Making It Happen: Fred Goodwin, RBS and the men who blew up the British economy
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Relief in St Andrew Square was tempered with embarrassment. The board, in toying with a merger, had exposed the company to a takeover and revealed that they did not have a good enough plan to protect and grow the institution. By the mid-1980s the truth was unavoidable. The Royal Bank was looking like a tired bit-part player, overly reliant on invoking receding memories of past glories, which had only avoided takeover thanks to a political campaign and the work of the competition authorities.
Elsewhere, finance was being revolutionised. The so-called Big Bang, the radical deregulation introduced by Margaret Thatcher’s government in 1986, was designed to allow London to compete properly in a new age of international finance.4 Computerisation swept away the polite old world of the City with its sedate institutions operating, mostly, according to the motto of the Stock Exchange: ‘my word is my bond’, a promise that obscured considerable amounts of skulduggery and some insider trading, meaning trading on privileged information to which the general investor was not privy. With Big Bang, the traditional way in which stockbroking business had been conducted – on the floor of the exchange with buying and selling done verbally and on paper – was replaced by computer trading and various restrictive practices abolished. It wasn’t just share dealing that was metamorphosing. The clearing banks – the institutions, of which the Royal Bank was one, who were authorised to clear each other’s cheques – were being allowed to sell mortgages in large numbers. Until now this activity had largely been restricted to the building societies. In turn, these societies would soon be allowed to ‘demutualise’ and many would turn themselves into banks. Finance in all its manifestations – the funding of companies, the scale of borrowing, the types of deals done by bankers and basic banking for consumers – was changing. Would the old Royal Bank be capable of keeping up?
The man who thought that it could, who would transform its fortunes and then hire Fred Goodwin as his successor, was Mathewson. He wasn’t even a banker. By education and inclination he was an engineer. Born in Dunfermline in 1940 and schooled at Perth Academy, George Mathewson graduated from St Andrews University with a degree in maths and physics. A PhD followed but he was restless. The Britain of the late 1960s did not seem to him to be a place for an ambitious young man wanting to make his mark: ‘I joined the brain-drain,’ as he puts it.
Five years spent working for Bell Aerospace and living in Buffalo, New York state, introduced him to America’s enterprise culture. It was a revelation. In contrast to 1960s Scotland, America seemed invigorating, exciting and open to change, a country where a young engineer could glimpse the possibilities of wealth creation. Mathewson studied in the evenings for his MBA and looked around for business opportunities. But by 1972 he missed Scotland so much that he wanted to go home to build a career. Not one of life’s natural mandarins, he turned down an offer to join the civil service and instead accepted a job that would give him his first experience of finance, with the Industrial and Commercial Finance Corporation, which later became the private equity firm 3i. He knew nothing about finance; he just thought it sounded interesting, intellectually stimulating and potentially rewarding.
Mathewson was attracted by the chance to get involved in the boom that was under way in oil production in the North Sea. Aberdeen was being reinvented as a boom town and in London the deals were being done that helped fund exploration. Here was a can-do industry on the move, while much of the rest of Scotland was visibly decaying. Other than oil and a nascent computer industry, the Scottish economy by the late 1970s and early 1980s was in poor condition. The nation’s industrial heritage, hewn in the days of the Empire and the Industrial Revolution, was in steep decline. As in parts of the North of England, shipbuilding, coalmining, steel production and other heavy manufacturing were all but dying. In many cases what was to blame was a fatal combination of poor management, trade union intransigence and a failure to modernise stretching back many decades. But the human cost, in terms of rising unemployment and distress, was enormous when the reckoning came.
With UK unemployment rising above 2.5m in 1981 and heading for 3m, the Conservative government was under intense pressure in Scotland to look for ways to encourage the growth of new businesses that might replace the old dying industries. In 1981 Mathewson was recruited to head the Scottish Development Agency, the taxpayer-funded quango originally established in 1975 by a Labour government. It was supposed to solve the riddle of what Scotland would do once it didn’t make so many ships or extract so much coal from the ground. The answer appeared to be that it would extract oil instead, make computers (in the emerging industry known as ‘Silicon Glen’) and possibly expand financial services. Mathewson’s mantra as boss of the SDA was that he would make any public sector money available go as far as possible, whether it was in trying to kickstart the attempts at regenerating Glasgow or persuading foreign businesses to invest in Scotland. He also wanted to use his muscle and expanding network of connections to save grand old companies if they were worth saving. The SDA and Mathewson were pivotal in the 1980s when Weir Group, the engineering giant, encountered difficulties and needed rescuing.
For most of the period when Mathewson ran the SDA, the Secretary of State for Scotland was George Younger, Scotland’s man in Margaret Thatcher’s cabinet. Younger and Mathewson clicked; they worked well together. The politician was prepared to let the ambitious quango boss get on with it and in turn Mathewson found Younger – a pillar of the Scottish establishment – calm and supportive. Soon, they would collaborate to dramatic effect at the Royal Bank of Scotland. After six and a half years spent trying to help rescue the Scottish economy, with partial success, the impatient Mathewson wanted another challenge. Sir Robin Duthie, chairman of the SDA and a director of the Royal Bank, was wrestling with the question of succession. Who could he find to help shake up a bank that was struggling to adapt? George Mathewson.
In 1987 an approach was made and Mathewson became the bank’s new director of strategic planning and development. He was clear in his mind that in order to survive the Royal Bank needed its own version of the financial revolution under way in London. This Scottish nationalist who didn’t care for the City, who had no time for the new breed of loudmouth traders and investment bankers who were starting to dominate the dealing rooms and wine bars, had a different philosophical creed. It was a punchy patriotism, which expressed itself in repeated declarations that there was no reason on earth why a Scottish bank could not become the world’s best, if only it would change in order to compete with the English banks and others. Highly energetic, blunt and magpie-like in his enthusiasm for new ideas and technical innovation, he was far removed from the traditional image of the cautious Edinburgh banker.
Charles Winter, Mathewson’s new boss, was an old-fashioned bank manager who was known as ‘the banker’s banker’ because he had done it the old-fashioned way, starting in the Dundee branch straight from school, rising to the top by dint of hard work, loyalty and application. He was the organist in his local church, near Edinburgh. The Royal Bank Winter ran was chaired by Sir Michael Herries – of Eton, Oxford and the King’s Own Scottish Borderers. He was awarded the Military Cross for gallantry in 1944 and had run Jardine Matheson, the great Hong Kong-based venture that began by trading in tea and opium in the early nineteenth century. It had been started by two Scots and retained strong ancestral links. Ambitious Scots keen to travel and work abroad found it a good place to make their way. Yet, for all his accomplishments, the old-school Herries was not a banker. He had joined the board of the Royal Bank in 1976 and didn’t seem particularly suited to the cut-throat era of modern banking.
There was some important innovation under Winter and Herries, including the launch of Direct Line, the UK’s first telephone-only insurance business, created in 1985.5 Williams & Glyn’s – with its branches in England – was also subsumed by the Royal Bank brand in the October of that year. But the hope was that Mathewson would bring energy and ideas. Announcing the hiring of their new head of strategy, gro
up chief executive Charles Winter said: ‘Our dream is to create an international bank run from Edinburgh and we are well on the way to doing that.’ Mathewson loved the sentiment, but found the institution he landed in hopelessly old-fashioned and ill suited to turning Winter’s dreams into reality. An impatient Mathewson appreciated that Winter had strengths but some of the rest of the senior management weren’t up to it. The Royal Bank seemed slow, staid and lacking in sophistication. Profits were measly.
Then an opportunity for the beginnings of global expansion presented itself. In purchasing the American bank Citizens in 1988, Winter – encouraged by Mathewson – hoped eventually to go much further than establishing a mere outpost in the United States. Citizens Bank had begun life in 1828 as a savings institution, a small mutual firm, much like a British building society, based in Providence, Rhode Island. Run by George Grayboys, in the 1980s it had demutualised, turning itself from a mutual society into a stockmarket-listed company. Grayboys wanted the backing of a bigger partner to facilitate expansion and he had a meeting with Winter in 1987. On his trips to Edinburgh, where he and Mathewson strolled down the Royal Mile, immersed in conversation about the possibilities, he fell in love with Scotland.6 Think what could be accomplished if the two institutions came together. Citizens would get the backing from a new owner who wanted to grow and the Royal Bank would get new access to American expertise and markets. Grayboys, impressed by Sir Michael Herries with his war record and immaculate manners, wanted a deal. The Royal Bank paid $440m for Citizens.
In Edinburgh, Mathewson was growing concerned that the basic business of the Royal Bank was so decrepit that collapse or takeover was likely. It simply did not make enough money. The branch network was inefficient and the early adoption of computerised technology had not been followed up with sufficient verve. In the Royal Bank’s loan book there were also some horrors lurking. Mathewson had concluded that the situation needed to be confronted. With his customary bluntness, he sought out Herries in his office and told him: ‘We are going to go bust unless we do something.’ Winter concurred, although the Royal Bank old guard below him resisted Mathewson’s early talk of change. At a meeting with two of the leading executives of the period, the director of strategy was astonished to be told that the Royal Bank simply could no longer make money from its branch network in Scotland even though the Bank of Scotland seemed to manage it. This bank really is in trouble, Mathewson thought. The more he saw it from the inside the more he believed a total transformation of structures and culture, led by him of course, was required. Luckily for Mathewson, at that point an ally arrived, someone he knew well and liked from his days running the SDA. Sir George Younger had by now tired of being a cabinet minister and had given a commitment that he would become chairman of the bank while Herries remained chairman of the Royal Bank Group. After three years as Defence Secretary, preceded by seven years spent as Scottish Secretary, Younger told Margaret Thatcher that he wanted to step down, although he would remain an MP until the 1992 general election.
Younger became a director of the Royal Bank of Scotland on 1 October 1989, shortly before opponents of Margaret Thatcher attempted for the first time to unseat her as Tory leader. That autumn he was immediately drawn back into the fray at Westminster, with the Prime Minister asking Younger to run her leadership campaign when a stalking horse candidate – Sir Anthony Meyer – emerged in November 1989. She would be victorious, on that occasion. Her luck would not last long. Younger was trying to help keep Thatcher in Number 10, but in his office in the Royal Bank headquarters in Edinburgh he was becoming convinced of the need for a leadership challenge at the bank. As anticipated when he joined, in January 1990 he became deputy chairman of both the Royal Bank Group and also of the bank itself. In June Mathewson was elevated to the post of Deputy Group Chief Executive, retaining responsibility for strategic planning and development. By July Younger was chairman of the bank, but not the Royal Bank group, and he agreed with Mathewson that bolder action was required. Younger’s reputation as a creature of the establishment might suggest that he would have been happy to see the chairmanship of a grand Scottish institution as a comfy sinecure before retirement. Instead, he and Mathewson began plotting and pondering how to proceed with dramatic changes.
Every Friday, Mathewson began meeting in secret with a select group of colleagues to prepare a management clear-out and reorganisation. The office of Cameron McPhail, brought from the SDA by Mathewson to work on strategy, was swept for bugs, so that each week Mathewson, Norman McLuskie, Miller McLean, Frank Kirwan (another strategist) and McPhail could gather there and plot without being spied on. They chose a code name – ‘Novo Redo’ – meaning ‘new rethink’ or ‘redesign’ in Portuguese, because one of their number was doing some work in Portugal, although they argued about what the correct spelling should be. The discussions resulted in a confidential paper that autumn – written by McPhail and Kirwan, and edited by Mathewson – which advocated a wholesale reorganisation. To save it, the Royal Bank would be divided up into much simplified divisions: the Branch Banking Division under Tony Schofield, the Corporate Bank, eventually under Mathewson’s friend Iain Robertson who was hired from the SDA; Direct Line reporting to its founder Peter Wood; and Citizens in the United States, run by Grayboys. Winter, who approved of the plan, remained as chief executive but real power was passing to Mathewson, the deputy. More than half the existing senior executives would be cleared out and all of this would be sprung in one day when the board met in November 1990 to give the go-ahead. Mike Mosson, the head of personnel, was brought into the plot to help prepare the coup.
Here the Royal Bank’s history intersects with the removal from office of a British prime minister. At just that moment, in November 1990, the Tories were preparing their own dramatic management reorganisation. Thatcher’s coiffed rival for the Tory crown, Michael Heseltine, finally made his move and triggered a contest amidst feverish excitement at Westminster. Younger, busy scheming with Mathewson at the Royal Bank, was caught up in the fallout of the Conservatives’ civil war just when he was trying to concentrate on the Royal Bank’s looming, and still secret, internal revolution. At first he declined the request to manage Thatcher’s leadership campaign, telling his Tory colleagues that he could not spare the time because of his work in Edinburgh. Then loyalty to his old boss meant that unwisely he caved in to pressure and tried to do both, shuttling between Edinburgh and London, with the plodding, shambolic, and frequently drunken Peter Morrison MP as his deputy on the Thatcher campaign. Earlier in the year Younger had tried to warn the Tory leader just how perilous her position was, asking her to tone down her rhetoric on Europe. Thatcher would not listen.
From Thatcher’s point of view Younger’s handling of the second leadership campaign was disastrous. He said later: ‘MPs did what constituents do in by-elections. As we guessed, at least fifteen told us they would vote for Margaret and then did the opposite. This was the simple reason why our forecasts proved to be wrong.’7
On Tuesday 20 November Thatcher won, but fell four votes short of the total she needed to avoid a second round. Two days later she would resign. Famously, she was at the British Embassy in Paris when the result came through and went outside to say that she would fight on, delivering a holding statement that her supporters had persuaded her to make. On the night of the vote, Younger, her campaign manager, was not even at the count at the House of Commons in London. Astonishingly, he was in his office at the Royal Bank in St Andrew Square, watching events unfold on television. He wrote later: ‘I was in Edinburgh when the vote was announced and was shocked and horrified that it had not been possible to get the extra four votes – although even these would not have been enough to give her the full confidence to remain in power. Even so, I was devastated, partly for her personally but also because I felt that the Conservative Party had made an enormous blunder.’
What Younger was really doing in his office that evening was meeting Mathewson to make the final arrangements ahead of th
e Royal Bank’s own ‘night of the long knives’, which would start the following morning when the board met. The pair sat and watched Thatcher’s televised humiliation and then got back to work. On Wednesday the 21st, the group board were called in early to hear the proposals and then approve the palace coup. Within weeks many general managers and senior executives had been removed. The old-fashioned Royal Bank title of ‘general manager’, dating back to the eighteenth century, was abolished and the terminology modernised. Mike Mosson got to his desk one morning to find new headed notepaper in which he was listed as ‘Human Resources Director’ rather than ‘General Manager, Personnel’. These small tweaks were designed by Mathewson and the group who had led ‘Novo Redo’ to signal that much bigger change and modernisation was coming.
There were tears and considerable anger when the firings began. A quarter of the senior executives were forced to retire or depart almost immediately. The polite Royal Bank had never seen such corporate carnage. And then, for a while, it passed. For the first half of the following year it seemed to executives that the changes would not mean all that much. On the surface, the Royal Bank was still the model of Presbyterian reserve and civic-minded Edinburgh politesse. The location of its headquarters in St Andrew Square meant that it was plugged into the heart of Edinburgh. As chairman, Younger often made a point when he was leaving the headquarters building of going through the elegant main banking hall so that he could be approached by any customers who wanted to express an opinion. Edinburgh ladies accosted the chairman and politely made their latest complaints or observations about the bank’s services. The Royal Bank was, in its way, grounded.
If the facade still looked fine, behind it the bank was in an even worse condition than Mathewson had realised. The reorganisation of November 1990 was not going to be anything like enough on its own. In the summer of 1991, to the horror of its customers and shareholders, the Royal Bank issued a profits warning. A property downturn had revealed how inept and incontinent the bank’s lending policies had been. In 1992 it just about scraped a profit of £20.9m, which the following year was marked down and shown to have been only £12.6m.