by Iain Martin
The danger was that Goodwin’s approach might leave too little room for senior executives to admit to a hunch – perhaps based on years of experience spent observing a particular market. In a well-run organisation, sometimes the best question ahead of a potential disaster comes from someone who doesn’t necessarily know the answer, but who senses that their colleagues might have got carried away with a daft idea. The culture developing under Fred Goodwin, in which he seemed to see persistent questioning as dissent, could militate against open-minded discussion.
‘Fred was your classic bully,’ says one of his most senior executives. Some executives gossiped that this was because he had been bullied at school in Paisley and was a naturally introverted type who had learned that the best way to defend himself was to keep others on their guard: ‘I thought he did it because he always had to make himself safe, safe from attack,’ says a colleague. ‘I think he had no capacity for compassion. I really mean that,’ says another member of his team. Another colleague thought it was all about an inability to realise the human cost of his actions: ‘He had no understanding of the impact he had on others. I used to challenge him on it after he had had a go at someone and he was baffled. What’s the problem? It’s fine, we’ll have a beer at some point, he’ll be fine.’
The nature of Goodwin’s relationship with Mathewson complicated matters. They had achieved a lot together. They had even been vindicated over the Bank of Scotland. As predicted it disappeared as a stand-alone entity after losing the race to buy NatWest. In theory the combination with the Halifax, a former building society based in Yorkshire, was a merger. In practice, both of the two top posts were filled by Halifax people, with Lord Stevenson of Coddenham8 becoming chairman and James Crosby chief executive. Under Crosby, real power shifted south and the Bank of Scotland’s headquarters on the Mound in Edinburgh came to be seen by critics, including the Royal Bank team, as a mere shell adorned with a brass plate. Gratifyingly for Mathewson, the battle between the two banks, which had raged for almost three centuries, had been won conclusively by the Royal Bank.
Meanwhile, Mathewson was wrestling with how to police Goodwin. He tried at first to take a relatively indulgent view of the chief executive’s approach. ‘Fred was George’s creation,’ says a friend of Mathewson. ‘George picked him, he promoted Fred and he made him so he had to back him.’ Goodwin was learning on the job and Lord Younger – who knew little about the complexities of banking but who after a career in politics was a shrewd observer of human behaviour – had allowed Mathewson plenty of room to breathe and been on hand with advice when needed. The new chairman would try to give Goodwin some space. On the other hand Mathewson found it impossible to avoid having periodic blazing rows with his protégé. Alone the pair could get into heated discussions about the way Goodwin dealt with subordinates and his refusal to take advice.
In 2003 Mathewson moved to punish Goodwin, for the way the retail banking side of the business did not seem to be making as much progress as other parts of the Royal Bank. It was run by Benny Higgins, a colourful charmer. A schoolboy maths prodigy, fanatical Celtic supporter and poetry aficionado with a string of ex-wives, he had been tipped for the top at Standard Life, the Edinburgh savings and investment firm, before he left as a result of personal problems. He landed at the Royal Bank. Even then Higgins thought that the mortgages that banks such as HBOS and Northern Rock were issuing were ‘insane’ and likely to lead to losses, so he ran things conservatively. It meant that Goodwin’s performance bonus in 2003 was hacked to £990,000, from £1.7m in 2002. This was a huge pay cut, with his total remuneration going from £2.58m in 20029 down to £1.9m in 2003. Goodwin set out to encourage Higgins to leave, which eventually he did. Ironically, he then went to HBOS, where he discovered that the lending policies were even more aggressive than they appeared and he moved on again, only to be vindicated in the financial crisis.
Cameron McPhail, who had managed the Columbus Project for Mathewson, was also forced out. After Columbus he had been put in charge of Wealth Management, which comprised the private banks Coutts, Adam & Company, Drummond Bank and the offshore operations of Royal Bank International. This was banking of a very rarefied and exclusive kind reserved for the super-affluent and extremely rich. McPhail detested Goodwin’s management style and the atmosphere of ill feeling that it generated. He left in 2002. McPhail’s long spell on gardening leave gave him time to reflect and he resolved to sell the shares he had accumulated, getting his money out of the Royal Bank at a good price.
These interruptions aside, Mathewson was generally extremely pleased. His vision of a Scottish banking colossus was being realised astonishingly quickly. True, by necessity more of what the bank did was based in London – with all those NatWest customers to serve and corporate clients to service – but the heart of the bank remained in Edinburgh, where the board met and many of the most senior executives lived. Vindication was piled upon vindication when the NatWest integration was completed early and the ‘synergies’ of combining the two banks turned out to be £2.03bn rather than the £1.73bn expected. All the NatWest back offices had been emptied of staff and the workings of the new group put on the Royal Bank platform. Those staff who remained shared in the good fortune. A 5 per cent of salary bonus was handed to 75,000 employees whose units had been directly involved in the integration. In addition, staff across the entirety of the new group were also given 10 per cent of basic salary as a profit share. Unsurprisingly, after this Goodwin was popular with staff when he spoke at conferences or went on visits to outposts of his empire.
Profits were continuing a seemingly relentless climb. In 2000 the Royal Bank had made £4.4bn before tax, in 2001 it was £5.8bn and in 2002 £6.45bn. The transformation was striking. Just ten years earlier, in 1992, the bank had come close to making a loss. In that year, before the full impact of the Mathewson revolution and with Project Columbus just getting under way, the comparatively small Royal Bank, with only 23,457 employees, scraped a measly profit of only £21m. Now it looked as though the next stop might be 8, 9 or even 10bn pounds.
Goodwin basked in the acclaim as the accolades and awards started to flow. At the end of 2002, a leading American business publication, Forbes magazine, announced that because of the successful integration of NatWest, it was making Goodwin its ‘Global Businessman of the Year’ and putting him on the cover. There was considerable excitement at the Royal Bank head office in Edinburgh, where there were signs that a ‘cult of Fred’ was developing. Your Magazine, the bank’s own staff publication, had already become increasingly confident in tone and each month featured an inordinate number of pictures of Goodwin in various poses, meeting staff, opening offices and generally grinning a great deal. He was visibly growing in confidence, shedding some of his geekiness, losing the glasses and projecting an assured image.
The Forbes article meant that the Royal Bank was really on the map and being taken seriously in America and beyond. Goodwin relished the praise: ‘He loved recognition and he loved awards. Unfortunately he took them seriously, which can be dangerous,’ says a member of his team. Forbes dispatched a correspondent to interview the 44-year-old chief executive. The resulting piece10 contained fulsome praise: ‘The Royal Bank of Scotland now has a market cap of $70 billion, making it the world’s fifth-biggest bank. Few realise that this 275-year-old Scottish bank, a nonentity on the world stage just a few years ago, is now bigger by [market capitalisation] than such household names as J P Morgan, Chase, UBS and Deutsche Bank.’ Profits were up, the cost-income had been reduced to make the Royal Bank one of the most efficient around and customer satisfaction and staff morale were on the rise.
Goodwin, said Forbes, was ‘an original thinker’ noted for his ‘analytic rigour’. His friends queued up to pay tribute, led by his old mentor John Connolly. ‘Fred never just accepts advice,’ said the boss of accountants Deloitte & Touche. ‘When we’ve all got a lot to do, it’s very easy to say, “I’ve had the advice. That’s the thing to do.” He always ma
kes time to satisfy himself that he has the right answer.’ Forbes, possibly due to a lack of space, did not point out that Connolly’s firm was by then the auditor of the Royal Bank, having won the contract shortly after Goodwin took over as chief executive. It wasn’t all sweetness and light, however. ‘When you meet Goodwin, he comes across as cool and witty. But there’s acid just below the surface,’ acknowledged the interviewer. Goodwin could be caustic, and due to a certain ‘tartness’ of manner he was not universally liked by those who worked immediately below him. Those extraordinary Royal Bank results had been achieved by making ‘almost inhuman demands on his executives’, one of whom described his boss as a ‘prowling fox’. Goodwin talked openly of ‘mercy-killing’ competitors.
The real growth area, noted Forbes, would be America. There were more targets that Goodwin and Fish had for Citizens, although the chief executive stressed he was not interested in anything too risky on the other side of the Atlantic. There were, acknowledged the man from Forbes, a few sceptical mutterings. An analyst from Lehman Brothers in London had noted that the Royal Bank had the highest exposure to UK corporate risk, meaning loans might go bad if the economy turned down in the years ahead. In particular the bank was number one in Europe in ‘leveraged finance’, the provision of vast loans which allow companies to take on large amounts of debt to make acquisitions or to fund a management buyout. At the start of 2003, there were a few clouds on the immediate economic horizon, although they soon dissipated as the long boom resumed with full intensity.
After the Forbes accolade, an endorsement arrived from an even more illustrious source. The Harvard Business School – the pre-eminent institution providing MBAs and schooling trainee corporate titans in the latest management thinking – gave its blessing in a 2003 paper describing the aftermath of the NatWest deal.11 Echoing the infamous ‘Masters of the Universe’ phrase, an epithet coined by Tom Wolfe to describe greedy young investment bankers on Wall Street in the 1980s, the Harvard study on Goodwin was headlined: ‘The Royal Bank of Scotland: Masters of Integration’. Immediately underneath was a quote that Goodwin had given in an interview conducted for a corporate video with the BBC journalist Kirsty Wark. ‘Hard work, focus, discipline and concentrating on what our customers want. It’s quite a simple formula, but we’ve just been very, very consistent with it.’
The tone of the Harvard paper was solemnly respectful. After detailing the successes of the NatWest deal, the authors mused on the management style of Goodwin and pondered his aspirations. Could the Royal Bank – which had expanded so rapidly – carry on growing? There was no way would Goodwin rest on his laurels, it seemed: ‘As he looked to the future he was confident that RBS would again prove the sceptics wrong.’ Goodwin told the authors from Harvard that he was confident his entire organisation was ready to meet the challenge. ‘They [the team at the Royal Bank] had a shared aspiration to make RBS not just a leading bank, but also one of the most widely admired companies in the world.’ A small bank, which had started with just eight staff in Edinburgh’s Ship Close, had weathered the centuries and reinvented itself so successfully that it was now the object of admiration and adulation by the high priests of global capitalism.
8
Sir Fred
‘There’s a perception among some investors that Fred Goodwin is a megalomaniac.’
James Eden, analyst, Dresdner Kleinwort Wasserstein, 4 August 2005
Ever since taking over at the Royal Bank, Fred Goodwin had wanted a bigger headquarters. The Royal Bank’s Georgian-fronted main office on St Andrew Square in Edinburgh had been home to the institution since the 1820s and although its elegant facade projected an image of genteel reliability, and the corridors of its management floor were hung with paintings evoking the bank’s history, the building seemed too stuffy, small and impractical. Even though next door there were bigger offices adjoining, it was concluded that the entire complex was a rabbit warren and architectural hotchpotch. This was not at all what one of Europe’s biggest banks needed. George Mathewson had concluded as much in his final days as chief executive. Along with his friend Angus Grossart, Edinburgh financier and vice chairman of the Royal Bank, Mathewson had cooked up a scheme that would involve the bank flattening a particularly ugly office block it had bought from the government, behind St Andrew Square. Leading retailers in the neighbouring shopping centre would get a pleasant new home, the Royal Bank would have a proper modern office attached to its elegant old home and the city’s populace would be rid of a concrete monstrosity dubbed ‘Scotland’s biggest eyesore’.
Goodwin had doubts. The project was Mathewson’s project, and the chairman needed to be indulged. But didn’t the Royal Bank need to make a much bigger statement of intent by building a headquarters away from the confines of Edinburgh’s New Town with its cobbled streets and space constraints? For a while there was speculation in Edinburgh that Goodwin was considering moving the headquarters to London, something he denied firmly when asked by his staff. A migration to England would have been a betrayal of the Royal Bank’s heritage. What he had in mind instead was the construction from scratch of a giant head office on the outskirts of Edinburgh, somewhere near enough to the airport to make it easy to jet around the world to visit other parts of the bank’s operations. It could be a symphony in glass and steel, with wide open spaces and state-of-the-art facilities for several thousand staff.
The talks with retailers in central Edinburgh were scuppered quite suddenly in the autumn of 2000 by the Royal Bank.1 Mathewson, who was personally identified with the city centre scheme, was initially unhappy over the loss of face, although along with Grossart he became excited by the possibilities of moving out of the town centre. Thanks in part to the Royal Bank, Edinburgh was booming, with house prices rising at more than 10 per cent a year and property speculators looking for opportunities. If the Scottish capital was really about to enjoy a new golden age then it would eventually need to expand beyond its existing boundaries. In opting for building a daring new head-quarters out near the airport, the Royal Bank was innovating and trying to show the way to other local businesses and developers. Eighty acres were purchased at Gogarburn, to the west of the Scottish capital. After RBS hit the wall in 2008, it was noted that its vast new headquarters had been built, appropriately it seemed, on the site of a former lunatic asylum. This was not strictly true. Gogarburn had been home to a hospital which enabled mentally disabled patients to be treated outside the asylum system, yet in the light of what went wrong at Goodwin’s RBS this important distinction was deemed not to matter.
The chief executive’s office was soon full of architects’ drawings as Goodwin pored over proposals and examined the options. The old adage is that shareholders should be worried about the CEO becoming a megalomaniac when a company builds a grand new headquarters, and doubly worried when he puts a fountain in front of it. Goodwin liked the idea of Gogarburn featuring a large fountain. The architects – a Scottish firm, Michael Laird – drafted in the craftsmen of the Fountain Workshop, who were based in the Royal Dockyard in Chatham, Kent. They came up with ‘a large external reflection pool with a 40m long overspilling weir edge’ that framed the main entrance to the development, ‘providing a crisp reflection of the architectural form’. The exterior of the main building was to be cast in dark glass and sandstone, with seven ‘business houses’ arranged around what was the spine of the development: an internal street lined with coffee shops, a hairdresser, a Royal Bank branch for staff to use, a chemist and other shops, giving the place the characteristics of a real town, ‘Fredtown’.
The architects trumpeted ‘a landscaped campus’ with a conference centre and nursery. With a total floor area of over 800,000 square fleet there would be room for as many as 3,500 staff. Next door, on adjacent parkland, was to be a Royal Bank business school in which executives would be tutored. It would be developed jointly with Harvard Business School, which, by a remarkable coincidence, was working on its academic paper hailing Goodwin and the Royal Bank
as ‘Masters of Integration’ for the NatWest deal. The designs for Gogarburn were completed in early 2002, planning permission was granted that autumn and work began almost immediately. At the peak of the project as many as 2,000 workmen toiled on the site, constructing a monument to corporate ambition and racing to get it ready in time for a grand opening scheduled for 2006.
When the planned move to Gogarburn was discussed in public, the emphasis was often on the ‘global’ dimensions of the project. The word international was used a lot. Gogarburn was the right location, the chief executive said, because: ‘There are a very limited number of sites in Scotland which would allow the expanded Royal Bank of Scotland Group to achieve the operational efficiencies that are necessary for a large international organisation.’2
Someone who seemed perturbed about notions of hubris at RBS was Lord Younger. Late in 2002, he was in a hospice stricken with cancer. At what would later turn out to be his death bed, Mathewson and Goodwin paid a visit, bringing artists impressions of what Gogarburn would look like and a picture of the RBS private jet. Joanna Davidson, Lord Younger’s daughter was there with her father. After he had looked at the drawings and pictures, and his former colleagues had gone, he turned to her and said: ‘When you see things like that you wonder if it’s time to sell your shares in RBS’. Joanna told family members about it and, later on, her work colleagues. She also died of cancer in 2008, aged just 50. Some members of the Younger family think that Lord Younger may have in part been joking, while others are convinced that he knew the growth of RBS was getting out of hand.