Take Care of Some Corporate Government Risks.

...

After this story of RBS, there are some lessons to be learnt and important recommendations made for when investing in banks.

The board is one of the most important parts of a bank. It is an intermediary between the shareholders of the bank and its top management team (Thomsen & Conyon, 2012). The board of RBS is a one-tier system where the supervisory and management are working together in the board. Having a two-tier board makes it better possible to control decisions.

Tom McKillop, Chairman of the RBS board, and Goodwin were working together closely. Because of this and the dominant role of Goodwin, decisions about the major acquisition of ABN AMRO were hard to reject. The board agreed with the acquisition without enough knowledge of the consequences and risks what it may be able to take (FSA, 2011).

The board of a bank should be more independent so they can control what happens in the company, which should lead to more satisfaction for stakeholders. Also there should be focus on an elected board by shareholders, so they can provide advice to managers and help create networks to important stakeholders.

There is a strong owner-manager agency problem noticeable in the RBS case. This arises between shareholders and managers. Goodwin made self-interested decisions, especially the acquisition of ABN AMRO. Goodwin did not listen to the doubt of his shareholders, which resulted in RBS being acquired by the government. Many employees were fired, depositors lost their money, creditors had no further access to credit and shareholders lost their investment. Shareholder activism, to turn up at annual meeting, criticize the management and vote against it, is recommended when investing in banks (Thomsen & Conyon, 2012).

The main recommendation is to stay focus on the core of banking and not lose your mind to focus on growth, which could result in a disaster like it was the case for RBS.

---------------------------------------------------------------

References

Adviescommissie Toekomst Banken. (2009). Naar herstel van vertrouwen. Nederlandse vereniging van Banken.

Allen, F., & Carletti, E. (2005). Credit risk transfer and contagion. Journal of Monetary Economics , 53 (2006), 89-111.

BBC. (2011). RBS: Inside The Bank That Ran Out Of Money.

Behery, M., & Eldomiaty, T. (2010). Stakeholders-oriented Banks and Bank Performance: Perspectives from International Business Management. International Journal of Commerce and Management , 20 (2), 120-150.

Financial Services Authority. (2011). The failure of the Royal Bank of Scotland - Financial Services Authority Board Report.

Investopedia. (n.d.). Bank Run. Retrieved October 18, 2014, from Investopedia: http://www.investopedia.com/terms/b/bankrun.asp

Martin, G., & Gollan, P. (2012). Corporate governance and strategic human resources management in the UK financial services sector: the case of the RBS. The International Journal of Human Resource Management , 23 (16), 3295-3314.

The Scotsman. (2012, June 22). RBS collapse down to Fred Goodwin's 'culture of fear'. Retrieved October 16, 2014, from The Scotsman: http://www.scotsman.com/news/scotland/top-stories/rbs-collapse-down-to-fred-goodwin-s-culture-of-fear-1-2370574

Thomsen, S., & Conyon, M. (2012). Corporate Governance Mechanisms and Systems. McGraw-Hill.