1 December 2011
The boardroom blunders, and particularly the failure of the non-executive directors, at Lloyds Banking Group have been brilliantly highlighted in a leader article headlined Black Horse Blues in today’s Financial Times, .
The article highlights a string of corporate governance errors made by the Lloyds’s board, which since September 2009 has been chaired by Sir Win Bischoff, a former Citigroup banker (pictured left). As I have pointed out in an earlier blog post, Bischoff is a man who is easily misled.
The FT suggests that Bischoff, formerly with Schroders, and his boardroom chums at the Gresham Street-headquartered Lloyds have made a number of catastrophic errors. These have included:-
(a) Hiring António Horta-Osório, a man who lacked appropriate experience of running a large and complex bank with challenging “legacy issues” like Lloyds, as chief executive.
(b) Allowing Horta-Osório to alienate most of the bank’s senior management by appointing several of his “Iberian” cronies, now known as the “conquistadores derrotados” (failed conquistadors) to senior roles at the increasingly dysfunctional banking group.
(c) Failing to recognise that these “conquistadores”, who have been hired at great expense, owe their loyalty to Horta-Osório and not to the bank, and will probably leave when Horta-Osório does (i.e. soon).
(d) Placing so much faith in their chosen CEO they gave him too much autonomy – just as the board of RBS gave too much autonomy to Sir Fred Goodwin in 2003-08.
Here’s an edited version of the FT’s Black horse blues:-
Much of the criticism heaped on Lloyds since the bank revealed that its chief executive, António Horta-Osório, would stand aside because of illness has centred on the uncertainty caused by his absence. The board has been chided for appointing a man whose hands-on working style may be unsuited to such a large institution. There have been calls for Lloyds to replace Mr Horta-Osório, rather than waiting to see if he can return to his post.
While these are important questions for Lloyds investors, they are not the only ones raised by the story. Broader issues of governance are involved in the way his hiring was handled. These do not redound to the credit of the board.
The decision to bring in an outside chief executive was reasonable. It reflected the view of the bank’s largest investor, state-owned UK Financial Investments, that Lloyds needed new management to integrate recent acquisitions and improve its performance . Mr Horta-Osório was a fair choice …
Whether Mr Horta-Osório’s frail health could have been foreseen is moot. The real failure came in allowing him to bring with him from Santander a posse of managers – the so-called conquistadores – one of whose recommendations seems to have been their intense loyalty to him. These individuals now occupy the top operational roles at Lloyds. It is unclear whether they will even stay if Mr Horta-Osório does not return.
Given Lloyds’ systemic importance, it is hard to understand how the board thought it appropriate to allow this. While it is reasonable for a chief executive to pick his team, it is a different matter if he surrounds himself with hand-picked allies brought in en bloc from a previous employer.
It is hardly as if Lloyd … could not have filled the posts internally. Not only would this have side-stepped paying premia to outside hires, it would have precluded conflicts of loyalty and bolstered morale. Equally importantly, it would have preserved institutional memory in a lender accounting for more than a quarter of the UK banking market.
One of the lessons of the crisis, surely, was that giving excessive authority to a high-flying boss is a mistake. Sir Fred Goodwin’s fall at Royal Bank of Scotland exposed the fallacy of that approach. It is troubling that Lloyds’ chairman, Sir Win Bischoff, and the rest of the board failed to heed it.