Don’t cry for me RBS

June 14, 2013

“Don’t cry for me, RBS” could certainly be the lament being sung by Stephen Hester, outgoing CEO of bailed out Royal Bank of Scotland, after the shock announcement that he will have left the bank by the end of this year. CEOs of banks come and go; however, the government stake in RBS makes this CEO particularly important.
There are two things that make Hester’s departure fascinating: firstly, the fact that the RBS board along with the Treasury have concentrated on how a new leader is needed to privatise the bank. Secondly, the fact that Hester doesn’t seem to want to go.

During an interview with BBC Radio 4 less than 24 hours after the announcement was made, Hester admitted that he wanted to take the bank through its privatisation process “for me that would have been the end of the journey.” However, that was not meant to be, and he said he “understood” that “new blood” at RBS was a good thing.

Did he have a spat with Georgie-boy at the Treasury? Did he ask for a bigger bonus or was he planning on an off-shore tax account? Did he have something in his past that made him a media risk? We will likely never know. The RBS Chairman, Sir Phillip Hampton, sounded fairly shell shocked in an interview soon after the announcement. He feebly mentioned that Hester had been in the job for 5-years, he was 52 and so the time was right for him to leave, after all, CEO’s only tend to stay in their roles for 5-ish years, he added. Maybe Hampton needs to be worried – he is 59 and has been at the bank for 4 years…

But while we can speculate on the political interference or not of Hester’s departure, there are a couple of concerning points that I, as a British taxpayer, want answered about RBS.

Firstly, whose bright idea was it to change CEO at the same time as the bank is taking steps to come off government life support and return to the market? Did someone not tell the Treasury that financial markets like certainty, they don’t like it when new people take over basket case banks? The market is a suspicious beast, but it had come to like Hester in recent years. He had implemented a lot of reform at RBS and changed it from an enormous loss-making monster to a slimmed down manageable bank. The market felt comfortable with Hester at the helm of RBS, which could have made the privatisation process simpler, from a market sentiment perspective.

The new CEO has a huge responsibility: not only do they have to persuade the markets they are competent but they also have to manage a complex process to ensure the taxpayer gets the maximum return when RBS does return to private hands. This sounds like an impossible job, which could make the hunt for a successor even harder. The markets greeted the Hester news with a chorus of disapproval and a massive 7% drop in RBS shares, adding to the losses felt by the taxpayer.

The second point is why does the government think that after 5-years a CEO has done their job? This is a terrible example of short-termism that helped to cause the financial crisis in the first place. Let’s say it took Hester 2 years to settle into the top spot at RBS, which meant that he only had a few years to make a difference. Although he said he would stay on until the end of the year, or until they find a successor, it’s unlikely that Hester will be giving 100% to his job now that he has been shown the door. This leaves the bank in limbo, and leaves the stock price open to further selling pressure.

Investors’ have had enough reasons over the last 5 years to sell RBS shares, which ultimately hurts the taxpayers’ “investment” in the bank. The Chancellor and co. who gave Hester his marching orders have added another reason to the list.

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