Standard Chartered: “A failure of franchise”

Standard Chartered Bank is broken. It was breaking up in full view over the past few years, except that it was not in the way that analysts think about banks. The worst is yet to come, but I thought I should write these thoughts down so that events can either confirm or deny my worst assessment.

The weakening of the Standard Chartered franchise offers the most instructive lesson on managing a global financial services business today. The lessons were actually already forthcoming from much that was happening to the other British banks – Barclays, RBS and Lloyds TSB – between the years 2001 and 2009, except that it struck no one to document them for subsequent CEOs to learn from. So, now in walking right into the same puddle, Standard Chartered Bank offers us a refresher course to home in the key points.

Standard Chartered Bank’s problem is what I would call “a failure of franchise”. I have written in the past, in my blog and in other places, about the “failure of leadership”. I had made assertions such as investment bankers do not have a good track record as leaders of commercial banks, because they are led by a very different set of priorities and commercial banks require leaders who are more prosaic in their approach – hands-on, being close to the people and the organic processes and so on.

A commercial bank is a franchise in the real sense of the word, because it depends on resonance from both from employees as well as from the customers. Unlike an FMCG (fast moving consumer goods) or a manufacturing company, it depends so much more on human interaction within the organization rather than top-line marketing or automated distribution processes. Over the years, many a smart person have found out to their detriment that no amount of strategy, technology or massive capital can replace the years of patient franchise building and the repeated drilling with ordinary staff that enables a bank to reach its full potential.

When all is said and done, the failure of Standard Chartered Bank will be a rehash of the mistakes of other banks and other leaders in the past ten years. Bob Diamond’s Barclays. Fred Goodwin of RBS. But it appears that Peter Sands was determined to offer his own experience as the one-stop final statement for the industry to learn from the mistakes of the past decade.

I think there were about six areas where Peter Sands failed his own people, and in doing so, failed the franchise:

1. Industry leaders from Jack Welch to Warren Buffet may have made it sound easier than it sounds, but “management by objective” has some caveats, without which a leader who does exactly what these men have done, can still lead his organization to disastrous consequences. Peter Sands, from the beginning of his leadership at StanChart, had vocalized to the analyst community and internally to his own staff, his management objectives of growing the business by a certain percentage every year, meeting a specific dividend commitment every year and so on. His stated target was to generate 10% year on year growth revenue. There was nothing unusual or clever here. Jack Reed did the same with Citibank in the late 1990s (he targeted ROEs of above 20%). HSBC did that more recently. So do entrepreneurs like Emilio Botin and other entrepreneurs, except that they have such a strong feel of their franchise that they can feel to what extent it can stretch and thin before snapping.

The most important lesson to be learnt from Sands targets-based management style is that even when targets are met, they tell you nothing about how the franchise is coping. Meeting profit target of 10% year-on-year achieved at the cost of something else that can stress the organisation can have disastrous effects. What Sands did not pay attention to was how much his people were going to kill themselves internally to satisfy those commitments.

The difference between Peter Sands and Jack Welch and Warren Buffet was not in the sincerity of the belief that “hiring the best people and leaving them to run things” is an enlightened approach for a CEO. The difference was that Sands does not have that inherent instinct in reading people that a Jack Welch or a Warren Buffet had in knowing that they have indeed hired the best persons in the first place. If anything, the people he now surrounds himself with shows that he has been a poor judge of people with a poor feel of the ground, and was therefore not able to keep that kind of light touch that Welch and Buffet kept on their key people and were still able to achieve their goals.

2. Peter Sands had little appreciation for the DNA that he inherited at Standard Chartered. The Standard Chartered he inherited had an army of plodders, very ordinary but impressionable workers who had been moulded to believe from past crises that they made a difference to the organization. They may not have been what he wanted given his management consulting brain, but they were the only raw material that God would give to him to work with. The bank gave them respectable jobs in an age when the best jobs were with much larger multinationals. The bank gave them a sense of community, both within and with the society they served. The bank was small enough that a simple pilot project in Singapore could easily be transposed to the global business. The organisation had a high number of lifers – employees who had dedicated their whole careers to the organization.

So it was incumbent for Sands to be mindful of the fact that any new person he brought into the organization had that empathy to draw from the inner strength of very ordinary staff. So, bringing in a cold and engineering-type Steve Bertamini to replace a much more flesh and blood Mike Denoma or Philippe Paillart before him, had a profound negative impact on the people who worked in the bank’s global consumer banking business. There was no one thing that Bertamini did that was disastrous, only that he did not give his staff a reason to come to work every morning, that transcended the numbers he wanted from them. Mike Denoma before him had instituted the various social and marketing programmes, including the annual marathons around the world, that gave the franchise an ability to connect with its local community and enhance a brand that its own employees could believe in.

Bertamini hails from a 1990s model of GE style running a business as an aloof set of numbers. The GE culture that includes long conference calls, numbers, numbers and more numbers, a constant revaluation of staff and a constant managing upwards may appear to be results orientated. But contact with the ground is kept light so as not to get personal when it comes to delivering numbers, and after a while, results in a very competitive world do not matter anymore.

I have come to see the GE proposition as one that is dated, going back to the 1990s, when the monoliners were kings in the US. The focus then was superior ROEs by squeezing costs and streamlining processes. It worked well in the credit card business in the US, which in that time was all about delivering industrial quality numbers. Jack Welch and the GE leadership style of running everything by numbers and processes did not allow the business to build newer models based on customer, rather than product profitability. Today’s focus on cross-selling, customer retention and value creation requires so much client contact and testing and learning from so much new technology and social media, that a head of retail who does not understand how to stand with his troops will not get those very same numbers in the way a credit card business in the old days would.

At one stage (maybe in the 2008 period), StanChart was at a pioneering point in terms of consolidating its formidable sales force capability with its channel integration efforts. Both its on-the-ground sales force and the new call centers it was putting in place were seeing results, except that it required considerable thought in aligning the two because the people in the virtual channel were saying that they were originating business for the physical channels and vice versa. This is not something a Steve Bertamini approach was designed to deal with.

Sands could have seen Bertamini’s problems by just spending time with the staff working on mobile banking, social media and other new innovations at the bank that constantly needed to be tried and tested, that they in turn needed leaders who believed in them and trusted them. Not just asking for numbers from far away London or Australia, where Bertamini once operated from because he was never really comfortable with the rough and tumble of Asia.

I am not sure what Peter Sands thought of his other lieutenant, Karen Fawcett. Quite clearly as the boss’s blue eyed girl who ran transaction banking, she ratcheted up the staff numbers right after the 2009 global economic crisis on the boss’s orders to grow that business. I watched as she hired just about anyone available in the marketplace, offering them good salaries, with no concept of cost and income. 1.5 years later, I started hearing from her own transaction banking staff that travel costs were being cut and the very people she hired to travel were being restricted. She then started quietly letting people go. If running her business was akin to flying a plane, Karen was out there in full view, wobbling first to one side, and then to another, struggling to keep it flying if only to meet her boss’s crazy targets.

To be fair, the transaction banking industry itself was undergoing tremendous change in that period. The general media was writing how transaction banking was becoming the new annuity generator in banking, and Sands probably believed the press without understanding this business himself. But with interest rates and borrowing costs falling to all-time lows, the business was to prove elusive. But equally important was the fact that Fawcett was finding it difficult to articulate the transformations taking place in supply chain management and was also not able to take advantage of trade flows like its domestic competitors were able to in each market. Without a strategy and without the money, she was limping on a few cards, like the renminbi flows which was driven by StanChart’s home market, Hong Kong, at great cost to the bank.

Now to put a clueless Karen who almost destroyed transaction banking to take over the core consumer business for which she has even less of a clue, I can only say is something so dangerous that no board should allow their CEO to do to. Consumer banking in the core markets brings in excess of 30% of the organisation’s net income. Whatever other sins the organization has, this would have the effect of protecting the bank from any near death experience, as it did for Citibank. Sure, it is sheer hard work finding the best possible consumer banking talent to secure this business, give it a breath of fresh air and launch the remedial process from, but it is something that had to be done correctly and not be gambled with.

3. Standard Chartered Bank is an anomaly in that the boss sits in London while the real business takes place in Hong Kong and increasingly from Singapore. I must say that London has had this neutralizing lure on a string of Standard Chartered chief executives. Being chief executive of Standard Chartered was like a corporate membership into a gentrified club in London that these CEOs would not otherwise be invited to join.

I had watched the same thing happen with a number of Sand’s predecessors. Mervyn Davies and Rana Talwar and long before that, even with Malcolm Williamson. All three presided over a string of operational integrity problems in the organization, resulting in fines as high as 300m sterling in India in the 1990s, which was long before the $300m in the US just last year. I put this to the top management in London being disconnected from the rank and file in the bank’s core regions. What business is there, that derives 30 percent of its profits from Hong Kong, that has a boss who calls into the office from London eight hours later every day?

But London is alluring. Long after he left the bank, Talwar still maintains homes there and enjoys the hotter part of the Indian summer in the city every year. Mervyn did well for himself, using his positions within the bank to consciously gain recognition in London, first through politics as a UK government minister and then by becoming nothing less than Baron Davies of Abersoch.

Peter Sands has ratcheted his entire public relations team to build a similar respectability in London that will make his own life comfortable after leaving the bank. He participates in local government initiatives, lunches with UK editors, contributes op-eds to UK-based publications and even Linked-In, not for one minute offering the same level of attention to the markets where StanChart’s actual businesses are in. If only he read his bank’ own epigraph, that it was the world’s leading emerging market, and not UK, bank.

The failure of the public relations team to build any real goodwill in the US came down hard in the form of a little known New York regulator choosing StanChart to be the bank to show its prowess, when it close to fine the bank a handsome sum for 60,000 Iranian originated transactions, while investigations at the other regulators were still going on. Sands scrambled to New York do some crisis management, only to find that he had no friends there in the same way he had in the clubs in London.

Not that London treated StanChart any better because of its CEOs pandering. Despite all their cavorting with editors, regulators and the gentry, the London media keeps putting StanChart into a box, always treating it as nothing more than a takeover target. What you read in the UK newspapers today about StanChart being a takeover target is nothing new. The UK media has been consistently hounding StanChart like a pack of wolves since the 1980s, to make it a takeover target, if possible to Lloyds as the only acceptable conclusion. There is a senselessness in the UK media world that one should not pander to, and as Sands is about to find out, they will have no qualms in squashing all the goodwill he has invested in with them, and sacrifice him to fill another page in tomorrow’s newspaper when his own time comes.

In all this, StanChart’s London-based public relations team is probably the most flatfooted of all the international banks. All that money spent supporting the establishment newspapers, a dysfunctional team that has hardwired itself to a dysfunctional CEO’s agenda. If Sands said a certain UK editor was worth cultivating, the PR team would cultivate that editor brainlessly. Other editors, especially in Asia, were treated shabbily with Sands signature cold fish shrug. There was no strategy. Just people they liked. No global branding that could withstand a global crisis. The PR team, like their boss, is disconnected from reality, heady from the intoxication of yet another party in London the night before, if that was what made the boss happy.

Sands, like his predecessors, will hopefully still be the winner in all of this. He will be lifted by a proverbial helicopter to be knighted and be absorbed into the London wallpaper, while the careers of deserving executives will lie like corpses on the streets of Seoul, Shanghai and Hong Kong.

Now, there is one big difference between a StanChart being domiciled in London but deriving its business from Asia, versus a HSBC doing the same. HSBC’s core management team is made up of its proverbial 300 British executives being sent out to represent the bank in the rest of the world. The COE has a handle on them. HSBC makes no pretence that there are any global management opportunities for any of its domestic staff in any of the far flung offices out there in the empire. So the CEO has a stronger handle of the bank’s senior management team, than a StanChart, whose management team is drawn from the grounds in which it operates in, while the CEO sits in London.

4. Peter Sands cultivated cronyism. It is hard to say how or why. His growing up years as a son of very English colonial parents in Malaysia would have made one of two types of persons out of him. Either an intensely defensive one, dividing and ruling just like the English did in colonial times; or an intensely inclusive one, subscribing to a commonwealth of strengths to solve daily problems. The people whom he defaulted to in the management shake-up earlier this year – Karen Fawcett, Jaspal Bindra, Mike Rees, V Shankhar – and more pronouncedly, the people he alienated, showed clearly that he was intensely defensive. You need to understand how a Jaspal Bindra survives in the organisation to understand the depth of the problems that the leadership at StanChart is suffering from. He may not be a main cast, but he is still a John Falstaff in Shakespeare’s King Henry VIII.

Cronyism creates a layer of agreeable management staff who make it even more difficult for the boss to see the reality on the ground. Ray Ferguson, a Sands man in Southeast Asia who has since left the bank, made the headline grabbing claim in 2010 that he wanted to raise the number of staff in Singapore from 2000 to 8000 by 2012, at a time when all other bankers could only scratch their heads. Just like Karen Fawcett, he obviously had no clue “at what cost” should such a massive increase be achieved, but he was just regurgitating his boss’ madness. He probably left the bank a broken man, mindful of what an idiot he looked like saying those things in the best of his days with the bank.

Cronyism in the boss also has the effect that it leads to cronyism in the subordinates. When she was head of transaction banking, Karen Fawcett simply surrounded herself with (mostly Indian and Australian) managers who told her what she wanted to hear. For a time, they even gave her the numbers she needed to feed her bosses. But she was simply not able to build her own agenda or take a StanChart to the next level that even essentially domestic regional banks like DBS and Maybank were slowly chipping away to get at. So when the transaction banking business started to falter, she could not retrace the plot (she did not even know how many staff she had). But all is well, as neither is she now required to sort it all out.

I must say that despite the upheaval in its upper echelons, Standard Chartered continues to preserve much of its core teams working on different projects of its deliver capability remarkably well. They are out there in the trenches, waiting to see which direction their bosses in London will take them. This remains one of the best banks in the use of Data and Analytics, in its customer delivery strategies, especially in the use of mobile technology, in its small business segment, in its risk management culture. The fact that so many of the people who built these strengths of the bank are still there is an amazing anomaly. Under the right leadership, their skills can still be built on, and that is what makes StanChart’s infrastructure truly world class.

5. The combination of cronyism and the lack of empathy for the franchise is exasperated by a more fundamental problem. A lack of appreciation for operational cost. Managing cost is perhaps a CEOs single most important skill and instinct, barring all others. Sands paid attention to two things very well – dividends and capital. Operating costs was not a feature in his deliberations because he loved his shareholders more than he loved his staff. Any analyst going through the numbers would have appreciated that they were designed for the unsuspecting shareholder.

A dreaming management consultant may wish to rake up the topline growth in the way Sands did over the past 10 years, but a sharp intuition for costs was needed for a leader to be able to say “no” to acquisitions and businesses that could potentially kill the organization. There was the fatal acquisition of Korea First Bank. I always wondered about the audacity in absorbing an acquisition that could potentially account for 40 percent of the bank’s total business. I was originally really impressed. It could have worked. But it needed to be augmented by franchise building skills. It had to be augmented by frequent visits to Korea to understand what the country was made off, if indeed it was going to generate that amount of business.

Even a few casual visits to Korea told me that the consumer credit culture in that country was far more rogue than what met the eye. Someone who spent one day more in Korea than I did would have been far more cautious in growing the consumer loan book as aggressively as StanChart did. There was this unbelievable money lending culture in Korea. The herd instinct of the local banks. The headache in aligning the Korean acquisition to the core franchise of the bank. There was no substitute to a feel of the ground.

So, his 2009 and 2010 numbers looked particularly good, and the creeping costs were easily explained away. They were kept that way by intensely suppressing the parts of the business that were actually keeping the bank’s franchise in order, and rewarding the parts that were generating the top line numbers but at great cost to the bottomline. Herein lies another anomaly of cost control for a CEO who has lost his way. When it comes to the crunch, he asks his plodders who were giving him his numbers to sacrifice their salaries while continuing to reward the people who were bleeding him, for fear of losing them.

The way in which the corporate finance business has been raked up to deliver 70 percent of the top line growth, without consideration to the bottom-line costs to the business, is set to haunt Sands in the next year or so. People like V Shankar are bookmakers, not franchise builders. People who do not understand the traders business see only that Sharma is “intelligent” and “bright”, but those who do know the business point out to his insistence to book as much of the debt and equity flows of the bank as his own.

Like Shankar, several of the people who Sands has surrounded himself now are investment and corporate bankers, in a bank whose core income is retail. Sean Wallace brought in to unlock the value of the corporate banking business into a high yield debt and equity capital market business now sits on a business where the corporate banking business never rose beyond being a balance sheet business. So the capital costs wipes out all the profitability of the flows these gentlemen have ostensibly created.

To give someone like Mike Rees or V Shankar the reigns of Standard Chartered today is the same thing as giving Bob Diamond the reign of Barclays in 2002, but with full benefit of hindsight.

6. By the time the plot started to unravel, I discovered yet one more thing about Sands that I had not realised before. He does not understand operations. Attempting to merge consumer and wholesale banking, whether at the technology or operational fronts, is a multi-generational process in any bank. It is simply not a case of cobbling a few disparate people on the organisational chart. It takes years to streamline consumer banking processes until there are clear parallels with transaction or corporate banking systems. Then you have to standardise, standardise, standardise. The heads of corporate banking systems and retail banking systems have to be talking to each other for years, before they mutually come to the conclusion that a merger would suit them.

One needs to test pilots and then entire processes before you can actually merge consumer and wholesale operations with engineering discipline. Throwing into the fray the very different people culture as if it was just a powerpoint presentation exercise is something that only an idiot would venture into. Anyone who understands operations can see clearly why this merger is designed to fail. These mergers are not about organisational charts, and this significance was completely missed the analysts. No alarm bells rang. In a large international bank, the decision is almost not made by the CEO but by the people in the middle who have a firm grip of the processes. Whatever the reasons Peter Sands had to made the decision to merge consumer and wholesale banking, putting an unproven person like Karen Fawcett to make it happen, is profoundly reckless.

All I can say is that Sands does not appear to be thinking about staying around long enough to see the effect of this dangerous decision. Which then puts the spotlight on the board. A board of directors is supposed to encapsulate the collective wisdom of a group of people who should prevent a management team from making mistakes like these. Are they also clueless? Or are they too mesmerized by an Englishman who knows how to direct his charm at them to get what he wants? The board, more than anyone else, must be held culpable when this chapter comes to its logical conclusion.

I use the word “franchise” to describe that point in time when all the parts of an organization resonates as one, such that the organization as a whole is delivering its best numbers because of the clarity of its leadership. It refers to the way in which all the people in the organization are well synchronized to achieve some things particularly well, perhaps because of the values they share, but more importantly the way they are trained, mobilized and motivated over a fairly long period of time.

Some of the best franchises may be described as old fashioned and conservative, but what they represent is low customer and staff acquisition and retention costs as well as low non-performing loans that enable them to deliver the performance numbers that leave other more brash players and the management consultants of the world scratching their heads. It’s very low cost structure is achieved because loyal staff stay not because of the money but because they are happy, and loyal customers stay because the key messages are compelling and consistent over the years. This same franchise would have created operational efficiencies and avoided some of the operational risk problems that StanChart found itself in. In other words, Sands could have built the same profitability figures for his shareholders if he focused on the very people he has been taking for granted.

A franchise can take anything from 5-6 years to bring about, from the time a new leader puts in place his or her vision of what the priorities should be, and the people take the time to deliver on them. A good franchise can last over many business cycles, and the management will be able to make important judgment calls, such as not entering some businesses even if the rest of the competition do.

There are a handful of leaders in the financial services industry who demonstrate this franchise building skill in very powerful ways. Most are entrepreneurs whose families own the banks. But some are also passionate managers. Standard Chartered may still have some of them. Their common trait is that they put their personalities on the table, and their personal careers on the line to lead from the front. When something goes wrong with their organisations, of course these personalities loom large, because they are there out there in the battle field with their troops every day. They don’t cringe from accountability. It is in this aspect that the aloof and calculating Peter Sands makes himself too complicated even for his own staff to understand.

A strong franchise is something that comes about when an ordinary business is run by ordinary people who get better at what they do over the years. Standard Chartered Bank was one such franchise in its original core home markets – Hong Kong and Singapore – although also in Malaysia, Taiwan and Australia where its core staff and its core customer base have grown with the organization over a 20-30 year period. If a bank does not get its core markets right, its growth in all other markets – as in Africa today where the bank is determined to open new branches – will be a cost overhang that it will not be able to bear.

Standard Chartered, HSBC and Citibank became strong international franchises that few other international banks could emulate, mainly because these had a strong domestic commercial banking arm in many of the countries they operated in. ABN Amro did grow to become an international bank very quickly, but without a franchise strength, it disintegrated very quickly as well. It is a lesson that ANZ should seek to understand even as it struggles on the cost front to build its own Asian story.

These banks would have found that no matter how international they are, their core 20% management talent bank and the core 20% of the customers still generated the 80% of their franchise’s core profit as well as so many of the other unquantifiable core characteristics of the bank. Break this bench strength and you break the bank. This bench strength for Standard Chartered rests with the core retail banking team in Hong Kong. Instead of being carefully nurtured, they have been given the short end of the stick on every cost cutting and resource reallocation exercise, while others in investment and corporate banking have been promoted way beyond their real contribution. It is a very human miscalculation every CEO makes, when he makes decisions based on who is standing right in front of him instead of having that instinctive skill for this business in the first place.

Whatever you say about Citibank, to this day, it has a bench strength of management staff on the commercial banking side of its business that can easily rise from the ashes of the errors made on the trading side of the bank. The manner in which Citibank employees are selected, trained, inculcated and nurtured to management positions is still very much intact – and herein lies its franchise strength. From this, it builds its bench strength in such a way that a reasonably good manager from the same franchise, like a Michael Corbat, will be able to pull the organization together very well. Vikram Pandit, although the only outsider to have been brought in to run Citi, did nothing to dismantle this franchise. If anything, to his credit, he carefully kept the entire franchise together, resisting to even offload some of the businesses during the hardest of times, for exactly this reason.

When Sands excuses himself from the current malaise by saying “the bank has had 10 good years” he is attempting to blame the loss of a franchise to economic cycles. There are good franchises that have survived many economic cycles (IBM for example and definitely Wells Fargo), and so we must not believe him at all. He had nothing to do with those “10 good years” in the first place. He was merely a beneficiary of the best cohort of people the bank ever had who gave him their best years until they finally could not do so anymore.

For the reasons I have mentioned above, I recommend that StanChart finally moves its headquarters back to Asia. If Hong Kong is home to HSBC, then StanChart should seriously consider Singapore, where much of its international operations is located. Notwithstanding its Hong Kong note issuing business. But that, as they say, is another story.

When things finally unravel, as I believe they should by the end of 2014, this assessment could also be read as the point at which this bank will be able to renew itself for another generation.