Interview with Neil Roden, RBS: Heavy interest

HR was not responsible for the crisis, argues RBS HR director Neil Roden

Neil Roden leans back in his chair and considers the past 12 months at the Royal Bank of Scotland. What was it like? Did he ever want out? “Actually,” he says, “I’ve had some very interesting experiences.” This must be the ultimate in HR sangfroid. After all, RBS nearly went to the wall as one of the biggest victims of the credit crunch. The government has had to step in three times with extra finance. Now 84 per cent owned by the taxpayer, RBS has announced nearly 20,000 job cuts, with more to come, has sold vast chunks of its business – 26 per cent of assets have already gone – and has replaced most of the board.

Five senior managers also left, but Roden, head of HR for the past 12 years, was one of the survivors. Anticipating that Stephen Hester, who took over from Sir Fred Goodwin as chief executive a year ago, might want to make a clean sweep, Roden offered his resignation. However, Hester rejected it. “I don’t think he saw HR as being in the firing line… more as part of the solution,” says Roden. 

From his own point of view, the experience of being in the eye of the storm during such an historic upheaval was unparalleled and he relished the challenges ahead. Also, he felt a loyalty to the organisation.

He agrees with Hester that HR was not to blame for the crisis, arguing that RBS would have stayed profitable if it hadn’t made the mistake of taking over Dutch bank ABN Amro. Although RBS declared a £24.1 billion loss in February (see RBS timeline, below) – the biggest loss in UK corporate history – all but two of the group’s businesses made a profit in 2008. Those that didn’t were Global Banking and Markets – the international investment banking arm – and Asia Retail and Commercial Banking, both saddled with a large quantity of ex-ABN Amro business.

However, most commentators have blamed the credit crunch at least partly on a reckless, bonus-fuelled culture in investment banking, coupled with lax lending in the retail banks. As HR is normally eager to claim responsibility for setting workplace culture in good times, shouldn’t it shoulder some of the blame in bad times? Roden points out that few considered the culture inappropriate at the time. Asked if there wasn’t too much of a buccaneering spirit about banking, he protests: “Wouldn’t Richard Branson describe himself as buccaneering? Isn’t Alan Sugar buccaneering? I think this spirit is good when things are going well. It’s only seen as bad in a downturn.”

He also believes that borrowers have to take some responsibility: “I wasn’t aware that Northern Rock was forcing people at gunpoint to take mortgages.” 

So what went wrong? “There was a failure in the risk management process and a failure of management to understand what was happening,” he says. 

“Also, 99.9 per cent of people didn’t see the crisis coming and it built up over a period of time: it was months, even a year in the making. When I look back now, it is clear it was primarily a financial rather than a people issue.”

HR may reject responsibility for the crisis, but it certainly has a role in dealing with the fallout. Most important, it needs to re-engage employees who have been buffeted by bad news throughout the year, culminating in last month’s EU requirement for RBS to sell off its Direct Line and Churchill insurance companies, 318 branches and part of its investment banking business. Although these sales will take place over four years, the Unite union, which represents many staff, predicts it will result in thousands more job losses as buyers rationalise staffing. They would come on top of 9,000 redundancies announced in April in the business services division, 3,700 in early November in the UK branch network and several thousand more in investment banking and the retail banking head office. Of the 19,700 job cuts announced since October 2008, 13,700 are in the UK.

Although these losses are about cost-cutting and efficiency, RBS maintains that many would have occurred anyway, without the crisis, as the group upgraded its technology. Roden says the focus in recent years on integrating new businesses meant there was less time to update systems. 

Unite disputes the need for such job cuts, especially in the branches where it says about one-third of customer-facing staff will go. The union also argues that employee morale is very low and this will make matters worse. Rob MacGregor, Unite’s national officer for the finance and legal sector, says: “It’s hard to overstate the change wrought in the company. This organisation reaped record profits year after year. So when the collapse came, most employees were absolutely devastated and couldn’t believe what was happening. Most people were reasonably happy working for RBS in the past, but it’s not the case now.”

The results of the bank’s annual staff engagement survey, released last week, reflect this, although the research was completed in September before the latest wave of bad news. It’s also worth noting that the final week of last year’s survey, used as a comparator, coincided with the collapse and government rescue.

The number who are satisfied with and engaged in their jobs has fallen by 10 per cent on the year to the level of two or three years ago, while the number of people who expect to leave RBS has increased. Job security is their biggest concern – down by 14 per cent – with pay also being an issue. Pride in the organisation has also taken a severe hit, although the new executive team received a positive score.

Roden says scores are poorest in the businesses worst hit by the crisis at the time of the survey. “Engagement has gone down, but not through the floorboards. In the insurance business, their scores went up; in investment banking, not surprisingly, they have gone down. Part of the value of the survey is that it helps you to understand these differences.

“I think a number of people felt let down. Also, we had very high employee share ownership and a lot of people are unhappy about that [because the share price crashed]. There are a lot of people who were hurt, whose pride was hurt, and many people were disappointed in the leadership.”

Despite this, staff turnover is stable. But Roden knows he must act to stem the potential flow of talent out of the organisation once the economy begins to recover. There are businesses where disillusion or poorer pay prospects mean many people have moved already – and it is often the most talented people. In Singapore, about one-third of RBS Coutts staff – roughly 70 people – have recently jumped ship. Roden says they moved to rival banks not operating the G20 summit agreement on bonuses (the deal links pay to long-term performance and, among other things, bans multi-year guaranteed pay deals and claws back bonuses in the event of losses). 

With the new boom in investment banking, some competitors are hiring quite aggressively. And Roden believes there is a danger of rivals leaving the UK and setting up in more attractive economies where they can continue to pay by different rules.

Having said that, he feels that, as long as the bank is maintaining market rates, pay is not the main issue in attracting and retaining talent or re-engaging the workforce. So what is? Roden lists a well-communicated strategy, career prospects, good leadership – with a focus on leadership development – and strong performance management. On the first, Hester has set out a new, group-wide strategy with five new “themes” or goals. They are: 15 per cent return on equity; top-tier competitive position in leading customer franchises; proportionate use of balance sheet risk and funding; organic growth; and customer support. As for leadership, it was decided to be upfront about the job losses that were needed in the belief that people had to know the worst and understand where the bank was going. 

There is a culture change, with more open and regular communication so employees can, as RBS puts it, “engage with leaders on the organisation’s future”. Starting at the top with conferences and calls between Hester and the top 350 leaders, communication is cascaded through the organisation.

“Stephen has a very different style to Fred [Goodwin],” says Roden. “A little bit less formal, a bit more relaxed. Both were interested in results, but he is much more focused on communication and performance management.” Roden says he got on with Goodwin, adding: “I think people in the organisation have a lot of sympathy for him. He was probably too fêted on the up and too criticised on the way down. He became a personification of the credit crunch banking crisis.”

Roden predicts that the group will now be “less dependent on one person and slightly more collegiate and collective”. Goodwin built RBS into a vast global enterprise, focused on growth, with businesses setting their own strategy. Hester will run a much smaller bank and needs to ensure that staff and investors are clear about its direction. 

Rather than billing the transition as a culture change programme, RBS decided on a more subtle approach, updating the executive performance assessment process to align to the group’s five new strategic priorities. This is supported by the launch of 360-degree feedback for managers and a revised executive leadership programme to develop the capabilities to deliver the strategic plan. Hester is sponsoring the new performance assessment process – and set the ball rolling. When PM interviewed Roden, he had just completed his comments on Hester. Roden and his team have also created a new development programme for senior leaders, piloted in October and due to start in the New Year.

Judging by the employee survey results, this approach has been successful. Ratings for communications, efficiency and performance management went up alongside better leadership scores.

At the same time, Roden is intent on providing an improved HR service. This includes updating HR systems in line with the group-wide drive to improve technology. “We are applying lean techniques to HR, making processes more customer-centric, so dealing with HR is more hassle free,” he adds. 

Looking ahead, Roden is cagily optimistic: “It would be nice to think in a few years’ time that the organisation had returned to profitability and dealt with its issues. There would be some satisfaction in that.” But it’s a safe bet there will be some more “interesting experiences” along the way.

RBS’s new pay and bonus structure

Politicians and the media have lambasted RBS for awarding high pay and bonuses despite having to be bailed out by taxpayers. So do the criticisms stand up? 

Executive directors on the RBS board will receive no bonus for performance in 2008 and no salary increase in 2009. They will have no cash bonus for 2009, but can receive a bonus in shares, deferred until 2012, which could be clawed back [as per the G20 summit agreement on bonuses]. 

Other executives across the group have had their salaries frozen in 2009, although some employees essential to the bank’s recovery who might otherwise be “at serious risk of leaving” will receive bonuses paid in three annual instalments from 2010 in RBS bonds. The bonds will represent “subordinated debt”, which means that, if the company becomes insolvent, the holders are less likely to get their money than the main “senior debt” holders, but more likely than if the payment was in shares.

For 2009, the bonus for employees with an annual salary of above £39,000 will be paid in three annual instalments from June 2010. Those with salaries below that may receive cash bonuses of up to £2,000 to be paid in March 2010, with larger sums deferred.

‘Shock, anger and a feeling the media was unfair’

Elaine Arden describes it as “the week when everything went ‘boom!’” – the days in October 2008 when the government had to step in to rescue RBS and chief executive Sir Fred Goodwin resigned.

What did it feel like for ordinary staff inside the sinking ship? “There was shock, anger at the leadership and also a feeling that media coverage was unfair,” recalls Arden.

“There was a period,” she adds, “when there was a real furore about bonuses and ‘greedy bankers’ and my people were saying, ‘but that’s not us’.”

Arden is the HR director of RBS’s business services division, covering 45,000 service centre and operational employees, IT specialists and support staff. Over half are UK-based. 

“They went from being quite proud to being vilified: having to go down the pub or golf club and ‘admit’ they were from RBS,” Arden says. 

Four months later, the company announced the biggest loss in UK corporate history. A few weeks after that, the division was told it would have to cut 9,000 jobs, half of them in the UK. 

Arden says she and colleagues in the management team decided to be upfront about the job cuts rather than drip feed the news through the year. It fitted the new culture of more open communication. HR was also closely involved in the review of the division that led to the cuts: “We were aiming to be very, very lean and take out bureaucracy where we found it, remove redundant functions and take out layers of management,” Arden says. “We did some benchmarking and proposed maximum layers and spans of control.”

As the firm is unionised, there was a formal consultation with Unite, a process that forces managers to articulate detail on their proposals. 

“If we didn’t have a trade union, I’d want to do that anyway,” says Arden. 

The HR team worked with senior managers to prepare them to lead the change. The announcement was kept under wraps so that people didn’t hear the news through the media and was sent out to everyone in the division on the same day.

Each part of the business then went through a process of identifying the jobs that would go – supported by a website, background materials and a workshop for senior managers. About half the job cuts have now been made, mostly through voluntary redundancy and natural wastage – only 6 per cent were through compulsory redundancy.

RBS timeline

1727-2007: RBS is founded in Edinburgh. It grows to become the world’s fifth largest bank through acquisitions including NatWest, Coutts and Ulster Bank

2007: RBS takes over ABN Amro for £48bn in a consortium with Santander and Fortis

Aug 2007: Failure of sub-prime mortgage market starts credit crunch

April 2008: Signs of trouble emerge with RBS announcing rights issue to raise £12bn

Aug 2008: Interim results show first loss in 40 years

Sep 2008: Lehman Brothers collapses

Oct 2008: Government invests £20bn to rescue RBS, giving taxpayer a 60 per cent share, and provides £17bn for Lloyds TSB and HBOS. CEO Fred Goodwin quits and is replaced by Stephen Hester the following month

Jan 2009: Government announces more cash for banks, in effect nationalising RBS by raising state holding to 70 per cent. Creates state-backed insurance scheme against loans defaulting

Feb 2009: RBS posts largest loss in UK corporate history – £24.1bn

Apr 2009: Bank announces job losses of 9,000 globally, including 4,500 in UK

Jun 2009: Fred Goodwin volunteers to reduce his pension to £342,500 after public and media protests

Aug 2009: Hester sets out five-point strategy

Sep 2009: 2009 staff survey starts

Nov 2009: RBS agrees to sell off insurance business, commodity trading arm, credit payment and 318 branches over four years to meet EU requirements. To help the bank meet FSA regulations, it receives up to £33bn extra government funding, which raises the taxpayer stake to 84 per cent. Cash bonuses for 2009 for staff earning more than £39,000 are deferred. The bank announces a £2.1bn loss for third quarter 2009 and 3,700 staff cuts in retail bank branches