonalskillsareoftheutmostimportanceduetothefactthat

thispositionrequires themotivation,supervision,guidanceofsubordinates (Singh,

2000).

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3.3.4 FunctionalManagement

Theroleofafunctionalmanageristomakesurethatorganizationalobjectivesarein

linewithacompany'svisionandstrategy.He/sheistheheadofadepartmentinthe

business, but is not as involved in operational processes. It is more common to

employ functional managers in large businesses where there are many different

departments.TheFunctionalManagershouldbeanexpertandhaveexperience in

thedepartmenthe/sheoversees(Pavett&Lau,1983).

3.3.5 GeneralManagement

GeneralManagers (“GM”) areusually employed in small- andmediumbusinesses.

Theyareresponsibleforalldepartmentsinthecompany.ThetasksofaGMinclude,

butarenotlimitedtothemanagementofday-to-dayoperations,andmanagement

andforecastingofresources.ItiscrucialthataGeneralManagerhasadiversesetof

skills and extensive knowledge of the different business areas to be able to run a

companysuccessfully(Pavett&Lau,1983).

3.3.6 ManagementinFor-profitOrganizations

For-profit companies operate with the goal to earn a profit and therefore create

wealth and increase the company value. To achieve this goal, businesses produce

and sell products or services to their customers. Employees are motivated by

monetarycompensations,likesalariesandbonuses(Moore,2000).

3.3.7 ManagementinNonprofitOrganizations

Non-profit organizations are created with the goal to support a charitable or

educationalpurpose.Itisprohibitedtomakeaprofitfortheownerofthebusiness.

Mostpeopleworkingatsuchorganizationsarevolunteers,astheyarenotpaid.The

managementofthevolunteersdifferscomparedtothemanagementofemployees.

As there is no monetary motivation to work, the managers of nonprofit

organizationshavetomotivatethembyleveragingthesatisfactionofacontributing

toagreaterpurpose(Moore,2000).

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3.3.8 Mutual-benefitOrganizations

Amutual-benefitorganization isusuallyanon-profitorganizationand isownedby

the members. The goal is not to make profit, but to achieve a benefit for the

members who own the company. Therefore, the business is not accountable to

shareholders,andrather focusedonthebenefit itprovides to itsmembersand/or

the environment. In this type of business, the employees are motivated because

theirinterestsarelinkedtotheorganizationalpurpose(O’Neill,1994).

3.4 Leadershipvs.Management

The two terms leadership and management are often used interchangeably, but

they have distinct differences (Greenberg, 2011). The definitions and theories

concerning both terms were analyzed extensively in the previous section of the

thesis. To illustrate the distinction between these phrases oncemore theywill be

contrastedtoeachother.

Aleaderisapersonwhohasavisionwhichgoestowardsattainingagoalorfulfilling

thepurposeand the strategyof anorganizationwhich canbeused toobtain that

goal. Incomparisonamanager isapersonwho implementssaidvision. Inpractice

the leader chooses a direction for the future of a company. The manager then

creates a plan and monitors the results gained from implementing the plan to

eventuallycarrytheleader'svisionintoeffect(Greenberg,2011).

In realityexecutivesoftendon’t simplyactas leaders, focusingon thevision.They

alsomake a plan detailing the strategy on how to implement the vision. For this

reason, there is often confusion about the differences between the two distinct

terms.It isgenerallythecasethataleaderisalsoamanager,butnotallmanagers

areleaders(Greenberg,2011).

3.5 CorporateSocialResponsibility

3.5.1 Definition

As for the terms discussed in this thesis already, Corporate Social Responsibility

(“CSR”)hasbeendefinedbymanyresearchersindifferentways.Theconsistencyis

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that thedefinitions refer to fivedimensionswhichare imperativewhendiscussing

CSR,namely:

1. theenvironmentaldimension(thenaturalenvironment),

2. thesocialdimension(therelationshipbetweenbusinessandsociety),

3. the economic dimension (socio-economic or financial aspects, including

describingCSRintermsofabusinessoperation),

4. thestakeholderdimension(stakeholderstostakeholdergroups),and

5. the voluntariness dimension (actions not prescribed by law) (Dahlsrud,

2008).

Theimplicationisthatthesefivedimensionsareaffectedbyabusinessandshould

be taken into consideration when creating a business strategy to secure the

protectionofthem(Dahlsrud,2008).

Dahlsrud(2008)states that it isnotas important tohaveacleardefinitionofCSR,

ratherthanunderstandhowtotakeCSRintoaccountwhendevelopingstrategiesfor

aspecificbusiness.

4 TheFinancialCrisis

As stated previously there were many different factors which contributed to the

financialcrisisin2008.

Many American politicians, such as Senator Bernie Sanders and Senator Elizabeth

Warren claim that the repeal of the Glass-Steagall act in 1999 during the Clinton

administrationwas the first step towards destabilizing banking system. TheGlass-

Steagallactwaspassed in1933under theRooseveltadministration in response to

theGreatDepression.Itforcedbankstoseparatecommercialfromprivatebanking,

whichmeansthatbankswererestrictedfromusingdepositors’moneyforhigh-risk

investments.Therepealof theGlass-Steagallactenabledbanks, suchasCitigroup,

LehmanBrothersandBankofAmericatogrowsubstantially.Repealingthisactwas

certainly not the only reason for the crisis, but it clearly contributed to the

devastatingoutcome(Irwin,2015).

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Before the shock of the financial crisis there was consistent growth in the UK

economyinthepreviouseightyears.Thistimeframewasknownforareductionin

themacroeconomicvolatility andwas called “TheGreatModeration”. During this

period the global banking sector became more and more vulnerable (House of

Commons,2009).

IntheUSsubprimemortgagesweregivenouttolenders,whowereatahighriskof

defaultingon those loans.The issuewas that thehigh-risk loansweregiven tobig

bankswhopooledthemandclassifiedthemaslow-risksecurities.Thepooledloans

were further used as collateralized debt obligations (“CDOs”) and divided into

tranchesdependingontheirriskofdefault.Thetrancheswereratedbycredit-rating

agencies, like Standard & Poor’s and Moody’s. These credit-rating agencies were

paid by the banks and gave the tranches high (usually AAA ratings) and therefore

betterratingsthantheyshouldhave(TheEconomist,2013).

The issues which were pointed out were large capital disparities and consistently

growing deficits in western countries like the US and the UK. Additionally, there

were surpluses inAsianmarkets. This lead to imbalances in capital flowsbetween

different countries which had the effect of banks offering low interest rates. The

imbalancesincapitalflowbetweendifferentcountrieswerepossibleduetothefact

that Asian economies were growing quickly and entering the market, thereby

creatingasurplus.Concurrentlywiththisthepoliciesintheindustrialworldensured

a certain level of demand to create a stabilized inflation rate. The combination of

thesetwofactorscausedlowinterestratesindevelopedcountries.Thedemandfor

assets increasedas theywereofferinghigher returns. Thismeant thatmoneywas

beinglentonlooseconditionswhichincreasedtoassetvaluesandpricesevenmore

(HouseofCommons,2009).

Lowinterestratesfurthercausedthewillingnesstotakehighrisks,whichwascalled

the “search for yield”.Many banks, but especially US and UK banking institutions

took advantage of these conditions to increase their gains (House of Commons,

2009).

DuringthetimewheninterestrateswerelowinvestorsboughttranchesofCDOsas

theyappearedtobesafeandhigh-returninvestments.Thelowinterestratesdidnot

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solely influence investors, but also banks and hedge funds. All institutions in the

finance industry were incentivized to invest into high-risk assets to gain higher

returns.When the American housingmarket crashed a chain reactionwas set off

andfrailtyofthefinancialindustrybecameapparent(TheEconomist,2013).

Manypeoplehadnotrealizedtheextentofdamagethisschemecouldcausetothe

global financialmarketsuntil the collapseof LehmanBrothers in September2008.

Duetotheconnectionsbetweenthe internationalbanking institutionsthecrashof

Lehman Brothers caused a chain reaction in the industry and banks which were

followingthesamestrategywereinastateofcrisis(HouseofCommons,2009).

4.1 CausesandConsequences

Theprimarycausewhich lead to thecrisiswas theculture fostered in thebanking

industry of always trying to get the easy reward. The CEOs managing the banks

decidedtotakethepathofleastresistance,nomattertheriskassociatedwiththat

strategy.Furthermore, theydidnotconsider theconsequenceswhichwouldresult

fromthoserisks.Asaresultofthisthemajorityofthebankinginstitutionswerenot

prepared for a crisis situation, failed to have appropriate risk management

approaches in place, and this fundamental weakness exposed all their

vulnerabilities.Theconsequenceswerethatmanymajorbankshadtobebailedout

bytheirgovernments(HouseofCommons,2009).

The devastating crash can be traced back to the leadership in the banks and the

fragilityoftheglobalbankingsystem.CEOsacted irresponsiblyandcertainlynot in

thebestinterestoftheirshareholders.Thisbehaviorwasperpetuatedbythebonus

culture which has been fostered by the banking industry. Senior managers are

incentivized to deliver exceptional results, but only in respect to short-term goals

(like the next quarter). In addition to that, the lack in oversight by the Board of

directors only perpetuated the problem. As a consequence, there was a high

turnoverinmanagementpositionsafterthecrisishit.CEOswithmoreconservative

business strategies were put into place. Regarding the Boards, oversight and

monitoringof seniormanagementbecamemore important.Corporategovernance

principleswerereviewedandamendedtotaketherisksofthefinancialindustryinto

account(HouseofCommons,2009).

21

AnothercauseofthefinancialcrisiswasthatthebankingsystemintheUShasslowly

but steadilybeenderegulatedover timeand the international banking regulations

whichwere inplacewere insufficient.They left toomuch leeway for thebanks to

exploit the economic situation during that time. As a result of the crisis the Basel

Committee on Banking Supervision published new rules and regulations for the

globalfinancialsector.Theregulationsfocusspecificallyonriskmanagementinthe

industry(HouseofCommons,2009).Inaddition,theEU

In the EU the financial market consists of three different areas, namely banking,

security and insurance, andpost-trading activities. After the financial crisis the EU

introducednewregulations inbanking,securitymarkets,accountingstandardsand

theframeworkwhichwasputintoplacetoensureregulationandsupervisioninthe

financialsector(Quaglia,2012).

While many CEOs of the large banks were removed from their positions, and

receivedlargeseverancepackages,millionsofpeoplelosttheirhomesandtheirjobs

due to the actions of the bankers. The consequence the crisis had on these

individuals and society as a whole often passes without critical analysis by

commentators.Nevertheless,itstartedadiscussionamongthegeneralpublicabout

corporate social responsibility. Corporations do not just have a responsibility to

ensure they deliver their shareholders the highest return on investment (“ROI”)

possible. They also should be aware of their responsibilities to the other

stakeholders involved, particular their customers and the wider communities in

whichtheyoperate.

5 BankingRegulations

5.1 BaselCommitteeonBankingSupervision

TheCommittee onBankingRegulations and Supervisory Practiceswas foundedby

thecentralbankgovernorsoftheG10countriesin1974.Lateronitwasrenamedto

the Basel Committee on Banking Supervision. The Basel Committee was founded

after the breakdown of the Bretton Woods system of managed exchange rates,

whenmany banks had to dealwith losses in foreign currencies. The Committee's’

primary purpose was to create an exchange between banking institutions of the

22

member countries about supervisory matters in the banking industry. The Basel

Committee on Banking Supervision has the aim to increase the understanding of

important supervisory issues and enhance the quality and effectiveness of

supervision in the global banking sector. To attain this goal, the Committee sets

standards for banking regulation and supervision. The cross-border information

exchange in thebankingsectorassists indeterminingrisks for the financial system

and increases the know-how concerning these problems in the industry (Bank for

InternationalSettlements,2015).

The members of the Basel Committee come from Argentina, Australia, Belgium,

Brazil, Canada, China, European Union, France, Germany, Hong Kong SAR, India,

Indonesia, Italy, Japan,Korea, Luxembourg,Mexico, theNetherlands,Russia,Saudi

Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, the United

KingdomandtheUnitedStates(BankforInternationalSettlements,n.d.).

The presiding chairman of the Basel Committee is Stefan Ingves. The Group of

GovernorsandHeadsofSupervision(GHOS)isconsultedbytheBaselCommitteeon

crucialdecisionandiswheretheCommitteehastoreportto(BankforInternational

Settlements,2015).

5.2 BaselI

In1988 theBaselAccord (Basel I/1988Accord)wasapprovedby thegovernorsof

the G10 and released to banks around to world. It was a capital measurement

systemwhichwasputintoplacetostabilizethebankingsystem.Theobjectivewas

to eliminate a source of competitive inequality coming from the differences in

capital requirements which each country had (Bank for International Settlements,

2015).

5.3 BaselII

InJune2004ThecommitteepublishedtheRevisedCapitalFramework(BaselII).The

newframeworkwasanadaptationofBaselItothechangesandnewriskswhichhad

developedinthefinancialmarkets.Itwasbuiltonthreepillars,whichwere:

23

1. “minimum capital requirements,which sought to develop and expand the

standardizedrulessetoutinthe1988Accord;

2. supervisory review of an institution’s capital adequacy and internal

assessmentprocess;and

3. effective use of disclosure as a level to strengthen market discipline and

encourage sound banking practices” (Bank for International Settlements,

2015).

5.4 BaselIII

Before thedevastating collapseof LehmanBrothers in 2008 it hadbeen apparent

that itwasnecessary toputanadditional setof regulatorymeasures intoplace to

deal with the risk management in banking. In response to this the committee

published“Principlesforsoundliquidityriskmanagementandsupervision”(Bankfor

InternationalSettlements,2015).

In December 2010 a new set of measures were put into place by the Basel

Committee to reform banking supervision, strengthen the existing regulation, and

monitor the risk management in the banking sector more closely. The measures

formedtoachievetheaimareto:

1. “improvethebankingsector’sabilitytoabsorbshocksarisingfromfinancial

andeconomicstress,whateverthesource,

2. improvetheriskmanagementandgovernance,and

3. strengthen banks transparency and disclosures” (Bank for International

Settlements,2015).

Thesemeasureswerespecificallyidentifiedtosolveissueswithbank-level,ormicro

prudentialregulationandmacroprudentialsystemwiderisks.Ifthesepointswould

not havebeen addressed therewould havebeen and stillwould be a high risk of

banksfailinginperiodsofeconomicstress.Additionally,therewouldbeavarietyof

risks within the banking systemwhich keep building up over time. Themeasures

determined by the Basel Committee will ensure a reduced risk of system wide

shockstothebankingindustry(BankforInternationalSettlements,2015).

24

TherehavebeentwoversionspriorBaselIII(BaselIandBaselII),butastimegoeson

change is inevitable in the financial sector and therefore it is essential for the

Committee to keep adjusting and amending the global banking regulations to

protecttheindustryfromnewchallengesandrisks.

While someorganizationshaveacceptedapositiveattitude towards reform in the

financialsectorothersremainaversetochange.Financialorganizationwhicharefor

change are less connected with others in the market, while on the other hand

businesseswhoareagainstchangeareinterconnectedbylobbyingnetworks(James

& Christopoulos, 2015). This creates a disincentive for connected organizations to

push for change in the regulatory system and rather try to maintain the current

statusoftheindustry.

6 Methodology

6.1 Approach

Thepurposeofthiscasestudyistoexaminetheleadership,andmanagementstyle

duringandafterthefinancialcrisisin2008oftwolargebanksintheUK.Thebanks

whichwerechosenforthiscasestudyareRBSandHSBC.Theaimistoclearlyoutline

whichdecisionsinleadershipandmanagementledtotheoutcomewhereonebank

hadtobebailed-outbythegovernmentandtheotherwasabletosurvivethecrisis

withoutgovernmentalsupport.

Inorderfocusthethesis,thefollowingtworesearchquestionswereformulated:

1. What impact did the financial crisis in 2008 have on the leadership and

managementstyleoftheCEOsandtheboardofdirectors?

2. What differentiated the leadership andmanagement style of bankswhich

were better equipped to deal with the oncoming crisis from banks which

werepoorlyequippedtodealwiththecrisisandthereforecrashed?

For thepurposeof thispaperaqualitative researchapproach isused topresenta

clear picture of the situation during the time of crisis. In order to exhibit a

25

comprehensive overview of the topic primary and secondary data is analyzed.

Furthermore,acasestudywasconductedaswellasin-depthinterviews.

First the general theories and constructs of leadership and management are

explained and outlined to give a better understanding of these topics. Then the

phenomenonofthefinancialcrisisandthecausesandconsequencessurroundingit

are discussed. The primary part of the paper was aimed at providing a basic

understandingofthetopicandconveyingcrucialinformationaboutthestateofthe

bankingindustryduringtheanalyzedtimeframe(thefinancialcrisisin2008).

InthecasestudytwolargeUKbanks,namelyRBSandHSBC,areanalyzedwiththe

goal to determine the effectiveness of their management and leadership styles.

First,eachbank isdescribed inabriefprofile.Thisshowsthat thecompetitorsare

similar in size, structure, and business profile which makes them comparable.

Additionally,thisdemonstratesthattheycanbeseenasrepresentativesfortheUK

banking industry, and more specifically for large UK banks who share similar

characteristics.

To gain further in-depth knowledge of the perceptions of leadership and

managementduringthetimeofcrisis, interviewswithsenioremployeesfromboth

RBS and HSBC were conducted. The interview participants were employed at the

banksatthetimeofthecrisisand/orduringtherecessionafterthecrisiswhichgives

them a unique and close perspective of the on goings during the analyzed

timeframe. The interviews were conducted in person and had open ended

questions.Everyparticipanthadtheopportunitytoanswerthesamesixquestions.

The interviewquestionswere designed to better understand the actions taken by

RBSandHSBCinthewakeofthefinancialcrisis.Thefirstquestionisinregardtothe

perception of the CEO’s during the crisis. The next two questions are about the

impactoftheBoardofDirectors’ontheCEO’smanagementstyleandtowhatextent

their interventioninfluencedtheoutcomeofthecrisisforeachbank.Furthermore,

theintervieweeswereaskedaboutthelessonswhichwerelearnedandthecurrent

visibilityofchangesresultingfromthatlearningcurve.Thenextquestionfocuseson

the extent to which the leadership of each bank contributed to their ultimate

survival. Lastly the participantswere asked to outline the differences of the bank

theywereemployedattotheotherbankwhichisanalyzedinthecasestudy,and/or

26

other banks in theUK sector. The answers givenby the interviewparticipants are

contrastedandcomparedtoeachotherinanarrativeanalysistofindoutifthereis

consistency in their opinions. The findings are then summarized and presented to

concludethecasestudy.

Finally, conclusions are drawn from the combined analysis of the theory and the

outcomeofthecasestudy.

7 CaseStudy

7.1 RoyalBankofScotlandGroupPLC–BankProfile

TheRoyal Bank of ScotlandGroup is aUK-centeredpublic limited companywhich

provides banking and financial services to customers worldwide. The bank was

foundedin1727andisheadquarteredinEdinburgh,Scotland(UnitedKingdom).As

aninternationalplayerinthefinancialservicessectorRBSisrepresentedacrossthe

globe,inEurope,Asia,theMiddleEastandNorthAmerica(RBS,2015).

7.1.1 CorporateGovernance

Royal Bankof Scotland ismanagedby a structured frameworkof different boards

and committees. At the head of this structure is the group board which is

responsibleformakingdecisionsabouttheleadershipandcontrolofthecompany.

Furthermore, the board determines the strategy for the group and each of its

separate brands. A formal schedule of matters has been put into place which is

reviewedattheannualboarddiscussion(RBS,2015).

7.1.2 ChiefExecutiveOfficer

The current chief executive officer of RBS is RossMcEwanwhowas appointed in

October 2013. RossMcEwan has over 25 years of experience in the banking and

finance industry.Hehasworkedas theCEOofNationalMutual LifeAssociationof

Australasia Ltd/AXA New Zealand Ltd., managing director of First NZ Capital

Securities and executive general manager at Commonwealth Bank of Australia

beforestartingatRBSinAugust2012(RBS,2015).

27

7.1.3 TheBoardofDirectors

The presiding chairman of the board is Howard Davies. The group board is the

highestauthorityatthebankandthereforeresponsibleforthelong-termsuccessof

RBSand the returns for theshareholders.Theprimaryobjectiveof theboard is to

“provide leadership of RBS within a framework of prudent and effective controls

whichenablesrisktobeassessedandmanaged”(RBS,2015).

The hierarchy continues with a number of committees, which are responsible for

different areas of banking. Nevertheless, it is their main objective to advise the

boardtoensurethebank'ssuccess.Thesecommitteesoverseethefollowingareas;

audit, risk, performance and remuneration, nominations, sustainable banking,

capital resolution board oversight, executive, corporate and institutional banking

board oversight, compliance statement and remuneration policy, auditor

independence(RBS,2015).

7.1.4 Values

At the coreof thebank's values is thekey conceptofwanting to serve customers

well.Additionally,theirvaluesincludeimportantcharacteristics,suchasteamwork,

doingtherightthingandalwaysthinkingintermsofthefuture(RBS,2015).

7.1.5 Brands

RBShasadiverserangeofbrandsincludingNatWest,RoyalBankofScotland,Ulster

Bank,Coutts,Adam&Company,Child&Co.,Drummonds,Holt’s,IsleofManBank,

LombardandRBSInternational(RBS,2015).

In2014thecompanyrecognizedthattheywouldbemoresuccessfuliftheyshifted

their focus back to their original core competencies and core markets. For this

reason,manyoftheirinternationalbrandsweresold(RBS,2015).

7.1.6 Products

RBS offers its financial services to private, corporate, as well as international

customers.

28

Thediverse rangeofproductsoffered to customers includebut arenot limited to

current accounts, credit cards, savings accounts, investments, loans, overdrafts,

mortgages,homeinsurance,lifeinsurance,andcarinsurance(RBS,2015).

7.1.7 Mission

RBShaspositioneditselftobemorefocusedontheUKandIrelandbankingmarket

with themission to become stronger, simpler, and fairer. The bank further states

that they want to be known as the number one bank in the areas of customer

service, trust, advocacy, business efficiency, commitment to supporting enterprise

and economic growth, and investments in new technologies and processes. For a

better understanding of the most important concepts, the keywords stronger,

simpler and fairer are further divided into sections. Stronger means focusing on

reducingrisk,buildingcapital,thebalancesheetandinvestingintechnology.Simpler

refers to all aspects related to easing the banking experience for their customers.

The last keyword in the bank's mission statement is fairer, which refers to their

responsibilitytoactinthebestinterestoftheircustomers(RBS,2015).

Figure1:RBSEarning/losspershare(GBP)

Thegraphaboveshowstheearnings/lossperRBSshareinGBPfrom2005to2010.

This clearlydemonstrateshow steep the losswas in from2007 to2008when the

-1

-0.5

0

0.5

1

1.5

2

2005 2006 2007 2008 2009 2010

RBSEarning/losspershare(GBP)

29

financial crisis started in the US and made its way into the financial markets in

Europe.

Figure2:RBSIndustryrisk2008-geographicalanalysis

ThispiechartshowstheriskinthegeographicalareasRBSwasoperatingin.AsaUK

centeredbankmorethanhalfoftheriskwasgeographicallyintheUK.Nevertheless,

a substantial amountwas in theUSwhich iswhy the RBS had started to feel the

effectsofthecrisisbeforeithadexpandedintotheEuropeanfinancialmarkets.

7.2 Hong Kong and Shaghai Banking Corporation Holdings PLC –

BankProfile

HSBC is an international bank which was founded in March 1865, in Hong Kong,

China.TodaythebankhasitsheadquartersinLondon,UnitedKingdom.Itoperates

in more than 71 countries and territories around the world and serves over 47

million customers. HSBCwas able to survive and consistently be successful in the

past150yearsduetotheirwillingnesstoadapttothechallengeswhicharoseinthe

financial sector over this time, including revolutions, economic crises and the

immersionofnewtechnologies(HSBCGroup,2016).

52.63%

12.90%

28.66%

5.80%

RBSIndustryrisk2008

UK US Europe RestoftheWorld

30

7.2.1 CorporateGovernance

HSBChasputavarietyofpoliciesandsystemsintoplacetomakesurethatthereis

effective oversight and control within the bank and to avoid mismanagement

occurring on any level. The Group has high standards for corporate governance

which is clearly outlined in their corporate governance codes. These corporate

governance codes expand on the codes provided by the UK Financial Reporting

CouncilandtheStockExchangeofHongKong.Allseniorfinancialofficersareheldto

thehigheststandardsatHSBCandmustcomplywiththecompany’scodeofconduct

which is basedon theprinciples of governinghonestly andethically (HSBCGroup,

2016).

HSBCismanagedbyaChiefExecutive.Furthermore,theleadershipisstructuredinto

different board committees which consist of different directors and non-director

members. The hierarchy continueswith the directorswho are responsible for the

internalcontrolofthebank.Theyhavethetaskofanalyzingtheeffectivenessofthe

differentareaswithinthebank(HSBCGroup,2016).

7.2.2 ChiefExecutiveOfficer

StuartGulliverwasappointed to thepositionofCEOofHSBC in January2011and

currently stillholds thisposition.He startedworking for thebank in1980andhas

held a variety of vital positions in the company since that time. These positions

include serving as the chairman on different boards responsible for internal

oversightatHSBC(HSBCGroup,2016).

7.2.3 TheBoardofDirectors

Thepresidingchairmanoftheboard isDouglasFlint.Mr.FlinthasbeenwithHSBC

since1995andwas appointed tohis currentposition as chairmanof theboard in

December 2010. The chairman is not only responsible for the leadership of the

board,butalsomanagestheperformanceoftheCEO.Furtherresponsibilitiesofthe

boardofdirectorsinclude:

• theoverallmanagementandmonitoringofHSBC,

• maintaining relationships with various regulators, the government, and

investors,

31

• ensuring cooperation between non-executive directors and members of

seniormanagement,

• ensuringthegoodimageandreputationofHSBCisupheld,

• ensuringasustainableandlong-termgrowthofthebank,and

• ensuringtheeffectivenessofHSBC’sleadership(HSBCGroup,2016).

7.2.4 Values

ThevaluesonwhichHSBC isbuiltonarebeingdependable,beingopenmindedto

new ideas and cultures, and being connected to all stakeholders involved in their

business.

Being dependable includes delivering on their commitment to customers, being a

trustworthybusiness,andbeingaccountableforactionsmadebythebank.Bybeing

openmindedtonewideasandculturesHSBCwantstoaffirmthattheyareinclusive

and value different viewpoints. Furthermore, the group states the importance of

caringaboutallstakeholderswhichareimpactedbytheirbusinessandreiteratesthe

importanceofbeingawareofexternalissueswhichcanimpactthebusinessofHSBC

(HSBCGroup,2016).

7.2.5 Brand

HSBC operates a vast amount of subsidiaries in Europe, Asia, Middle East, North

Africa, North America, and Latin America. All of these subsidiaries operate solely

undertheHSBCbrandname(HSBCGroup,2016).

7.2.6 Products

HSBCoffersavarietyofproductstoitscustomers,suchascurrentaccounts,savings

accounts,creditcards, loans,mortgages,overdrafts, stocksandshares, investment

funds,homeinsurance,andtravelinsurance.

7.2.7 Mission

HSBChasthegoaltobecometheworld’sleadingandmostrespectedinternational

bank. Theyposition themselves inmarkets andeconomieswhich still have a large

growthpotential.Thestrategytoensuretherealizationof theirgoalandthe long-

term success of thebank includes two crucial points; building a global networkof

32

businesses and the provision ofwealthmanagement for all the different types of

customers. More specific HSBC focus lies on capturing market share in emerging

marketsandgainingcustomersfromthegrowingmiddleclasswithinthesemarkets

(HSBCGroup,2016).

Figure3:HSBCEarning/losspershare(USD)

The graph above shows the earnings per HSBC share in USD from 2005 to 2010.

Thereisasteadydeclinefrom2007to2008whichwascausedbytheeffectsofthe

financial crisis. From 2008 to 2009 the earnings become even less due to the

aftermathofthisevent.Afterthatthetrendlinerecoversandtheearningspershare

starttoincrease.

-1

-0.5

0

0.5

1

1.5

2

2005 2006 2007 2008 2009 2010

HSBCEarningspershare(USD)

33

Figure4:HSBCTotalAssets2008

ThispiechartdemonstratesthegeographicaldivisionofHSBCstotalassetsin2008.

ItshowsthatmorethanhalfofthetotalassetsareinEurope.Theremainingassets

aredividedamongtheothergeographicalregions inwhichHSBCoperates,namely

HongKong,Asia-Pacificarea,NorthAmerica,andLatinAmerica.

8 DataAnalysis

8.1 Participants

The interviewsconductedhadtwoparticipants fromRoyalBankofScotlandGroup

plcandtwoparticipantsfromHongkongandShanghaiBankingCorporationHoldings

PLC.Allfourparticipantsareemployeesinseniormanagementandwereworkingfor

the previously mentioned banks during the analyzed timeframe. The interviewed

employees were working in different areas within the banks, namely corporate

banking, investmentbanking,and internationalbanking.Thismakesthemqualified

tosharetheirexpertiseandtheiruniqueviewsontheleadershipandmanagement

aspectsofRBSandHSBC.

53.10%

16.10%

10.40%

21.90%

3.90%

HSBCTotalAssets2008

Europe HongKong RestofAsia-Pacific NorthAmerica LatinAmerica

34

8.2 InterviewDesign

The interview consisted of the same six questions which were given to all

participants.Theinterviewswereconductedinperson.

Thefollowingquestionswereaskedandansweredinthecourseoftheinterviews:

1. How would you describe the corporate behavior and personality of Fred

Goodwin(RBS)/MichaelGeoghegan(HSBC)atthetimeoftheglobalfinancial

crisisin2008?Washealeader*oramanager*?

*Definition Leader: Envisions and articulates the purpose ormission of an

organizationandthestrategyforattainingit.

*Definition Manager: Oversees the implementation of the purpose or

missionofanorganization.

2. HowdidtheBoardofDirectors'responsetotheglobalfinancialcrisisimpact

themanagementstyleoftheCEOatRBS/HSBC?

3. To what extent did the Board's intervention during the financial crisis

influence the outcome for RBS/HSBC? (and the bank's eventual bailout by

thegovernment/nobailout)

4. What were the crucial lessons from the financial crisis, and the resulting

changes in leadership, management practices and corporate governance?

How are they visible in the behaviors of the current management and

leadershipofRBS/HSBC?

5. TowhatextentdidtheleadershipoftheCEOandthegovernancepractices

of the Board ultimately contribute to the survival of RBS/HSBC? (requiring

governmentsupport)

6. WhatdifferentiatedtheleadershipandmanagementstyleofRBS/HSBCfrom

thatofbankswhichdidnotrequireabailout(likeHSBC/RBS)?

8.3 RBSInterviewSummary

FredGoodwinisdescribedasanauthoritarianleaderwhowasnotopento,anddid

not value input from others. Goodwinmanaged RBS in his ownway to fulfill the

visionhehadforthecompany.Hisgoalwastoachieveasmuchgrowthasquicklyas

possible.Ahighgrowthstrategylikethatisalwayslinkedtohighrisks.Furthermore,

both interviewees stated that nobody, from senior management was willing to

35

challengethe formerCEOofRBSonthebusinessstrategyoranyother issues.The

problemthatarisesfrommaintainingastrictlyauthoritarianleadershipstyleisthat

onepersonhasallthepower.Additionally,tohavingthefulldecisionpower,other

employeeswerereluctanttocriticizeGoodwin.This leadershipbehaviorfostereda

destructive corporate environment where Goodwin was able to bully senior

managementandeventheBoard into lettinghimtakegreatriskswhichultimately

ledtothedownfallofRBS.

When the financial crisis hit the UK banking sector immediate changes had to be

made at RBS. The composition of the Boardwas changed and Fred Goodwinwas

relievedof his position as CEO. StephenHesterwas appointed as thenewCEOof

RBS. It was Hester's goal to change the high-risk strategy which RBS had been

following the past years and achieve sustainable growth by imploring a more

conservative strategy. Hester also concentrated on fixing the problems the bank

had,tobeabletoreturntoprofitability.Unfortunately,thesechangeshappenedtoo

lateand itwasnotpossible toundo the financialdamagewhichhadalreadybeen

done to RBS. The government immediately had to step in and bail out the bank,

whichwould have failed otherwise and caused evenmore damage to the already

veryunstableUKbankingsystem.

Due to the fact that the leadership of RBS had failed in preparing for a

destabilizationofthebankingsectorandtheresultingcrisis,thegovernmentbailed

out thebank. The answers givenby theparticipants abouthow the impact of the

Board’sinterventioninfluencedtheoutcomeforRBSslightlydifferfromeachother.

The first viewpoint is that the Board actively sought out the support of the

governmentandtheBankofEngland.TheotheranswerreflectsthattheBoardhad

amore passive role in thismatter. The explanation for this is that RBS had been

mismanaged to suchadevastatingextent, that the responsibility for thebankwas

taken away from the Board and given to the government. This minor difference

between the two answers may be unfortunate wording, yet the second answer

impliesthattherewasahighdegreeofdistrustintheBoardtosolvetheproblems

whichRBSwasfacing.

Theresultofthefinancialcrisiswasasteeplearningcurveforleadersandmanagers

inbanking.Thevitallessonswere:

36

• havegoodbankoversightandcontrol,

• sticktothecorebusinesses,

• ensuringenoughcapitaltodealwithfinancialshocks,

• soundassetquality,

• minimalassetconcentrations,

• ensuringenoughliquidityandahighdiversityoffundingsources,

• having a clear strategywhich is built on goodbusiness judgment, detailed

analysesandforecasts,

• employingaCEOwhoiswillingtofacethechallengeandisopentodifferent

opinions,and

• installing a Boardwho is not afraid to challenge the CEO and can lead by

showinggoodcorporategovernance.

TheanswertowhatextenttheleadershipbytheCEOandtheBoardcontributedto

thesurvivalofRBS is “at the timeof thecrisis,notatall” (InterviewB,2016).The

governance practices of the new Board were responsible for stabilizing RBS.

Nevertheless,thesolereasonforsurvivalwasthebail-outbythegovernment.The

other interview participant concurs with this and further stated that, the new

management board showed a clear vision and strategywhich in turn empowered

employees. This is how it was possible to reach the newly set goals which were

necessaryforthebanktosurvive.

The reason for the different outcomes for RBS and HSBC was the difference in

leadershipandmanagementstyles.Additionally,thedecisionbyMr.Goodwintoput

hisowninterestsbeforethelong-termsuccessofthebankcallshiscompetencyand

integrity into question. Fred Goodwin acted alone in managing the bank with no

controlling force challenging his decisions and strategy.His only goalwas to grow

the company at a quick rate without consideration of the risks RBS became

vulnerable to. Other banks, like HSBC were managed by leaders who had visions

whichincludedsustainablegrowthandfactoredinrisksassociatedwithfastgrowth.

Additionally, theywere supportedbyBoardswhoheld themaccountable for their

actions. TheBoardsofotherbanksalsomade sure that theywere complyingwith

corporategovernanceprinciplesandnotneglectingtheresponsibilitiestheyhadto

theinvolvedstakeholders.

37

8.4 HSBCInterviewSummary

In 2008 Michael Geoghegan was the CEO of Hongkong and Shanghai Banking

Corporation Holdings PLC. He was perceived as a strong and positive leader who

successfullynavigatedthebankthroughthefinancialcrisisin2008.Mr.Geoghegan

was highly involved in the development and implementation of the company's

strategiesduringthattime.Thestrategyandtheplanonhowitshouldbeexecuted

wasmade in cooperationwith theemployeesworking in seniormanagement.Mr.

Geogheganwas also aware of the strengths of these strategies and expected the

peoplewhoheldpositionsinseniormanagementtoknowthemaswell.Theywere

thenabletomanagetheirteamsindependentlyandaccordingly.

Theparticipantsoftheinterviewcametotwodifferentconclusionswhenaskedhow

theBoardofDirectorsresponsetothecrisisimpactedthemanagementstyleofthe

CEO.Thefirstperspectivewasthattherewasnovisiblechangeinthemanagement

styleduringandafterthecrisis.Thereasonforthiswasthehighconfidence inthe

abilities, experience and know-how ofMichael Geoghegan. The second viewpoint

was that the Board of Directors started to become more visible and active in

contributing to HSBC’s business. The Board's actions further supported Mr.

Geogheganandledhimtobeabletofocusonthecorecompetencies,strengthsand

strategieswithinthebank.

The Board’s intervention during the crisis did not have a huge impact on the

outcomeforHSBC.Theyweremoreactivelyinvolvedinfollowingthedevelopments

inthemarket,analyzingtherisksinthebankingindustrywhichhadthepotentialfor

destabilizing HSBC, and overseeing Michael Geoghegan. Due to the fact that the

bankhadastrongcapitalposition,goodliquidity,avarietyoffundingsources,good

asset quality, geographic and product diversification itwas possible to absorb the

shockofthefinancialcrisisandcontinuetheeffectivestrategytowardsattainingset

goals.

Even though HSBC came through the crisis without requiring a bailout, the bank

sufferedduetothesystemicproblemsoftheindustry.Therewerecruciallessonsto

belearnedwhichallbankstooknoteof,theseincluded:

• stayingfocusedoncorebusinesses

38

• ensuringsufficientcapitaltoabsorbshocks

• ensuringhighassetquality

• ensuringdiversificationintheareasfundingandliquidity

• the need for Boards to challenge their CEO’s, especially if they have an

autocraticleadershipstyle

• theneedforcompetentBoardswhoapplytheprinciplesofgoodcorporate

governance

HSBC had an effective strategy which was working towards getting through the

financial crisis withminimal damage. Due to this therewere no changesmade in

theircorporategovernance,leadership,andmanagementpractices.

TheBoarddefinitely contributed to the survival ofHSBC. They supported theCEO

andothermembersinthemanagementteamtoensurethatthelong-termstrategy

for sustainable growth was executed. By monitoring and controlling the

development and implementation of the strategy by the senior executives, HSBC

managed to get through the financial crisis without any major setbacks. Both

governing forces, the Board and the CEOwere responsible for and contributed to

thissuccess.

A crucial reason for the success of HSBCwas the clearly outlined strategy. It was

focusedon the core strengths of the business regarding customers, products, and

geographical locations.RBSwas lesssuccessful,becausetheyhadastrategywhich

focusedsolelyonexpandingtheirbusiness. Inadditiontothat the implementation

andexecutionof thestrategywasnoteffectiveandsloppy.RBSstarted toacquire

banksinternationally,suchasCitizensBankUSandABNAmroinTheNetherlandsto

growataquickerpace.Theywerealsoknowntothrowtheirbalancesheetbehind

transactions which was irresponsible and tremendously risky. This strategy finally

ensuredthatRBSbecamethelargestbankontheglobe(measuredbytotalassets)in

2008.Atthesametimethestrategycertainlydidnotpayoffinthelongterm,asit

putthebank intothepositionofhavingtobebailedoutbythegovernmentwhen

thefinancialcrisishittheUKbankingsector.

39

8.4.1 Analysis

By interviewingRBSseniormanagers itbecameveryclear that thecombinationof

theleadershipofFredGoodwinandthefailureoftheBoardtoensureoversightof

hismanagerialactionswastheprimaryreasonforwhyRBShadtobebailedout.The

authoritarian leadership stylewhichwasemployed lead to theCEOholdingall the

powerintheorganization.Furthermore,heinstilledfearinothermembersofsenior

managementtospeakoutagainstthestrategybeingpursuedduringthattime.

The only reason why RBS was able to survive was due to the bailout by the

government and the support of the Bank of England. As soon as the Board was

overturned Fred Goodwin was removed from his position as CEO. The newly

appointedCEO,StephenHesterwasconsideredtobeamoreparticipativeleader.He

worked in cooperation with the senior management team to develop a more

conservative strategy for RBS. Additionally, the newmembers of the Board were

more diligent in terms of oversight. They closely monitored Mr. Hester's

implementation of the new strategy and ensured the compliance of a stricter

corporategovernmentpolicyatthebank.

The interviewswithseniormanagers fromHSBCsupporttheclaimthattheCEOof

HSBC during the financial crisis in 2008, Michael Geoghegan had a delegative

leadershipstyle.Thismeansthathewasworkingtogetherwiththemembersinthe

management team and the Board members of HSBC. He empowered the other

employeestohaveself-initiative,gavethemthepowertomaketheirowndecisions

andthereforefosteredaproductiveandeffectiveworkenvironment.Togetherthey

developedastrategywhichallowedthecompanytogrowataslowbutsustainable

rate. Additionally, they took the risks which HSBC was exposed to, due to the

accommodativeregulationsintheUKbankingsector,veryseriously.

Byapplyingadelegativeof leadershipstyleMichaelGeogheganleadHSBCthrough

thecrisiswithoutanyseveredamagetothebank.TheBoardofDirectorssupported

Mr.Geoghegan's leadershipstyle,which iswhyheremained in thepositionof the

Chief Executive Officer during the crisis. The Board worked closely with Michael

Geogheganand supervisedhim, inaddition to theother seniormanagers tomake

surethattherewerenobreachesincomplyingwiththesetregulationsforcorporate

40

governance. This is the reason for HSBC's success during the UK banking crisis in

2008.

As the interviewparticipantswerepartofRBSandHSBCduring the financial crisis

andheldleadershippositionsinthebanksduringthattime,theycontributedtothe

outcomeofthecrisis.InallinterviewstheresponsibilitywasplacedontheCEOsand

theBoards.Combiningthesystemicproblemsinthebankingindustryandthebonus

culturefosteredoverthepastdecades,employeesinseniormanagementwerenot

incentivizedtochallengeuppermanagement.Theparticipantswerenotspecifically

asked about the active involvement of seniormanagement in contributing to the

crisis in the interviews. Nevertheless, senior managers hold a certain amount of

responsibilityfortheresponseduringthecrisisandtheoutcomethereafter.

9 Conclusion,RecommendationsandLimitations

9.1 Conclusion

The conclusion which can be drawn from this study is that leadership and

managementarecloselylinkedtothedirectsuccessorfailureinabank.

The example and view that RBS providedwas that the autocratic leadership style

whichwasdemonstratedbyFredGoodwinwasdetrimentalandcontributedtothe

crash of the bank. The hostile work environment which an autocratic leadership

stylefosteredledtotheCEObeingtheonlypersonmakingstrategicandmanagerial

decisions. The main issue that occurs when one person makes such important

executive decisions is that there is no open exchange and communication of

different opinions and solutions. The CEO ends up dictating the direction of the

bank.Thisdoesnotmeanthatanautocraticleadershipstylecanneverbesuccessful,

butcombinedwithpersonalitytraitswhichFredGoodwindemonstratedautocratic

behaviorcannotleadtogoodoutcomes.

The leadershipbytheBoardofDirectorsandStephenHesterdemonstratedduring

thecrisiswasexactlywhatwasneededtoallowthebanktosurvive.Bysecuringthe

support of the government the Boardmanaged to buy some time. After that RBS

wasintheadaptivephase.ThisphasewasnavigatedbyMr.Hesterwhowasableto

41

fosterchangeandadoption,embracethedisequilibriumanduncertaintycreatedby

itandgenerateleadershipamongtheothermembersinthemanagementteam.His

leadershipstylewas lessautocraticandmoreparticipativethanthatof the former

CEO. This created an inclusive work environment which allowed the other senior

managerstobepartofmakingstrategicdecisionsandthereforeenrichedthework

environmentandensuredeffectiveworkanddecisionmakingprocesses.

Ontheotherhand,HSBC'sexampleshowedathatadelegatingleadershipstylewas

beneficialandevenvital tocreatestrong leadershippositions.MichaelGeoghegan

empowered the members of his management team to be strong and positive

leaders. By allowing them a certain amount of responsibility and decisionmaking

powertheycouldgrowasleaderswhichcreatedanevenstrongercultureofpositive

leadership at HSBC. By allowing people to have a certain amount of power Mr.

Geoghegan additionally promoted the idea of exchange between themembers in

senior management and throughout the business, in the form of constructive

criticismand feedback.Thisenabled theBoardofDirectors tocarryout itscontrol

function in a productive way. The confirmation that HSBC was operating with an

effectiveandenlightened leadership stylebecameclearwhen thecrisishit theUK

bankingsector.Asmostbanksdid,HSBCbecamestrainedfinancially.Nevertheless,

the important differencewas that therewere no changes in seniormanagement,

nor in their leadership style. Thebank continued topursue the samestrategyand

wascorrecttodoso,becauseitcontributedtotheirsurvival.

Byanalyzing the leadership stylesdemonstratedatRBSandHSBCduring thecrisis

theconclusioncanbedrawnthatanautocraticleadershipstylecanleadtoadverse

effects on a bank and can even cause it to fail. That is not to say that acting

autocratically isalwaysanegativething.Aleaderhastobedecisiveandbeableto

takeautocraticactionswhennecessary.Thereisno“correct”leadershipstyleforthe

bankingindustryassuch.Thechoiceof leadershipstyleverymuchdependsonthe

situationincombinationwiththeleader’spersonalitytraits.

Sound corporate leadership and management are further essential, because they

count towards the overall corporate social responsibility a bank has towards its

stakeholder. RBS certainly demonstrated poor judgement in corporate leadership

andmanagement.TheextentofthisproblemleadtoCSRissues.Thecorporateweb

42

pageforRBSindicatedthatthebankhasbecomemorediligentregardingthisissue.

The turnaroundon this issue shouldbe treatedwithcaution,asbanks remain for-

profit companies who have shareholders to answer to whose interest is mainly

focusedonthereturnoninvestment.

9.2 Recommendation

As mentioned before there is no one perfect leadership style. To decide which

leadershipstyleshouldbeappliedit iscrucialthatfactorssuchaspersonalitytraits

are included in the decision. For example, someone who is prone to risk-taking

behaviorwilllikelytransferthistotheirleadershipstyle.

Additionally,itisveryimportanttocreateaworkenvironmentwherethereisactive

communication and exchange between the members. An openness to different

viewpoints and ideas generates more valuable and better strategies for the

company.

9.3 Limitations

During the process of reviewing and analyzing the data, the studywas facedwith

several limitations hindering the clearance of the objectivity of the conclusions

basedonconductedtests.

Thefirstidentifiedrestraintwasthesmallsamplesize.Duetothefactthatonlytwo

employeesofeachbankwereinterviewedtheresultsmaynotberepresentativefor

allpeopleworkinginseniormanagementatRBSandHSBC.

Afurtherissueisthesubjectivityoftheanswers.Duetothepersonalinvolvementof

theparticipants in theongoingsduring theUKbanking crisis in2008 theanswers

maybeskewed.

Finally, there isalsoa lackofcertaingeneralizabilityof thesecases.TwoUKbanks

wereanalyzed inthecourseofthisstudy.Whiletheyareagoodrepresentationof

whatbanksweredealingwithduringthecrisis,theoutcomeofthisstudyshouldnot

be transferred to the whole industry. To achieve a better sense of the specific

differences among banks during that time, amore comprehensive analysis of the

differentinstitutionsisrequired.

43

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47

Appendices

InterviewA

RBSInterview1(24.02.2016)

MynameisVivianTsolakisandIamcurrentlyinmyfinalsemester(6.semester)at

Modul University in Vienna, Austria. I am pursuing a Bachelor of Science degree

majoringinInternationalManagement.AsthefinalpartofmystudiesIamcurrently

workingonabachelorthesis.Thetopicofmythesisismanagement,leadershipand

CSRintheUKbankingsectorandIamveryinterestedinresearchingRBS.Toelevate

thethesisandmakethefindingsmoreinterestingandrelevant,primaryresearchis

necessary. I would appreciate if you could give me your time and expertise and

answerthequestionsbelow.

All participants of this study must take part voluntarily. Their answers to the

interviewwillbekeptanonymouslyandthereforenoresponseswillbeattributedto

anyindividualansweringtheinterviewquestions.Furthermore,afterrespondingto

theinterviewquestionsallparticipantshavetheoptiontowithdrawtheiranswersat

anytime.

1. How would you describe the corporate behavior and personality of Fred

Goodwinatthetimeoftheglobalfinancialcrisisin2008?Washealeader*

oramanager*?

*Definition Leader: Envisions and articulates the purpose ormission of an

organizationandthestrategyforattainingit.

*Definition Manager: Oversees the implementation of the purpose or

missionofanorganization.

FredGoodwinwasaverystrong leader,whowasnotopentochallengeor

seeking consensus. He ran the bank his way and nobody wanted to

challengehimorgetinthewayofhisplans.

2. HowdidtheBoardofDirectors'responsetotheglobalfinancialcrisisimpact

themanagementstyleoftheCEOatRBS?

48

TheBoardwaseffectively turnedoverafter theglobal financial crises.The

government stepped in to bail out the bank which would otherwise have

failed. As the dominant shareholder and with Board representation, Fred

Goodwin was removed as CEO and the government appointed Stephen

Hester, and at the composition of the Board was also changed.

Under new management appointed by the new Board, the new CEO

adopted a very different style, much more of a manager focused on

execution of a strategy aimed at sorting out the bank's problems and

returningthebanktoprofitability.

3. To what extent did the Board's intervention during the financial crisis

influence the outcome for RBS? (and the bank's eventual bail out by the

government)

Astheseverityofthefinancialcrisisbecameapparentandthedirefinancial

positionofthebankbecameclear,itwascriticalthattheBoardinterveneto

enlistthesupportofthegovernmentandtheBankofEnglandtoensureRBS

survivalandthestabilityoftheUKbankingsystem.

4. What were the crucial lessons from the financial crisis, and the resulting

changes in leadership, management practices and corporate governance?

How are they visible in the behaviors of the current management and

leadershipofRBS?

The lessons around basic banking disciplines were stark. These included

ensuring:

• adequacyofcapitaltoabsorbfinancialshocks

• soundassetquality

• minimalassetconcentrationsegRBSwasexcessivelyexposedtoreal

estate

• adequacyofliquidityanddiversityoffundingsources

Beyondthis:

• aclearstrategywhichwasbasedongoodbusinessjudgement

backedupbyrobustanalysisandforecasts

49

• aCEOwhowouldacceptchallengeandbepreparedtoconsider

alternativeviews

• aBoardpreparedtochallengetheCEOanddemonstrategood

corporategovernance

5. TowhatextentdidtheleadershipoftheCEOandthegovernancepractices

of the Board ultimately contribute to the survival of RBS? (requiring

governmentsupport)

The new leadership and Board of RBS appointed after the global financial

crisiswere instrumental in the survival of RBS. They demonstrated a clear

vision of the purpose for the bank's existence and strategy to accomplish

thatandthisprovidedunambiguousguidanceforallemployeesofthebank

astothebehaviorsrequiredtofulfillthegoalsofthebank.

6. WhatdifferentiatedtheleadershipandmanagementstyleofRBSfromthat

ofbankswhichdidnotrequireabailout(likeHSBC)?

Prior to the financial crisis, RBS leadership and management style

personified by Fred Goodwin was leadership without accountability and

therewasanunhealthyarroganceabouthisintimidatingmanagementstyle

which instilled fear into subordinates. He pursued a simple strategy of

growthbutwithnostrategicvisionbeyondthat.Otherbanksseemtohave

moreapproachableCEO'swithclearervisionsfortheirbanksandsupported

by Boards with stricter disciplines around their corporate governance

responsibilities.

InterviewB

RBSInterview2(24.02.2016)

MynameisVivianTsolakisandIamcurrentlyinmyfinalsemester(6.semester)at

Modul University in Vienna, Austria. I am pursuing a Bachelor of Science degree

majoringinInternationalManagement.AsthefinalpartofmystudiesIamcurrently

workingonabachelorthesis.Thetopicofmythesisismanagement,leadershipand

CSRintheUKbankingsectorandIamveryinterestedinresearchingRBS.Toelevate

50

thethesisandmakethefindingsmoreinterestingandrelevant,primaryresearchis

necessary. I would appreciate if you could give me your time and expertise and

answerthequestionsbelow.

All participants of this study must take part voluntarily. Their answers to the

interviewwillbekeptanonymouslyandthereforenoresponseswillbeattributedto

anyindividualansweringtheinterviewquestions.Furthermore,afterrespondingto

theinterviewquestionsallparticipantshavetheoptiontowithdrawtheiranswersat

anytime.

1. How would you describe the corporate behavior and personality of Fred

Goodwinatthetimeoftheglobalfinancialcrisisin2008?Washealeader*

oramanager*?

*Definition Leader: Envisions and articulates the purpose ormission of an

organizationandthestrategyforattainingit.

*Definition Manager: Oversees the implementation of the purpose or

missionofanorganization.

FredGoodwinwasaveryaverystrongleaderwhowouldnotbechallenged

andevencameacrossasabully.

2. HowdidtheBoardofDirectors'responsetotheglobalfinancialcrisisimpact

themanagementstyleoftheCEOatRBS?

TheBoardchangedandsodidRBS.StephenHesterwasappointedCEOand

hecameinwithaclearmissiontofixproblemsincontrasttotheaggressive

andcavaliergrowthagendaofFredGoodwin.

3. To what extent did the Board's intervention during the financial crisis

influence the outcome for RBS? (and the bank's eventual bail out by the

government)

The perilous state of RBS at the time of the crisis was so severe that

responsibilityforthebankwastakenoutofthehandsofmanagementand

theBoard,andthegovernmenttookover.

51

4. What were the crucial lessons from the financial crisis, and the resulting

changes in leadership, management practices and corporate governance?

How are they visible in the behaviors of the current management and

leadershipofRBS?

Thelessonsarisingfromthecrisisweresticktogoodsolidbankingprinciples

inhowthebankdoesbusiness,do thebusinessyouknowandunderstand

anddemonstratedisciplineandhavegoodcontrols.This ishowthebankis

nowbeingmanaged.

5. TowhatextentdidtheleadershipoftheCEOandthegovernancepractices

of the Board ultimately contribute to the survival of RBS? (requiring

governmentsupport)

Atthetimeofthecrisis,notatall.ThenewmanagementandBoardplayeda

big role in stabilizing the bank but survival was only possible with

governmentsupport.

6. WhatdifferentiatedtheleadershipandmanagementstyleofRBSfromthat

ofbankswhichdidnotrequireabailout(likeHSBC)?

Fred Goodwin ran the bank as his own enterprise without material

accountability to theBoard.Otherbankswhichsurvivedwithoutabailout

from the government were run and managed according to commonly

acceptedmanagementandcorporategovernanceprinciples.

InterviewC

HSBCInterview1(25.02.2016)

MynameisVivianTsolakisandIamcurrentlyinmyfinalsemester(6.semester)at

Modul University in Vienna, Austria. I am pursuing a Bachelor of Science degree

majoringinInternationalManagement.AsthefinalpartofmystudiesIamcurrently

workingonabachelorthesis.Thetopicofmythesisismanagement,leadershipand

CSRintheUKbankingsectorandIamveryinterestedinresearchingRBS.Toelevate

thethesisandmakethefindingsmoreinterestingandrelevant,primaryresearchis

52

necessary. I would appreciate if you could give me your time and expertise and

answerthequestionsbelow.

All participants of this study must take part voluntarily. Their answers to the

interviewwillbekeptanonymouslyandthereforenoresponseswillbeattributedto

anyindividualansweringtheinterviewquestions.Furthermore,afterrespondingto

theinterviewquestionsallparticipantshavetheoptiontowithdrawtheiranswersat

anytime.

1. HowwouldyoudescribethecorporatebehaviorandpersonalityofMichael

Geoghegan at the time of the global financial crisis in 2008? Was he a

leader*oramanager*?

*Definition Leader: Envisions and articulates the purpose ormission of an

organizationandthestrategyforattainingit.

*Definition Manager: Oversees the implementation of the purpose or

missionofanorganization.

Duringtheglobalfinancialcrisis,MichaelGeogheganprovidedastrengthof

leadershipasisrequiredtoovercomethesignificantchallengespresentedin

a time of crisis. He led strongly from the front, and expected his direct

reportstomanageandexecute.

2. HowdidtheBoardofDirectors'responsetotheglobalfinancialcrisisimpact

themanagementstyleoftheCEOatHSBC?

The Board took confidence in Michael's knowledge of and significant

experienceinthebankingindustryandwithHSBC.Asaresult,therewasno

perceptible change in themanagement style evident throughout the bank

aftertheglobalfinancialcrisis.

3. To what extent did the Board's intervention during the financial crisis

influencetheoutcomeforHSBC?(nobailout)

WhilsttheBoardactivelyfolloweddevelopmentsinthemarketsthroughthe

globalfinancialcrisis,theprofileofHSBC'sbusinessdidnotexposethebank

tothedirectriskswhichresulted inthefailureor instabilityofotherbanks

53

such as Lehman Brothers, Citgroup and RBS. Therefore, the Board could

focusmoreonthesystemicrisksinthebankingsectorandhowtheymight

challenge thebank.However,HSBCwason such a strong financial footing

withasolidcapitalposition,goodliquiditywithdiversifiedfundingsources,

good asset quality and strong geographic and product diversification that

thebankwaswellinsulatedfromtheshocktothefinancialsystem.

4. What were the crucial lessons from the financial crisis, and the resulting

changes in leadership, management practices and corporate governance?

How are they visible in the behaviors of the current management and

leadershipofHSBC?

As I commented in response to your previous question, HSBS fared well

through the global financial crisis because of the profile of our business.

Someofthosebankswhichdidnotfarewellweredisadvantagedby:

• insufficientcapitaltoabsorbtheshocke.g.LehmanBrothers

• poorassetqualitywhichdeterioratedquicklyafterthecrisisstarted

e.g.RBS

• inadequate diversification in sources of funding and liquidity e.g.

NorthernRock

• autocraticCEO'sneedstrongBoardstochallengethemandprovide

balance

• without competent Boards supported by good corporate

governancedisciplines,CEO'scanmakepoorstrategicandbusiness

choices

Aswewerenotasadverselyaffectedby theglobal financialcrisisasother

bankswedidnotexperienceanysignificantmanagementchangeasadirect

consequence. We had a management change at the end of 2010 when

Michaelretiredbutthiswasnotconnectedtoeventsof2008.

5. TowhatextentdidtheleadershipoftheCEOandthegovernancepractices

oftheBoardultimatelycontributetothesurvivalofHSBC?

ItisclearthatMichaelGeoghegan,wellsupportedbyhismanagementteam,

hadthebankwellpositionedacrossallthekeymetricsforprudentandlong

54

termsuccessfulbankperformance.TheBoard,nodoubt,playedasignificant

role inmonitoring andmanaging the evolution and execution of all these

strategies. I would therefore say that both the CEO and the Board played

centralrolesincontributingtothesuccessandsurvivalofHSBC.

6. WhatdifferentiatedtheleadershipandmanagementstyleofHSBCfromthat

ofbankswhichdidrequireabailout(likeRBS)?

I thinkHSBChaddeveloped clearer andmore robust strategies for growth

thanmanyotherbanks.Therefore,HSBC'sgrowthwasfoundedonourcore

strengths in terms of customers, products and geographies. In contrast,

other banks such as RBS seemed to be in pursuit of growth for growth's

sake,withoutandstrategiclogic.e.g.acquisitionofCitizensBankintheUS,

acquisition of ABN Amro in The Netherlands. They were known as deal

junkies andwould lead transactions and throw their balance sheet behind

transactionswhichotherbankswouldnotdo. That'showRBSbecame the

largestbankintheworldin2008asmeasuredbytotalassets.

InterviewD

HSBCInterview2(21.03.2016)

MynameisVivianTsolakisandIamcurrentlyinmyfinalsemester(6.semester)at

Modul University in Vienna, Austria. I am pursuing a Bachelor of Science degree

majoringinInternationalManagement.AsthefinalpartofmystudiesIamcurrently

workingonabachelorthesis.Thetopicofmythesisismanagement,leadershipand

CSRintheUKbankingsectorandIamveryinterestedinresearchingRBS.Toelevate

thethesisandmakethefindingsmoreinterestingandrelevant,primaryresearchis

necessary. I would appreciate if you could give me your time and expertise and

answerthequestionsbelow.

All participants of this study must take part voluntarily. Their answers to the

interviewwillbekeptanonymouslyandthereforenoresponseswillbeattributedto

anyindividualansweringtheinterviewquestions.Furthermore,afterrespondingto

theinterviewquestionsallparticipantshavetheoptiontowithdrawtheiranswersat

anytime.

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1. HowwouldyoudescribethecorporatebehaviorandpersonalityofMichael

Geoghegan at the time of the global financial crisis in 2008? Was he a

leader*oramanager*?

*Definition Leader: Envisions and articulates the purpose ormission of an

organizationandthestrategyforattainingit.

*Definition Manager: Oversees the implementation of the purpose or

missionofanorganization.

Michael Geoghegan provided positive leadership at HSBC. He knew his

strengthsandstrategiesandexpectedeveryoneonhisteamtobethesame

andmanagetheirteamsaccordingly.

2. HowdidtheBoardofDirectors'responsetotheglobalfinancialcrisisimpact

themanagementstyleoftheCEOatHSBC?

Aftertheglobalfinancialcrisis,theBoardbecamemoreactivelyvisibleand

engagedinthebank'sbusiness.ThatseemtomakeMGevenmorefocused

onthebank'scorecompetencies,strengthsandstrategies.

3. To what extent did the Board's intervention during the financial crisis

influencetheoutcomeforHSBC?(nobailout)

I don't think the Board really intervened. It looks like the y were more

activelyinvolvedbutintheend,thatwasjustobservingMGcarryingonwith

executionofthesamestrategyinthesameway.

4. What were the crucial lessons from the financial crisis, and the resulting

changes in leadership, management practices and corporate governance?

How are they visible in the behaviors of the current management and

leadershipofHSBC?

The lessonswere simple - stickwith thebusiness you knowandwhat you

aregoodat.Therewerenochangesinleadershipormanagementpractices.

The bar was raised on the level and intensity of corporate governance.

TherewasnosignificantmanagementchangesatHSBC.Theleadershipteam

andtheirstyleremainedquitestableandpredictable.

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5. TowhatextentdidtheleadershipoftheCEOandthegovernancepractices

oftheBoardultimatelycontributetothesurvivalofHSBC?

The leadership and the Board can be proud of the significant role they

playedinrunningandmanagingHSBCtightlysoastodeliver itsuccessfully

andintactthroughthefinancialcrisis.

6. WhatdifferentiatedtheleadershipandmanagementstyleofHSBCfromthat

ofbankswhichdidrequireabailout(likeRBS)?

HSBChadaclearandunambiguousstrategy.RBSandotherbankswereless

preciseandsloppy,evencarelessintheexecution.