Corporate Governance RBS
Nicole Kraemer (413991)
The rise and fall of the Royal Bank of Scotland is characterized by poor corporate governance which allowed for the complete dominance of the executive management over the board of directors and a massive principal-agent problem. Positive social dynamics and the power of weak ties allowed for compliance while intimidation and bullying tactics silenced questions, concerns and opposition. The board’s utter compliancy and borderline negligence enabled rampant, unchecked empire-building at the cost of shareholder value and led to a spiral of unaccountability and gross incompetence. Stakeholders’ loss of confidence from misinformation and misdirection was an inevitability that sealed …show more content…
When confidence vanishes however, bank runs occur and without cash reserves there is no way for the bank to return citizens’ money.
By October, the vaults of RBS were empty of cash reserves and no bank was willing to lend them money. The UK government was forced to intervene and bailed RBS out for £20bn using taxpayer money. Shareholders were not the only ones devastated. Many depositors lost their savings when the reserves ran out and economy was slow to recover after the crash. Social-corporate responsibility took on new importance in the wake of the recession, particularly among financial institutions.
The RBS case illustrates the disastrous combination of a domineering CEO and an impotent board. Although the absence of a competent monitory board is rarely felt when times are good, when things turn bad it can be the only thing standing between the firm and total destruction. Board autonomy was compromised at RBS through questionable succession practices, managerial-board intermingling, social dynamics, fear of repercussion and passive-compliancy bordering on negligence.
Some recommendations to guide future investments with banks would be to pay special attention to board autonomy and whether the board is taking advantage of all the powers given to them. Power to curtail management is meaningless if the board chooses not to exercise its rights. Board autonomy should also be protected – no board member should run the risk of repercussion for speaking