RBS' Sir Philip Hampton: We should all Learn How Banks Should Behave

Sir Philip Hampton was described as a “safe pair of hands” when he became chairman of The Royal Bank of Scotland (RBS) in January 2009, at a time when it was weathering one of the most severe financial storms ever. A year and a bail-out package later, RBS seems more secure. Sir Philip spoke to Forbes India about the issue of executive compensation in banking.

Sir Philip Hampton
THE MAN
He is one of the most respected chairmen in the UK. The British retailer J Sainsbury prospered under his stewardship. Later, he was the moving force behind the Hampton Report which provided for better co-ordination between various local authorities in Britain. He was also the chairman of UK Financial Investments Ltd., the company that managed UK government’s stakes in various banks after the recapitalization.
THE ASSIGNMENT
As chairman of RBS, he has overseen its recapitalisation with an infusion of more than 50 billion pounds from the British government, one of the largest such events in business history. He has to now make the bank more competitive on a global basis.
HIS PLANS IN ASIA
Be a large global bank but in each geographical area choose specific lines of businesses to dominate. RBS, for instance, is getting out of retail and commercial banking in Asia and India. It will focus on investment and transaction banking in these markets.

The last one year has been clearly one of the most trying times for someone leading a banking institution. What would be the important challenges you had to grapple with?
I would categorise what needs to be done in three categories, which I call the three “R”s. The first one is the recapitalisation of the business, second one is refocussing of the business and third one is restoration. The year 2009 we focussed on the first aspect, that is, the recapitalisation of the business. If you go back in time, RBS acquired ABN AMRO at the worst possible moment; just before the credit crunch. And we paid for the acquisition in cash, which means capital was depleted right at the very worst moment.

We have very good businesses and very good franchisees in both RBS and ABN AMRO. So we have, till now, focussed on rebuilding the capital base, one of the biggest recapitalisations in global business history.

There is so much of debate around executive compensation. What kind of new approaches are you contemplating?
I think we were at the forefront of making changes to our compensation structure in banks. The key principle is that bonuses be deferred so that the results [of an executive’s actions] are clearly corelated to profitability.

Bankers should not be paid too much more highly than extraordinarily able people in other demanding industries. This issue is particularly challenging at a time when taxpayers have been bailing out banks and that becomes a political issue.

My job is to help run the businesses so we need to pay people at the right level to run these businesses effectively. Some of these things we cannot address unilaterally. One of the Treasury ministers, one of the ministers in the UK government, said that RBS cannot do this unilaterally, even when we are government-controlled and we are particularly exposed in terms of competition.

What is the long-term solution? Unless coordinated action is taken banks like yours will be prisoner of the market in some way?
The solution is a properly functioning market where people get paid at the market rate and not at excessive levels. This is hard at the moment because of the fantastic gyrations we have had in banking profitability. With the bailouts, it is quite hard to see what the long-time profits will be in international banks. So I don’t think we can make those judgments this year.

Do you reckon we need a new set of discussions at the board level on stewardship or trusteeship and community-centric approach? Did businesses end up placing too much focus on shareholder value creation?
Banks should be absolutely rooted in their communities and in their countries, and in their functions as good citizens.

A bank to me is more fundamental and so its businesses should be strong — particularly when its customers are weak because you go to the bank in the times you want help. So what happened in the recent past turned the bank model upside down. Banks ran out of money, so they had to go to the taxpayers. It’s terrible. We should all learn from this about how banks should behave. Having said that, banks still need to be businesses. They still need to perform well financially and they still need to reward their people.

The other area of worry is all the stuff that is going on the regulatory side, specifically the separation of commercial and investment banking. How do you see the regulatory landscape taking shape?
The world does need some big banks. We have lot of big customers who want us to be a big bank, operating in a number of global financial centres. I don’t see that going away. I see more multinationals. More economic activity requires more international banks over time.

The real issue is, to what extent you can marry that sort of global activity with country-specific deposit gathering. Cheque leaves signed get into difficulty because when the deposits are in UK, United States and because something has happened on the other side of the world, my money is unsafe. That is not acceptable. That bit of regulation we have to crack. An absolute structural separation of investment banking and corporate banking is one way to tackle this problem. Deposit gathering is another way to crack it. One can also look at separate capitalisation levels for banks in each country, in each jurisdiction. Penalty capital charges for banks is another way to crack it. I think all this has been considered by the regulators. I don’t think at this moment there is a single powerful voice that everybody is really listening to.

Why are you making an exit from retail from this part of the world, at a time when multinationals are making Asia the centre point of their business?
If we had almost unlimited capital, we would have continued with the expansion of our retail businesses. I think, in the end, to succeed in businesses you have to reach a proper scale. Building scale against some pretty tough incumbents in India will certainly need huge amounts of capital. There is absolutely nothing wrong with the long-term growth prospect in India, China, Indonesia and other strong economies. But I think there is also certainly an issue of management control. This idea that you can be in every aspect of the banking market in every significant economy of the world may not be correct.