to executives at some of the world’s top banks despite disastrous
results and massive writedowns. Neville Richardson, CEO of the UK’s
Britannia Building Society, tells William Cain why
big bonuses in hard times do not tally with its ‘fairness’ branding
agenda.
Neville Richardson, CEO of Britannia Building Society, the
UK’s second-largest mutual, has criticised some of the huge bonuses
awarded to banking executives.
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Richardson said the level of executive bonuses awarded this year
has sent out the wrong message to consumers in a market which
suffered falling profits and large subprime writedowns. UK
government figures, for instance, show bonuses in the City of
London were among the highest on record in the first three months
of 2008 and have come under the scrutiny of the FSA, the UK’s
financial services watchdog.
Richardson told RBI: “It is counterintuitive in that
the whole industry has been feeling the pressure and the whole
industry has taken some pretty big writedowns. The counterintuitive
piece is for the vast majority of people to get big bonuses.
“Individual by individual, you can put a case forward. But when
you look across the entire financial services piece, you would
expect on that basis to have seen fewer bonuses. But I have not
seen much reduction.”
Britannia’s bonus structure is calculated across a range of
customer service, employee and stakeholder targets, but is
underpinned by a profit target, which meant Richardson did not
receive a bonus last year. He said it is a fairer system and ties
in with the mutual’s “building a fairer society” marketing
programme.
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By GlobalData“It’s up to banks and building societies to decide for
themselves. But I would say this differentiates us – and I can
stand up in front of the members of Britannia and our own people
and validly claim a level of fairness. At a time when results are
under pressure from many, many organisations, it sends out the
wrong signal for the chief executive to be receiving very, very
large bonuses.”
Consumer confidence is key
Richardson’s comments are unusually forthright for someone
within the industry and come almost a year after the bank launched
its “fairness” branding push. He said the concept is particularly
apt in today’s financial climate. “Confidence: that’s the key word.
The general public’s level of confidence has reduced significantly.
That’s why our brand campaign, at a time when people are losing
trust in financial services organisations, to make it clear we
believe we are a fair organisation, means a lot,” he added.
Building societies traditionally have a good record in customer
satisfaction, significantly outperforming their commercial bank
peers – an area where Britannia is particularly strong. One of the
key areas it focuses on is customer advocacy – members who would
recommend the society to family and friends – a figure which
currently stands at 85 percent and puts it among the industry’s top
performers.
Quarterly surveys are carried out questioning 800 randomly
sampled members who recently transacted with the society to monitor
performance. The society also closely monitors its performance in
employee satisfaction and engagement and was voted number two in
the Sunday Times’ Best Big Companies to Work For survey; in a
separate category Richardson was awarded the top prize for
leadership.
Britannia also tracks processes and financial performance in its
benchmarking – but Richardson emphasised it was a “balanced
scorecard approach” across all four quadrants (customer service,
employee satisfaction, processes and financial performance). And he
said Britannia did not need to be the biggest building society to
achieve its aim of being Britain’s best mutual.
“The straight answer: do you have to be the biggest to be the
best? No, you don’t,” Richardson said. “What you have to be, which
is why we measure across the quadrants and the balanced score card,
is what does best look like in each area.
“We don’t have to make acquisitions, but it would be foolhardy
to say we won’t. We’re an organisation which has been formed by
numerous mergers itself. If we are the product of 60-odd mergers
over the years, why wouldn’t we be in the future? Does that mean we
have growth as a major objective? No, we haven’t in this
climate.”
Britannia’s financial performance was relatively weak compared
to its building society peers because it chose not to compete in
the low-margin, high risk mortgage business and because wholesale
funding costs increased. Profit before tax was £115.2 million ($224
million), down from £130.4 million in 2006.
That compared with modest growth among the country’s top ten
mutuals for 2007, where average total pre-tax profit was marginally
higher than in 2006, rising 1.2 percent. The results of Nationwide,
the UK’s largest mutual, published late in May, reflected the wider
mutual market, showing considerable success in the retail deposit
market but constrained mortgage lending. Net retail deposits for
Nationwide were £9.1 billion in the 12 months to April, giving it
an estimated UK market share of 19 percent.
Deposit flows up markedly
Net inflows of deposits at the UK’s 59 building societies
increased markedly in 2007, rising £16 billion. They have also
increased in the early part of this year, with the figures in
January and February the highest in ten years and the figure for
March the highest ever.
But Nationwide saw a 40 percent drop in home loans in its full
year results, which saw its market share fall from 11 percent to
around 7 percent. Mortgage lending fell to £6.7 billion from £11.2
billion the previous year.
Chief executive Graham Beale said the mutual would run the
business on a cash flow model until he was confident normality had
returned to the marketplace. Britannia has also pared back its
mortgage lending as a result of uncertainty.
Richardson said: “We’ve restricted our mortgage lending because
people’s view of risk has changed and as the credit crisis has hit,
loan losses have increased. People have reined back because of the
general uncertainty about what will happen in the future.
“We are sitting with liquidity way above the statutory
requirements. But we, as with Nationwide, are holding back on
lending because entering into a 25-year commitment when market
conditions are tough is something you have to be very careful
about.”
Beyond Nationwide, Britannia and, to a lesser extent, West
Bromwich, most building societies have not used secured forms of
funding because of difficulties securitising member mortgages,
according to a recent Moody’s report. This has meant that mortgage
lending at some of the smaller societies has not been hit in the
same way.
The UK government scheme to accept mortgage-backed securities in
exchange for bonds has gone some way to easing the liquidity
shortage in the financial markets. There have been some signs of
success: HBOS completed the first securitisation of any mainstream
European issuer since the start of the credit crisis.
But that does not signal that problems in the money markets are
near to being solved. One senior industry figure said it was like
“getting the first rowing boat full of survivors out of Dunkirk and
cheering”.
Richardson said: “The Bank of England facility has helped from a
position where, if 12 months ago views were very optimistic, they
then declined because of a combination of Northern Rock and
cessation of lending on international markets, increased cost of
funding because of Libor and restrictions and subsequent other
issues where confidence was moving out of the market. I think this
move was a step in the right direction.”
In such difficult financial conditions, it is hard to imagine
there will be much consolidation in the building society sector in
the near future, even though there is room for it. Nationwide and
Britannia have each recently integrated acquisitions into their
businesses, but both are likely to ride out the current uncertain
market conditions before considering significant future deals.
Outgoing Building Societies Association (BSA) chairman Iain
Cornish, also the chief executive of the Yorkshire Building
Society, summed up the uncertain times ahead in his farewell speech
at the BSA’s recent annual conference.
He said: “Whatever the scenario, societies are very well placed
to succeed. We will clearly have to focus on running our businesses
in a lower growth and higher risk environment, with all that
entails, but for me the most important priority will be to go on
focusing on the needs of our savers and borrowers above all
else.
“In my view that should be the core purpose of any mutual, and
we should pursue it with absolute conviction and confidence. And I
say as a society, whose own FSA supervisor once queried whether the
board was concerned that we didn’t seem to be growing at the same
rate as Northern Rock.”
TRENDS
Banking bonus debate heats up
Neville Richardson’s forthright comments on bonuses come as the
UK’s FSA announced it was considering taking remuneration
structures into account when deciding on the overall level of a
bank’s exposure to risk. There are concerns that bonus schemes
reward excessive risk taking, which some commentators claim have
exacerbated the current financial crisis.
Jon Moulton, chairman of private equity group Alchemy, argued in
front of the Treasury Select Committee, which works closely with
the FSA, against excessive banking bonuses.
He said they had led to short-term decision making and that the
only method to bring them down would be to regulate. He added it
was likely there would be serious downward pressure on bonuses,
which would affect all bankers – including in retail.
He told RBI: “I suspect they (the FSA) will come up
with a basic idea that if bonuses exceed some percentage of
salaries, they will be top quartile bonus, and will be deemed to be
a higher risk bank. That would mean they would be quite literally
faced with the possibility of needing more capital if they want to
pay big bonuses – which is a pretty effective method of wiping out
the bonus culture quite quickly.
“I think the banks will be more regulated, they’ll have tighter
capital and they’ll probably get stopped from doing things which
can’t be regulated. As you get toward retail banks, that becomes
imperative. The last thing you want is retail banks being deeply
innovative with unusual structured products.”
Angela Knight, chief executive of the British Bankers
Association (BBA), also spoke in front of the Treasury Select
Committee on the subject of bonuses. She said that the matter was
not solely a UK issue, and needed to be addressed from a global,
rather than a national level. There is concern that heavy-handed UK
regulation on executive remuneration could deter some of the
industry’s top talent from working in London, and undermine it as a
financial centre.
Responding to claims it sent out the wrong message to award
executives huge bonuses when banks themselves were struggling, a
BBA spokesman said: “Using remuneration as something to send out a
message to anyone is a tricky concept to grasp. Rewarding
innovation and expertise is what has made London a world financial
centre.”
Britannia’s Richardson said he was also sceptical about whether
the FSA plan would work, because the system would be complicated
and difficult to implement.
He said: “Suppose you have an organisation which had been
performing very poorly and had a poor return on capital, and was in
a turnaround situation – it may be that chief executive actually
deserves the bonus. You could have an organisation which is
producing a fantastic return on capital which should be doing
better.”
