Blank Walks The Plank...

In Money Week, I've been writing about how chief executives are going to start getting a much rougher ride. And about time too....Here's a taster.

Nobody will be sorry to see Sir Victor Blank depart as the chairman of the newly-created Lloyds Banking Group, least of all its shareholders. The rushed merger with HBOS, cobbled together after a drink with Gordon Brown, will surely go down in British corporate history as one of the most spectacular financial catastrophes of all time. The only surprise is that he hung on to his job all the way to May rather than being forced out as soon as the mess he had made of the job became clear.
But Blank will be far from the last FTSE chief forced to walk the plank. Indeed, the next five years look set to be very rough for the pampered executive class. Heads will roll on a scale that would make even the most blood-fevered Jacobin revolutionary feel queasy. Chief executives and chairmen have grown used to hiding behind a booming economy, whilst lining their own pockets with salaries, pensions and bonuses that would make even a backbench MP feel embarrassed.
The far tougher economic conditions of the next five years will sort out the really skilled businessmen from the mere clock-watchers and time-servers.
Indeed, Blank himself is emblematic of the kind of executive who prospered during the great bubble. He was a skilled net-worker: just about everyone in the City will have been to one of the summer cricket matches at his Oxfordshire estate. But there was very little evidence of any real commercial talent. He started his career as a lawyer, becoming a partner in what was then Clifford Turner, before switching to corporate finance and dabbling with mostly non-executive roles. He was chairman of Trinity Mirror for many years, during which the Daily Mirror began its long descent into irrelevance. He was the architect of the merger with the Trinity local newspaper group, another catastrophe for shareholders. But it was at Lloyds that he really got found out.
It is probably a good rule that lawyers shouldn’t be put in charge of banks: another lawyer, Lord Alexander, was the chairman of NatWest for a decade in the 1990s, and that ended up being sold to Royal Bank of Scotland, with results that are now plain for everyone to see. Blank certainly seem to have very little idea what he was wading into when he took control of HBOS last autumn. Lloyds had sensibly avoided the worst excesses of the bubble. But years of careful management were blown in a few days with the £7.7 billion acquisition of HBOS.
A career banker would have been a lot more cautious: there were already plenty of stories circulating about wild and imprudent lending at HBOS. Blank’s naivety, and his lack of hands-on experience of retail banking, were cruelly exposed.
He will have plenty of company of the next few years, however.
This recession will sort out the smart business brains from the public relations men and networkers. In a bubble, all manner of weaknesses can be quietly swept under the carpet. All that is now about to change.
First, the bubble allowed lots of pretty ordinary businesses to look as if they were doing pretty well. Since it burst, we’ve discovered that British Telecom isn’t really a world-beating, science-based company on the cutting edge of technological change. It’s a fairly dull old utility, with some big pension problems. Marks & Spencer turned out not to be a brilliantly re-invented retail concept ready to conquer the world, but a slightly odd combination of an over-priced food chain with an underwear retailer added on (or maybe it’s the other way around). Plenty more chief executives will find the next few years a chastening experience. It wasn’t that hard to push up sales and profits in an economy growing at 3%-plus a year. It is a lot harder in one contracting by 3% a year.
Next, there isn’t going to be much leverage around to pep up performance. During the credit boom, plenty of chief executives borrowed some tricks from the private equity industry. Even if they company wasn’t doing that well, they could spice up returns by calling in some investment bankers and re-engineering the balance sheet. Debt could be pushed up. Properties could be sold off and leased back. With the money, you could raise dividends or launch share buy-back programmes. None of that is going to be possible for the next few years. The cash won’t be there.
On top of that, there isn’t much chance of an M&A boom. A mega-merger allowed companies to promise growth in the future. Even if that didn’t materialise, you could strip out a lot of costs, and grind out higher profits. GlaxoSmithKline has been playing that trick for years. But with the markets in no mood to finance any mega-deals, that won’t be on the table either.
Lastly, investors are about to get a lot more demanding. Capital will be scarce – and the huge borrowing requirements of every major government will suck up much of what money there is available. For much of the last decade, shareholder oversight of big companies has been largely a fiction. Company boards could essentially do whatever they liked. That too is about to change. Companies will have to pay close attention to what their shareholders want. If they don’t, they’ll find themselves quickly voted out of office.
Chief executives have done well out of the boom of the last decade. Million-plus salaries that once provoked headlines have become the norm. Pension packages were lavish. Bonuses were paid out regardless of whether they were any results to justify them. And yet of the British companies in the FTSE, only BP, HSBC, Tesco, Vodafone and RTZ could really be argued to have made much progress as global businesses in the last decade. The rest were just treading water, and that is putting it kindly.
The easy days are over. In the next five years, company directors will have to understand their businesses inside out. They will need to know how to create new products, expand into new markets, and deliver improved returns for shareholders. Otherwise, they’ll soon find themselves keeping Sir Victor Blank company in the ex-Chairman’s club.