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The many failures that lead to the disaster at the Royal Bank of Scotland finance

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Published: Mon, 5 Dec 2016

Among the many failures that led to the disaster at the Royal Bank of Scotland, there was obviously a failure of corporate governance. So it is only right that, along with all the other regulatory reviews, there should be a review of the governance of corporate governance.

In Britain, this is partly a matter of self-regulation, with companies expected to follow the best practice corporate governance standards set out in the so-called Combined Code.

It is surely only a matter of time before some headline-grabbing politician identifies the root cause of all our problems: we have been letting the rascals regulate themselves.

So it is very sensible for the Financial Reporting Council, which acts as caretaker of the Code, to try to get its retaliation in first. And it is very sensible that it will work closely with Sir David Walker, who is conducting a separate review of governance of banks.

Critics of the British approach to corporate governance – particularly in America – enjoy pointing out that RBS was, in fact, a model pupil. It did everything by the book, ticked all the boxes and filled page after page of its annual report with an exhaustive analysis of its corporate governance performance.

In particular, it had a separate, non-executive chairman – a central pillar of the UK code, but far from standard practice in the United States – a post is designed to restrain an over-mighty chief executive. Yet the RBS chairman Sir Tom McKillop failed to restrain Sir Fred Goodwin, with catastrophic consequences for the bank and the taxpayer.

American critics of the British system claim that we are so focused on ticking the boxes that it makes us complacent. It is one thing following all the rules, but boards also have to ensure that they are working in practice.

There are a few obvious areas the review should examine.

The roles of chairman, chief executive and senior non-executive director need to be better-defined. The code should encourage non-execs to seek outside advice on big decisions. It should consider whether there should be special rules applying to banks – it would clearly be advantageous if at least the chairman and members of the risk committee of banks had specialist experience.

The review should consider ways to encourage more active involvement of shareholders in corporate governance questions. And not just traditional institutions, but also sovereign wealth funds and even hedge funds.

The problem with all this is that, however they are structured; boards are only as good as the people on them.

And, for many reasons, the job of non-executive director of a big company, let alone chairman of a bank, is not getting any more attractive. Even good people fail. Example is RBS board. It included the likes of Peter Sutherland and Sir Steve Robson. And, given that so many reputations have been tarnished by the credit crisis, the pool of good people is shrinking.

But it would be a mistake to allow the few good people to take on too many jobs. As chairman of BP, Mr Sutherland is now supporting the reappointment as a director of Sir Tom, whom he helped to become chairman of RBS. Sir Tom, the man ultimately responsible for Sir Fred’s pension, even sits on the BP remuneration committee.

Research Question and Methodology:

Royal bank of Scotland was a good example of following corporate governance which follows all the code of corporate governance. Despite this RBS had to bail out by taxpayer money, and majority of it’s share now owned by taxpayer.

Board of directors of RBS was all outsiders and reputed on their own field and there was no inner member on the Board. This proposal found a report that RBS trader bought £34 billion pounds of sub-prime toxic assets in US without informing it’s Board. The sub-prime assets are being blamed for causing the bank’s near collapse in 2008. Last year RBS posted a loss of £28 billion – the largest in British corporate history.

There may be a conflict between Board of members and Management. Maybe if there were member in Board from inside or from management this trouble in RBS might be avoided.

This proposal will try to find out structure and role of Board of Member and Management at RBS. And try to find out any conflict between Board and management which put RBS in turmoil.

This proposal will try to research on theory of corporate governance and their practice at RBS; try to find out the impact of corporate governance and its practice at RBS.

This proposal will use secondary date for its quantitative research.

Literature Review:

Corporate Governance & Board of Directors

The Corporate Governance is a wide and important subject that covers a range of issues from accountability and transparency and the relationship between the board of directors, management and shareholders to help in determining the path and performance of the corporation (Hunger & Wheelen, 2007, p. 18). The corporate governance system was designed to help oversee the decisions and best interest of the shareholders. The system should works accordingly: The shareholders elect directors, who in turn hire management to make the daily executive decisions on the owner’s behalf. The company’s board of director’s position is to oversee management and ensure that the shareholders interest is being served. Corporate governance focus is with promoting enterprise, to improve efficiency, and to address disputes of interest which can force upon burdens on the business. Ensuring that the clearness, and truth in a company’s business can make contribution to improving the enterprise standards and public governance. In brief, corporate governance is the system of controls to ensure that investors can assure themselves that they will get their investment back.

Depending on laws and other standard it might vary, but generally Board of Director describes as bellow:

Those who set the overall path, vision and mission within the business.

Those who make the decisions to hire and, or fire any top management member (Hunger & Wheelen, 2007, p. 19)

Those who oversee management and evaluate strategy.

Those who have the shareholders’ best interest in mind.

Those who review and approve the use of company resources, as well as monitoring the effectiveness of the governance practices.

Corporate Governance in U.K.

Corporate governance is varied in almost every country depending on a number of factors such as the economic development of the country, the strength of the legal system, the stability of the government but despite this the U.K is decidedly different from that of it’s neighbouring regions in the E.U. There is a unitary board of management and a broader shareholder bases as well as hardly any dual shares and no pyramid structures. (Franks et al. 2004) An examination of the history and development of corporate governance and legislation in the U.K may provide some answers to the considerable differences that have occurred in contrast to many other European countries and worldwide.

The U.K corporate governance practices have evolved from an agency perspective and the principal agent theory with a strong bias towards shareholder protection and shareholder rights. The protection of shareholders, in particular minority shareholders is covered by Company Law and is a major reason for the wide shareholder base characteristic of U.K listed companies.

The major developments of a workable corporate governance system for the U.K came about due to a few notable high profile financial scandals and public corporate collapses such as Maxwell’s Communication Corporation and Bank of Credit and Commerce International (BCCI). Robert Maxwell had been taking money out of the pension funds to aid his downwardly spiralling financial situations and managed to bypass auditors and shareholders alike. His uncurbed power made this possible. The BCCI scandal had a worldwide effect. The Bank was guilty of bribery, arms trafficking, money laundering, the sale of nuclear technology, tax evasion, illegal immigration etc. Auditors were blamed again. After these and various other scandals there appeared to be a lack of confidence in the ability of many U.K companies to accurately report on their financial situations. This led to an important committee being formed; the Committee on the Financial Aspects of Corporate Governance.

The report issued by the committee in December 1992 is one the most influential codes on corporate governance and has been used and adapted by many other countries in the development of their corporate governance systems. Sir Adrian Cadbury was the Chairman of the Committee and so the report became known as the Cadbury Report. This report made many valuable recommendations on the composition and roles of the board of directors as well as the non executive directors.

Some of the recommendations given in the Cadbury Report were the separation of the Chairman and the CEO, the inclusion on non executive directors, regular and scheduled board meetings, directors access to advice, the length of appointments, the system of appointing non executive directors, disclosure of remuneration and the system of reporting and controls.

All U.K registered companies who want to be listed must comply with the Codes of Best Practice recommended by the Cadbury Report. This ‘comply or explain’ system as opposed to statutory regulation is said to give the United Kingdom an advantage in that it doesn’t “unnecessarily constrain business practice and innovation.” (Financial Reporting Council 2006)


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