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The royal bank of scotland

The Royal Bank of Scotland

Executive Summary

Royal Bank of Scotland's rapid expansion into the global market as against its roots as a national bank, has exposed the bank to the ripple effect created by the fall in the USA housing market, which has led the global banking industry into greater economic crisis. As a result of RBS's exposure to the current financial crisis, this report shall looks at the difficulties involve in leading and motivating staff of RBS as it navigates its way out of the crisis.

The difficulties with leading staff of RBS that shall be looked into involve, lack of In-depth and technical knowledge by the board and the CEO, Managing culture, Managing Change, Loss of reputation, and Government Interference.

Understanding and satisfying of staffs need in this current financial crisis may be a difficult task for the management of RBS, this report shall also evaluate the difficulties of motivating staff of RBS ranging from government influence, disparity in pay, public outcry and challenges in satisfying the need of every employee of RBS

Lastly the report shall recommend practicable solutions that are applicable to the current financial crisis to the management of RBS.

1.0 Introduction

The environment where business operates has a major impact on its operation. Royal Bank of Scotland (RBS) operates in the UK financial industry which is one of the strongest financial hubs in the world. Porter (1998) says that a business will be successful if all the elements of the microenvironment are favourable to the organisation, this can not be in isolation of the macroenvironmental factors which also dictates the success of an organisation. The current financial crisis, was ignited by the fall in the USA housing market, and has a ripple effect which has exposed RBS and the UK banking industry as a whole, this has led to the liquidity problem been faced by the industry and the loss of confidence in the banking industry.

Companies that market products or services have always had to deal with a wider range of issues than those encountered by domestic firms (Jeannet and Hennessey 1998).

Royal Bank of Scotland's rapid expansion into the global market as against its roots as a national bank, has exposed the bank to greater economic crisis. The new chairman headed by Sir Philip Hampton in his bid to reform the bank has rooted out seven non executive directors and the former CEO Sir Fred Godwin who spearheaded the Global expansion, and appointed a new CEO Stephen Hester. In 2008 RBS group declared a loss of £28bn the biggest loss in British corporate history (www.guardian.co.uk) and this has culminated into several lay off of staff. The Government in its effort to save the bank has injected some fund into the bank's business and now owns about 70% of the bank.

RBS has laid off some thousands of its workforces over the past year, there is consistent criticism from the media and the general public about bankers pay and reward, banks exposure to the global crisis, government's control power etc, all these have sent different signal to the remaining staff and also create difficulties in leading and motivating these staff by the management.

2.0 Leading Staff Of RBS During The Financial Crisis

It takes a mentally tough and emotionally strong CEO and a competent Board to survive the current crisis. Kotter (1996) as cited by Robins and Judge (2007) says management is about coping with complexity by implementing the vision and strategy provided by leaders, coordinating and staffing the organisation for smooth operation, while leadership on the other hand in contrast is about coping with changes, by having ability to influence a group toward the achievement of a set of goals.

Robin and Judge (2007) also group leadership theories into two, Charismatic and transformational leadership. But says Transformational leadership builds on the transactional leadership

Ø The charismatic leadership theory.

Charismatic leaders have vision, willing to take personal risk, sensitive to follower needs. These individuals are set aside from ordinary people and treated as endowed with exceptional qualities and are given unprecedented autonomy and resources, which then makes such individual to posses ability to leverage higher salaries and reward even when their performance was not very good, high risk taker, incur high cost and engage in self sacrifice to achieve the vision, and engaging in unconventional behaviour. These traits were seen in Sir Fred Godwin character, though to some extent the staff and board were satisfied with him before the current crisis, but such attributes may be difficult to lead staff and the whole of RBS group in this current crisis judging by their recent performance (Refer to Appendix 1).

Ø The Transformational leadership theory

Transformational leaders are known for providing vision and sense of mission, communicates high hope, inspirational motivation, careful problem solving skills etc, however it also build up on the characteristic of transactional such as the contract exchange for reward, and management by exception. These set of individual inspire staff to put in more effort to achieve the business objectives and goals, and also help staff at looking at old issues in a different way by been more innovative and creative. These traits are been seen in the new CEO Stephen Hester and such characters may seems to fit in to lead in this current financial crisis

2.1 Challenges with leading staff of RBS out of this current financial crisis

Ø In-depth and technical knowledge of the board:

According to Peter Principle, "In a hierarchy every employee tends to rise to level of incompetence”. The remuneration package approved by the former board of RBS has shown that though the board has some financial experts but the full understanding of the former CEO package which led to the public outcry was not fully understood by some members of the board before they approved it. This was also emphasised by Ministers who believed that "it was not only Lord Myners who did not know that Sir Fred's pension was discretionary. They believed that the old board of RBS was kept in the dark too” (www.bbc.co.uk). The current board has several financial experts with years of experience working in the industry but this still does not guarantee that all strategies and decision made by them shall be perfect.

Ø In-depth and technical knowledge of CEO:

Dive (2009) argue that most CEOs do not know how to establish accountable organization. RBS was reported to have lost over £600m in Madoff's alleged investment scam. This could have been attributed to the lack of understanding and technical knowledge of such investment exhibited by the former CEO Fred Godwin before venturing into such a risky investment scam. However the new CEO too could have being tricked into such investment because it is very hard for CEO to posses in-depth and technical knowledge of all the financial operations and investment. But not withstanding CEO should strive enough to develop or gain the full understanding of some decision they might have made in past and to be able to correct some anomalies

When Egg card terminated over 100,000 of its credit card customer in February 2008, the CEO said he believes they pose an unacceptably "high risk” to the company, this was supported by Angela Knight, chief executive of the British Bankers Association, who said that Egg's action was "a sensible way of looking after a business" (news.bbc.co.uk).

Ø Managing culture

Another difficulty leaders are likely to face in the current financial crisis is the ability to manage culture. Leaders need to know how to manage culture that exit within its organisation and the environment where it operates. The issue that leaders face at each of their organisational growth stages are different, partly because the role that culture plays at each stage is completely different (Schein 2004). The inability by banks' chiefs to manage the bonus culture that exits within the financial institution in UK has led to public outcry and different criticism about the ability of these executives to run a profitable company and at the same time manage its staff. Stephen Hester who was brought to turnaround RBS might be faced with managing culture because it is a barrier to change, and change is prone to resistance.

Stephen Hester is expected to deal with lavish executive perks in RBS which has become a culture in the banking industry, such as the £17m private jet used by Sir Fred Godwin, and heavy pension schemes. However Stephen Hester too according to (www.dailymail.co.uk) lives an expensive life style such a 350 acres of country estate, expensive mansion in London, and large option reward. This is a culture that has been in the industry for quite some time and it may be difficult for any new CEO to change because he too might have been a benefactor at a point in time, and also for the position of a CEO of a large financial organisation like RBS to be attractive, the reward needs to be competitive. This is a major challenge that Stephen Hester and the board might faced in leading at this point of time.

Ø Managing Change

Johnson et al (2001) say when a business is in terminal decline and faces closure or takeover, there is a need for rapid and extensive change in order to achieve cost reduction and revenue generation. Stephen Hester was appointed not only as CEO at RBS but implied as a "change agent” who will carry out a rapid change within the bank. Change is a major challenge and may be difficult to implement than it seems at first because while changing the business strategies and operation, one has to change the people and their orientation. Balogun and Hailey (2004) say success rate for most of the change programme launched within organisation is poor and the failure rate is 70%. However Stephen needs to find ways of ensuring that the outcome is positive change rather than damaging to the business.

RBS in its bid to be back to a profitable organisation has embarked on different change management processes which have led to some job cut, however resistance to these changes is expected. Rob Macgregor, Unite's national officer, said the union was "appalled that thousands of people, who form the backbone of the RBS operations, are to be made redundant". He added: "These employees are totally blameless for the current position which RBS is in, yet they are paying for the mistakes at the top of the bank." (www.guardian.co.uk)

Ø Loss of reputation

Adams Equity Theory says the more upset people get the greater they strive to redress the inequity. The general public and the media's impression of banks and financial institution has led to the loss of reputation of most banks in the UK , which was even seen in the damage done to the building of RBS by angry protester in April 2009 during the G20 meeting in London. This has created fear into the members of staff of RBS not to be attacked in public once people know that they work for the bank. And this may even force some to leave the organisation or think about a career in another industry.

Ø Government Interference

The injection of over £20bn by the UK government to salvage the RBS from collapse has led to major influence of government in the decision to be made by the current Board and CEO. Decision made by management must always be the one politician will prefer rather than the one that will be of best economic interest to the bank. The recent announcement by the bank to cut 9000 jobs over the next three years which might result in a savings of over £2.5bn (www.guardian.co.uk) was strongly rejected by the Politician , and the bank's deputy chief executive had to change their strategy from job cut to redeployment of staff while facing the MPs. This is a vital challenge that faces the management of RBS in leading the staff for a profitable organisation.

3.0 Staff Motivation

Unhappy staff are known to have little chance to produce satisfied customers, so the more contented staff are, the higher customer satisfaction will be. The management of RBS needs to integrate individual needs along with the organisational goals in other to achieve the business objectives, but motivation of staff comes with different challenges.

3.1 Challenges with Motivating staff of RBS during the current financial crisis

Ø External influences

A key difficulty been faced by most organisations during this global financial crisis is that they have placed too much attention on the external environment, at the detriment of the internal working environment. RBS continuous laying off staff with the aim of cutting cost was a result of its exposure to the global economic crisis, liquidity in the market, and fall in stock value. This is a demotivating action to the staff of RBS but the management and board of RBS might want to first readdress it position in the banking industry before it can then focus on the staff extreme needs.

Ø Reward Structure

The pluralist perspective of organisational conflict according to Lashley and Ross (2003 ) emphasises that conflict between subgroups is inevitable, and therefore it must be handled and managed carefully . Because of the higher pay package being offered to some investment staff of RBS, some group of staff in the retail and commercial sector of business may believed that they are being underpaid and at the same time bring in lesser risk, this may result in different conflict and complex issues arising among staff.

Also the need for reward when target is met may be valued by some top performing investment staff within the bank, and they may threaten to leave if they are not been compensated competitively with what is obtainable in the industry.

Increased wages are precisely what RBS may not be able to provide during this storming period however Nelson (2005) has also said though money is a factor of motivation, but not sufficient condition alone to attract, retain and motivate good employees.

Ø Satisfying needs of all staff

Money may not be provided everytime while appreciation and involvement of staff which are seen as other means of motivation can be provided any time. The problem with this, is understanding the need of all members of staff of RBS and aligning organisation policies with these needs.

Maslow hierarchy of needs says before the self actualisation of need can be met, the basic life needs needed to be met, and he also said when a need is satisfied it no longer motivates and the next higher need takes its place (Refer to Appendix 2).

Maslow hierarchy of needs might be ineffective when organisation is faced with too many external factors. Virtually almost every staff of RBS is worried about their job security, public attack, loss of bonuses, and stigmatization of banking profession. Therefore understanding and satisfying of staffs need in this current financial crisis may be a difficult task for the management of RBS.

Ø Government Interference/ public outcry

The Government forced down the 2008 bonuses that were supposed to be paid to staff of Lloyd bank, as a result of government ownership in the bank and the poor performance of the bank in 2008, while some staff see these as unfair treatment because they met their target and they deserve their bonuses. This was supported by Unite trade union who says they will not accept a situation where staff are made to suffer financially for the mistakes or greed of the top executives who ran the bank. This could be demotivating to staff that work in the three banks where government have control, in which RBS is one of them

4.0 Recommendation

Leading and motivating is an integral part of managing people in an organisation, because people are major asset to such organisation. Gratton (2000) says people should be treated with politeness, respect, dignity and fairness. This can help to build an organisation where people can grow and flourish and at the same time save management reputation when they acted wrongly

Organisation branding could help to motivate employee, it helps to give them a job securities and the status that is attached to the branded company. Media can be used to gain back the good image RBS is known for, and also management should avoid action or event that may put the company into public debate by ensuring that ethical decision are taken all the time.

Businesses that survive the trying times are the ones whose leaders adopt a attitude of discovery and change, instead of resistances. Johnson et al (2001) suggest five style of change management: Education & communication, Collaboration/participation, intervention, direction, coercion, some of which can be used by the management of RBS while turning the business around.

Though RBS do appraise its staff regularly the use of management by objective (MBO) as part of its performance measurement for staff may be very much ideal in this era, in order to align both the goal of individual staff with that of the organisation.

Butler (2009) says that in a multicultural organisation, transformational leadership demonstrates care for the personal relationships with a diverse group of people that in turn builds better leader-member exchanges, trust and organisational commitment.

These kind of leadership traits might have been suggested to the board of RBS before the selection of Stephen Hester as the new CEO with the hope of changing the staff's paradigm and give them higher satisfaction. However a transformational leader will require more to be successful in this era , and this may include trust and been ethical, in other to gain the respect and to remove the stigma associated to CEO of big banks seen as selfish ,greedy, and extravagant lifestyle.

Apart from the normal qualities of a good leader, two exceptional role that may be expected of the new leadership of Stephen Hester and the new Board at RBS are to provide team leadership, and self leadership roles.

Team building is essential for every organisational development and growth. Task and problems are shared to enhance productivity, great leadership takes into account proper delegation amongst staff while still taking responsibility at the end of its completion.

Leaders lead by good examples in era such as this, Josef Ackermann, CEO of deutsche Bank pledged to relinquish his bonus which runs into millions of Euros (www.belfasttelegraph.co.uk). This action has also prompted 3 other senior board members to agree to relinquish theirs as well. Which is now been used as a yardstick in the industry. Though Stephen Hester is new at RBS but there are some other processes or action through which he can control his own behaviour in order to exhibit self leadership role

However leadership though required some qualities but these qualities and the leadership styles varies along with the changes in the environment. Managing change may go with different kind of leadership style. Lewin et al (1939) identify Authoritarian, Democratic, and laissez-faire style as the three major classification of leadership style. Stephen Hester may decided to use any or combination of the styles. Whichever option adopted has its own shortcoming, therefore the management should ensure it monitor the resistance and blend with any changes to its style that might fit any particular circumstances.

Training is one of the strategies for success in organisation, the cultural change that is expected of the new board can be done through training of its staff. Also RBS Management is expected to come up with some practicable corporate and business strategies, which will give not only the shareholder confidence in the bank but inclusive of the staff, who will then be certain about their long term commitment to the business instead of the fear of losing their jobs

RBS management need to put more efforts into the remaining staff so as not to lose the key ones, because of the amount of training and experience that has been impacted into them. Therefore involvements in plans and decision, timely and resourceful information, celebrating success, flexible working hours are some of the intrinsic motivation that can be used.

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