Knives are out for Fred, but non-executive directors must share the blame

Non-executive directors at RBS appear to have been a bunch of yes men and have much to answer for

The knives are out for Sir Fred Goodwin, the former CEO of Royal Bank of Scotland, who last year was officially named “the “world’s worst banker.”

The latest developments include that the Liberal Democrat MSP, Tavish Scott, has called for a Serious Fraud Office inquiry into the bank’s £12 billion rights issue last year; that former Labour deputy leader John Prescott is calling for Sir Fred to be stripped of his knighthood; and that the Prince of Wales has sacked Sir Fred as chairman of the Princes Trust.

There’s also a long piece by John Penman and Anna Burnside in yesterday’s Sunday Times Scotland (The bosses who broke Britain). The most revealing quote here comes from an unnamed businesswoman who had dealings with Fred. She said: “I found him cool to the point of rudeness, but the thing that stands out in my mind is how snivelling, whimpering and servile his staff were in front of him. They practically genuflected in front of him; it was nauseating. I got the feeling they were terrified of him.”

Fred certainly has a lot to answer for — particularly his hubristic quest for scale at precisely the worst point in the economic cycle and the shocking way in which he treated some subordinates.

However, it is increasingly dawning on people that even Fred could not possibly have acted in isolation at the helm of a bank with 170,000 employees. For a start, he had a board of directors, including 12 non-executive directors, as well as external advisers and auditors, around him, and one of their roles was supposed to be to ensure that the chief executive was managing the bank resonsibly.

Fred’s boardroom colleagues — including Sir Tom McKillop, RBS chairman from May 2006 to date, as well as people like Archie Hunter, who was chairman of the bank’s audit committee, also have a lot to answer for.

Other non-executive directors who appear to have been asleep at the wheel include Colin Buchan (ex UBS Warburg investment bankers), Bill Friedrich (ex Shearson & Sterling law firm partner), Joe McHale (ex JP Morgan investment banker) and Sir Steve Robson (former senior civil servant and former deputy permanent secretary at HM Treasury) – all of who sat on bank’s audit committee – as well as other non executive directors such as Peter Sutherland, former attorney general of Ireland and Jim Currie, former director general at the European Commission.

For the time being, none of these men seem willing to come blinking into the light of day and admit they share responsibility for RBS’s disintegration and collapse.

Stephen McGinty did an excellent job at exposing some of them in The Scotsman last weekend (The Silent Nine).

He set out to speak to nine of RBS’s non-executive directors in order to put a few simple questions to them. But few deigned to bother exchange sensible words with him. And the only one who seems to have said anything — Hunter — actually revealed quite alot about his own uselessness with the few words he did utter.

Hunter told McGinty: “Oh my goodness… Well, I would be surprised if you could get them [the nine] to speak to you. As non-executive directors, it is really not appropriate for me to make any comment at all.”

When asked if he had failed shareholders, Hunter — a former senior partner of KPMG in Scotland who was paid £162,000 by RBS last year, and also sits on the boards of Macfarlane Group and Edinburgh US Tracker Trust — failed to provide an answer.

Astonishingly, given that, as with other non-executive directors, his first duty is supposed to be to the shareholders and not to bank’s management, Hunter told McGinty that he was only prepared to comment after he had checked with the bank!

Perhaps the elevated fees that Hunter was being paid mean that he had “gone native” at the Gogarburn-based bank, on whose board he has sat since September 2004? Perhaps he started to see his role as shielding the bank’s management rather than looking after shareholders’ interests?

Most of the people I speak to about Hunter say he was not a particularly good auditor and would have been hopelessly out-of-his-depth as chairman of RBS’s audit committee. Those I have spoken to about Hunter in recent days have variously described him as “affable”  and “sycophantic to the likes of Angus Grossart”.

What audit committees, and non-executive directors, are for

Audit committees, such as the one that Archie Hunter chaired, are not just about signing off the accounts or appointing the auditors. Over and above these tasks, audit committee is meant to perform the critical function of monitoring risk right across the organisation, and not just the financial risks, among other critical corporate governance roles.

In 2003 Sir Robert Smith, currently chairman of Scottish & Southern Energy and Weir Group, produced some guidelines about audit committees as part of a government-sponsored review which were later absorbed into the UK’s Combined Code of Corporate Governance, which was itself first introduced in 1998. Smith said that, in addition to ensuring the integrity of a company’s financial statements, the audit committee should oversee a company’s internal financial controls and risk management systems.

Smith added that audit committee members, all of whom are non-executive directors at a listed firm, need to be “tough, knowledgeable and independent-minded.”

Hunter and other members of RBS audit committee seem to have fallen far short of this.

This blog post was published on 26 January 2009