By Ian Fraser
Published: Sunday Herald
Date: 28 September 2008
NONE OF the 15 board directors of Halifax Bank of Scotland should be permitted to join the board of the merged Lloyds Halifax banking and financial services group.
The stark claim comes from Professor Stewart Hamilton, one of Scotland’s leading business academics. The professor of finance and accounting at the leading European business school IMD, based in Lausanne, Switzerland, told the Sunday Herald: “I don’t think a single member of the HBOS board should remain a member, if this deal goes through. For them to have appointed Andy Hornby, a non-banker, as the chief executive was sheer folly. It’s extraordinary that they appointed someone with such limited knowledge of the banking sector. I think Hornby suffered from the arrogance of the Harvard MBA in assuming that he could run any type of business.”
Analysts have commented that out of HBOS’s eight non-executive directors, including the chairman Lord Stevenson, only one has any banking experience – John Mack.
But Mack, who formerly worked at Bank of America and the Japanese bank Shinsei, only joined the HBOS board in May 2007. Financial experts believe that corporate governance failures – including the lack of a non-executive with knowledge of banking – were a key contributor to the bank’s near demise. Among the bank’s seven executive directors, five have prior banking experience. However, only one, Colin Matthew, is listed as a fellow of the Chartered Institute of Bankers Scotland.
The 15 HBOS board members now face the ignominy of having to make a public admission that the strategy they aggressively pursued for the past seven years has been a failure. The reason the strategy failed is that – like Northern Rock’s – it was focused on winning market share in the UK banking market; was far too reliant on the UK’s tottering property markets; and was over-dependent on wholesale funding.
Colin McLean, chief executive of SVM Asset Management, said that necessity to compile an offer document in the next couple of weeks will require the board to effectively “come clean”. He said: “In the offer document, the board is going to need to be absolutely candid about prospects. An offer document requires far more verification than a regulatory news service announcement or press release, which is all we’ve had so far.”
McLean, one of Scotland’s most successful fund managers, added: “To recommend accepting a bid at a huge discount to assets, as they’re doing, they’re going to have to tell shareholders that they believe their bank has no independent future, that their business strategy was not viable and that no-one else other than Lloyds has any interest in taking them over. It’s going to be a hard ask.” Professor Hamilton, co-author of an acclaimed study named Greed And Corporate Failure, added: “These guys [the HBOS board] were asleep at the wheel.”
It remains unclear how many of HBOS directors are expecting to be given berths on the board of the enlarged bank if a deal completes. However, 10 days ago, Lloyds TSB’s chairman Victor Blank revealed that some sort of role is to be found for Hornby.
Hornby last week sought to deflect criticism about his role in the collapse of HBOS, insisting that he was only pursuing the strategy set by his predecessor Sir James Crosby.
Shock at the demise of the bank has given way to anger as members of Scotland’s business and financial community ask how the era of Hornby and his chairman Stevenson effectively led to the destruction of a 300-year-old institution. “It’s extraordinary they did not adapt their ‘growth at any costs’ strategy to suit different market conditions,” said one Edinburgh financier. “Dennis Stevenson has a lot to answer for.”
Last week, Gordon McQueen, a former finance director at Bank of Scotland and former head of treasury at HBOS, said that one symptom of the malaise at HBOS was that employees whose role was to grow the loan book were given lavish bonuses while those whose role was to grow deposits were given far less generous incentives.
Hamilton, a chartered accountant and former employee of the Edinburgh-based investment house Ivory & Sime, said that he believes another reason banks such as HBOS and Royal Bank of Scotland are in difficulties is the weakness of their audit committees, and perhaps also the compliance of their auditors. He said that he did not see why it might at some stage be possible to buy out the former Bank of Scotland from the Lloyds Halifax combine. “If there’s a will, there’s a way. I don’t see why that would be impossible to do. You saw how Scottish business people rallied round to prevent a takeover of Scottish & Newcastle in the early 1990s.”
On Friday, John Fingleton, chief executive of the Office of Fair Trading, confirmed that there is no prospect of the planned HBOS Lloyds merger being reviewed retrospectively by the UK competition authorities.
Even so, the OFT is still going to examine the merger and is due to present its findings to John Hutton, secretary of state for enterprise and business, by October 24. Scots with reservations about anti-competitive aspects of the deal are being encouraged to submit their views to this inquiry.
Even though a government waiver has apparently been issued on the deal, competition lawyers are warning that, once the merger completes, Lloyds Halifax could find itself coming under regulatory scrutiny further down the line if it is seen to be behaving abusively or if the retail banking market becomes “structurally dysfunctional”.
This article was the business splash in the Sunday Herald on September 28th, 2008