Martin and Gollan (2012) in their article on ‘Corporate governance and strategic human resources management in the UK financial services sector’ discuss the case of the Royal Bank of Scotland (RBS). RBS was founded in 1727 in Edinburgh but remained a small local bank rooted in the Scottish economy until the 1990s. However, deregulation of financial services in the UK in the mid-1980s led RBS to embark on a strategy of ‘growth-through-acquisition’ and hiring more entrepreneurial managers whose role was to fulfil the vision of expansion and diversification into related financial services. Having developed an earlier presence in the highly profitable investment banking sector, RBS acquired the Dutch bank, ABN AMRO Holdings, in 2007. This purchase was the largest ever in financial services history. As a consequence RBS became the world’s fifth largest bank by market capitalization and largest corporate and institutional bank in Europe. Unfortunately, the purchase took place just when negative signs of a recession were clearly visible, and ABN was heavily exposed to the toxic US securities. The RBS response to this crisis was to undertake a £12 billion rights issue, at the time the largest in the history of any company. However, when the rights issue failed, RBS reached the brink of collapse. The UK government had to step in with a massive bail-out, so the Bank rapidly became effectively state-owned. RBS alone recorded losses of £24 billion in February 2009.

 

 

The Credit Crunch of 2007–8 was a massive trigger for change. A condition for the UK government bail-out was the resignation of Fred Goodwin and his senior management team. In early 2009 the UK government’s first step in restoring RBS to profitability was to establish a hands-off governance structure and the appointment of a new CEO, Stephen Hester. In May 2009 a new RBS board was formed with only two former directors remaining. Given the profound and complex nature of the breakdown of trust triggered by the collapse of RBS, this executive group was faced with two very challenging tasks – firstly, to restore the bank’s financial performance by keeping talented people in the business, and secondly, to repair public trust in the bank. The two tasks are challenging, and they are also mutually exclusive, especially since the new board’s approach to performance management and the continuation of high levels of bonus payments was likely to lead to controversy and resentment. The strategy of the board in relation to this first task was to restore employees’ faith in senior managers while trying to reduce the company’s overall size, restore it to profitability and to private sector ownership.

 

 

Hester and his board attempted to change leadership style and organizational culture, but he and his board faced significant challenges in keeping staff engaged so that they worked towards its revival. The change in leadership style and its impact on organizational culture can be best characterized as a move from the use of ‘hard’ to ‘soft’ bureaucracy. Hester and his board promoted a culture of open and regular communication so that employees could engage with senior leaders. A new system of conferences and calls between the CEO and his most senior managers was introduced, and senior managers were required to cascade information throughout the organization.

 

 

Changes were also evident in RBS’s new customer charter and the bank’s emphasis on social responsibility. Such a change was indicative of a move towards a morally correct duty to treat people as ends in themselves. Another set of changes attributed to the new board of RBS were in relation to new approaches to performance management emphasizing the ‘means of achieving results as well as the results themselves’ (Martin and Gollan, 2012: 3310). The focus on a new approach to talent management and leadership development has also been noticeable; for example RBS moved away from recruiting externally to developing people internally with a focus on innovation and leadership development.

 

 

Answer the following questions

 

1. What were the external and internal triggers for change in RBS?

 

2. Were the changes in RBS post-bailout on the soft or hard end of the change spectrum? Which was most important?

 

3. The ultimate result of intervention strategy is a stable environment that incorporates the desired result. How does intervention strategy can be applied in RBS case.

 

 

 

 

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The external trigger for change in RBS was the Credit Crunch of 20072008 which led to the global fin... View the full answer