by Iain Martin
It had actually been a very pertinent question, even if Goodwin didn’t want to hear it. Was RBS in danger of getting ‘a bit up itself’? It looked to be well on the way. When the company prepared a corporate video celebrating the triumphs of Mathewson and Goodwin, Howard Moody, the communications chief, even secured the rights to use the music from the film Gladiator.1 Where once they had channelled the spirit of Braveheart, William Wallace and Mel Gibson, now they were going up a gear, and associating themselves with Ancient Rome, the Emperor Marcus Aurelius and a sword-wielding Russell Crowe.
While the immense pride of those at the top of RBS, and those further down the bank too, was certainly understandable, considering the growth of the company and the new exalted status that Gogarburn embodied, a fly-past in the presence of the Queen was usually reserved for great state occasions. It wasn’t normally sanctioned for the opening of a glorified office block, even if it sat at the centre of a ‘landscaped campus’. Perhaps the critics had been on to something when they mocked the puffed-up pretensions, flummery and fanfare that went with the Gogarburn development.
On 14 September 2005, hundreds of guests – the Scottish great and good and the not so great and good of the corporate, social and media worlds – gathered to marvel at ‘Fredtown’.2 Mathewson thought that Goodwin simply loved the occasion, although he appeared slightly uncomfortable or nervous at certain points, perhaps understandably. In the event, the official opening of Gogarburn went off as smoothly as Goodwin had planned. The Queen and Duke of Edinburgh were welcomed at the door at 11 a.m. by a receiving party whose members included the Secretary of State for Scotland Alistair Darling, the First Minister Jack McConnell, Mathewson, Goodwin and Mark Fisher. The pipes of the Highland Band of the Scottish Division provided the accompaniment as four Tornado jets from 56(R) squadron crossed the River Forth and screeched overhead. The royal couple met the architects and then groups of staff members presented by Gordon Pell, Johnny Cameron, company secretary Miller McLean and HR director Neil Roden, before mingling with guests who were consuming canapés and sipping champagne. It was soon time to move through to the ‘internal street’ at the heart of the building where the formal opening ceremony would take place.
Mathewson introduced Her Majesty. With the Duke of Edinburgh, the RBS chairman and Goodwin seated behind the Queen on a stage constructed for the occasion, she addressed the assembled grandees and RBS staff filling the hall and peering over balconies. It was, she noted, 278 years since RBS had been granted a royal charter by one of her predecessors, King George II. She paid tribute to those who had ordered the building of Gogarburn: ‘Even a prudent bank needs to build a new headquarters once in a while.’
The Queen does not write her own speeches. They are scripted by officials trying to capture the mood of the moment, who have to give the monarch something encouraging and fitting to say in front of an expectant audience.3 This short speech praised the prudence and good husbandry of Scottish bankers down the ages. Viewed from the other side of the financial crisis – in which RBS and the old Bank of Scotland in HBOS had starring roles – this is unfortunate. ‘For many years, Scotland has had an enviable reputation for efficient financial management in a highly competitive international market,’ the Queen went on. ‘This building is a fine tribute to the many generations of “canny” Scottish bankers, who have made – and are still making – such a valuable contribution to the national economy.’
That tribute and the day at Gogarburn should have been the crowning glory for Scotland’s canniest banker, yet by the autumn of 2005 all was not well. The golden boy, the master of integration, was being criticised. Even when RBS bought a 5 per cent share in Bank of China for £900m that August it was seen in the City through the prism of Goodwin’s alleged deal mania. Ironically, he had been doubtful about the wisdom of the transaction. It was members of the board who were much more keen and who had wanted to buy a bigger stake, 10 per cent, if possible. In the end it turned out to be a good investment, as RBS almost doubled its money when it sold the stake after the financial crisis. In 2005 it was presented as more evidence that Goodwin was on an ego trip, particularly because it came with a seat on the board of the Bank of China. In one sense the complaints from analysts such as James Eden, grumbling from shareholders and sniping from some journalists were merely irritating distractions. But some of the critics were also asking a perfectly valid question to which RBS didn’t seem to have an answer. What would Goodwin and his team do now? Growth had been so rapid since the pre-NatWest period that it was difficult to see how it could be sustained without another huge and risky purchase, perhaps of a bank in Europe or the United States, for which investors had no appetite.
Consider the balance sheet – total assets – of RBS by the end of 2005. It had ballooned since the takeover of NatWest. At the end of 2001 it stood at £369bn. By 2005 that figure was £776.8bn. Profits before tax were up dramatically in the same period, from £4.25bn to £7.9bn. That growth at the top of a long boom was coming from aggressive expansion. In 2005, the contribution to profits by Corporate Markets – the division under Johnny Cameron, which included investment banking activities – was £5.2bn, up 24 per cent on the previous year. Ulster Bank’s contribution to profits was up 15 per cent to £530m. And after swallowing Charter One, and pressing the accelerator on property loans in the United States, Larry Fish’s Citizens’ contribution was £1.57bn, a blistering increase of 47 per cent. How sustainable or sensible can it be to carry on trying to grow at anything like these rates year after year? Eventually, history suggests, the boom slows, pauses or even goes bust. In the early years of the twenty-first century this seemed to have been forgotten. Generally there was no belief that the bubble would burst.
There was also a little jiggery-pokery in the RBS figures – or ‘spin and bullshit’, as one of Goodwin’s team calls it. The manufacturing costs – of the vast centralised machine that Goodwin and Fisher had built to service RBS – were never properly broken down or adequately explained. The suspicion was that it obscured empire-building and costs that should be lower.
In late 2005 the simple question being asked of Goodwin was how he could maintain such a thundering rate of progress. Adding to the sense of dislocation, change was coming to the boardroom of RBS. Mathewson wanted to retire and the two vice chairmen, Sir Angus Grossart and former BT chairman Lord Vallance, stood down in April. After eighteen years, the Mathewson era was drawing to a close and a replacement was readying himself to take over.
Sir Tom McKillop didn’t want to become chairman of a bank. In fact it was just about the last thing he fancied doing. Six years spent on the board of Lloyds – wading through pile upon pile of board papers and dealing with bankers – had convinced him that chairing the board of a financial services company wasn’t how he wanted to top a successful career. But Peter Sutherland, the chairman of BP, suggested to Mathewson that he had identified just the man to be his successor. McKillop, a research chemist by training who had risen to become chief executive of the pharmaceutical firm AstraZeneca, sat on Sutherland’s board at BP. Sutherland sat on Mathewson’s board at RBS. He might get a discreet call from George about RBS, Sutherland told McKillop.
This was a slightly unorthodox way for a large company to choose a chairman, but typical of Mathewson’s RBS. Standard procedure in most large companies is that several non-executives will make approaches to a potential chairman, then there will be formal interviews, due diligence completed and an appointment made. Here the outgoing chairman was doing the picking, just as Mathewson had when he personally sought out Goodwin in 1998. Mathewson had been the main moving force in the organisation since 1987, an extraordinarily long period in modern corporate life. ‘In getting Tom, George was seeking to protect his legacy rather than risking the arrival of someone who might not like what they found and tear it up,’ says a colleague.
Dublin-born Sutherland is Ireland’s most impeccably connected international panjandrum and transcontinental schmoozer. A barris
ter and former politician, this jowly, Jesuitical, self-confessed Europhile has been Attorney General of Ireland, EU commissioner, head of the World Trade Organisation, chair of the court of governors of the London School of Economics and chair of Goldman Sachs International. As an apostle of the global establishment who helped liberalise international trade during his time at the WTO, he is sometimes referred to as the architect of globalisation, the process whereby tariffs and trading barriers are lowered to aid trade between emerging economies and the older, established economies. Sutherland is extremely well connected politically. He lobbied to become president of the EU Commission, only being blocked by President Chirac because of his association with Goldman Sachs and BP. In 2007, as chairman of BP, he was on hand, although just out of shot, when Tony Blair was filmed shaking hands with the despotic Muammar Gaddafi in a tent in the desert, a gesture which confirmed that the dictator was being brought in from the cold by the West. BP then signed a £545m oil exploration deal with the ill-fated Libyan leader’s government.
In 2005, the rapidly growing RBS had global aspirations but to a transcontinental mover and shaker such as Sutherland it still lacked a certain international sophistication. Appointing McKillop as chairman of RBS would deal with two problems at once. Even though much of its core activity took place outside Scotland, there were political sensitivities. Throughout the history of RBS the chairman had always been a Scot, and Mathewson was insistent that this should remain the case. McKillop, a high-flying Scotsman who had made his name in an industry that was genuinely global, thus ticked two boxes: home and international. A third box went unticked, of course. He wasn’t actually a banker – as his critics pointed out after the financial crisis – but he had sat on the board of Lloyds. Anyway, RBS had no tradition of appointing a banker as chairman.4 What seemed more important now was that he – and incidentally the chairman had always been a he – should be a strong character capable of understanding the unique history of the Royal Bank and the need for it to behave more in keeping with its status as an emerging global corporate giant.
Like Goodwin, McKillop had risen from a humble west of Scotland background. Born in 1943 in Dreghorn, Ayrshire, he was made the ‘dux’ of his school, the award handed out to the pupil judged most academically gifted. A first-class degree in chemistry at Glasgow and then a PhD followed. He had always envisaged spending his career in academia, until a job offer from ICI in 1975 made him reconsider. After running teams engaged in drug research he found he had a skill for management and by 1999 he was leading the merger that created AstraZeneca. He remained as chief executive of the firm until 2005.
Becoming chairman of RBS did not appeal, he told Mathewson when the pair had dinner in McKillop’s flat in Chelsea. Mathewson persisted and played the Scottish card. After such a long time away, wasn’t it time to give something back? Do it for Scotland. The call of his homeland began to tempt McKiIlop and his wife agreed that they should ‘reconnect, go back’. There would be a nice symmetry in him returning to his roots to chair the biggest company in the land of his birth. The appointment also came with the use of a flat in a town house in Heriot Row, in the heart of Edinburgh’s New Town, thrown in for when the chairman needed to be in the Scottish capital. McKillop set about doing some due diligence of his own, taking soundings from friends in the City, seeing John Connolly, the boss at RBS’s auditor Deloitte’s (who was very positive) and talking to Miller McLean, the RBS group secretary, to satisfy himself that the company’s governance was as it should be. It seemed that although Goodwin was a very strong character, his dealings with the board were open and transparent.
McKillop asked to see the FSA’s ‘Arrow’ reports, the regulator’s assessments of its dealings with RBS and Fred Goodwin, and he was encouraged by what he found. Similar reports on Lloyds, that he had seen in his time on the board, struck him as having been much more scathing in their criticism than those he read on ‘Fred the Shred’. Goodwin also visited McKillop at his flat in Chelsea and the pair got on well. They talked about the remarkable evolution of RBS and the challenge of finding ways to continue growing. Right, he would do it, McKillop decided. He informed Mathewson and joined the board as deputy chairman on 1 September 2005, a fortnight before the Queen opened Gogarburn. The understanding was that he would take over as chairman the following April.
As he familiarised himself with the company he would soon chair, McKillop concluded that there was a slight whiff of parochialism about some of RBS’s dealings. For a bank that was now the fifth-biggest in the world it still seemed a little homespun and naive in certain regards. Some of the Scottish touches immediately struck McKillop as gauche. Should an international bank really serve mince and potatoes at every board meeting? And shouldn’t the board be more international and diverse in its membership? Mathewson had made some efforts to broaden its composition to include more non-Scots, bringing in Sutherland and Colin Buchan, whose name made him sound Scottish when he hailed from South Africa, as well as Steve Robson, the former Treasury mandarin. Still, the board seemed very British with a strong Scottish tinge. This was basically a British bank with what seemed to be a strong US retail business attached. But Citizens was run almost separately by Larry Fish.
Goodwin’s management style was rather dysfunctional, McKillop observed. In front of the chairman the chief executive always took care to be calm and professional to the extent that McKillop never once saw Goodwin ‘shred’ anyone. Scrupulous politeness characterised his dealings with the board too and sometimes he said very little at its meetings. Board members found that requests they made, to visit parts of RBS or get a briefing on a particular part of the business, were fulfilled. ‘If you want that then you must have it,’ Goodwin, with his hands outstretched, told Archie Hunter, the retired senior accountant from KPMG who had recently joined the RBS board to chair the audit committee. The idea that surfaced later, that a stupefied board was somehow terrified into silence by a maniacal Goodwin, was bogus.
The obvious problem, McKillop concluded after touring the bank and interviewing RBS’s most senior people, came underneath board level, when Goodwin was dealing with his own executive team. His approach appeared to rely on an odd combination of styles. It was a weird blend, McKillop noted, of an ‘empowerment culture’ with daily control. The concentration was on milestones, targets, projects and goals, with numbers attached. Goodwin’s executives were given considerable autonomy to run and develop the parts of the business for which they were responsible, if they met their targets for rapid growth. ‘If he trusted you and you met your numbers you were generally OK,’ said one. But if there was even a flicker of a problem, or a hint that someone was off track, or a tiny detail he didn’t like the look of caught his eye, Goodwin was likely to interrogate the person responsible remorselessly in the manner familiar to all who had worked for him down the years. This helped explain why the morning meeting – ‘morning prayers’ or the ‘morning beatings’, as some called it – could become a wearing litany of problems, game-playing and blame-dodging. The smart executive had an incentive not to mention real difficulties, concerns, or even new ideas, for fear of being embroiled in a seemingly endless inquisition. When Johnny Cameron referred in passing at a morning meeting to something Alan Dickinson had done to reduce the amount of paperwork in the corporate banking division, Goodwin snapped: ‘What’s Alan done? What’s he done?’ Dickinson sighed – silently cursing Cameron for mentioning it because he would now have to explain every aspect of a relatively minor piece of administrative reorganisation. This wasn’t an environment in which asking an open-ended question was going to be a sensible course of action.
‘McKillop saw it straight away. He got it,’ says a colleague. ‘When he joined the board he saw the problems with Fred and realised that the governance wasn’t yet up to the standard an international company needed. The question is why he decided when he became chairman not to take the first of his three chances to move Fred on.’ Part of the answer was that when he visited the twe
nty largest institutional investors who owned a lot of RBS stock, McKillop felt the message he received was that Goodwin was someone he should hang on to. This ran contrary to some of the adverse comment which had appeared in newspapers, with Goodwin warned off pursuing more major acquisitions by the litany of criticisms since 2004. Yet with no obvious successor in place, it was deemed better that he stay and deal with the challenges facing the bank. Investors pointed to charts and research suggesting RBS had peaked. One said to McKillop: ‘You’re big in the UK, which is a mature market, and you’re big in the US. What about the emerging markets and the rest of the world? Where’s your growth?’ Other than the shareholding taken in Bank of China, it seemed like a fair question. The share price, which not long before had lagged because investors feared that Goodwin might be a megalomaniac ‘deal junkie’ obsessed with big purchases, now traded below expectations because RBS seemed to have no convincing plan.
Goodwin was going through something of a slump himself at Christmas in 2005. Reports had surfaced late in the year that the chief executive was thinking of moving on and Mathewson, in his final months as chairman, denied the rumours.5 The truth was that Goodwin was thinking about his future and had discussed it with Mathewson. With McKillop’s appointment as chairman confirmed and announced to the press on 21 December, Goodwin took a month off and tried to decompress, staying away from the office. Some of his colleagues believed the criticism had got to him, others that he was tired but had no intention of leaving and merely wanted to feel needed ahead of the handover from Mathewson to McKillop. ‘Fred was a bit bored with running RBS,’ says an RBS director of the period. ‘He wasn’t a natural-born banker and was thinking about whether he should do something else.’
