A lightning rod for discontent with the financial sector, Royal Bank of Scotland needs a strong corporate responsibility platform to rebuild trust
Now is a very good time or a very bad time to be running the corporate responsibility function at a major bank. The economic crisis has focused attention on the ethics, or lack of them, in the financial sector, with many finding both regulators and banks’ own capacity for acting responsibly to be wanting.
In light of recent events the development and execution of a coherent responsible business strategy has never been more important for a bank, says Andrew Cave, head of corporate sustainability at Royal Bank of Scotland, which has been at the epicentre of the financial crisis in the UK.
Cave believes the corporate sustainability function is central to rebuilding the bank’s reputation. Certainly, the bank has taken a number of big hits: the government bail-out, massive redundancies and the furore over former chief executive Sir Fred Goodwin’s pension and the pay of Stephen Hester, his successor.
The importance of having a “clearly defined” sustainability strategy has been heightened by the crisis, Cave says. “Right across the financial sector it will be important for companies to have strong sustainability programmes,” he says. “Getting things right on broad issues like safety, security, support for enterprise, consumer policy, global citizenship, all that adds up to building and maintaining trust.”
Key to defining RBS’s ethos was the launch this summer of a new sustainability strategy, which is “very clear about what we need to focus on over the next three to five years”, Cave says.
The bank’s turbulent recent history has informed thinking on the strategy. Cave is confident it covers “what people are talking about and worried about”. It is split into five themes: consumer issues, employee engagement, global citizenship, supporting enterprise, and safety and security.
There have been other changes, too. The annual sustainability report – a “vital means of communicating the changing culture of the company” – is now being produced to the new AA1000 2008 standard, something that Cave is proud of, while the company is in the process of creating an executive sustainability committee. This will be “a fully fledged group committee”, chaired by a non-executive director but comprising mainly executives, who are “best placed to drive through the actions”. Commitment “from the top of the house” is a key feature of the RBS sustainability platform, Cave says.
Meanwhile, changing the name from corporate responsibility to corporate sustainability reflects a “new approach” which sees corporate social responsibility not as “a series of obligations”, but issues that are “in our interests to get right and relate to the long-term sustainability of the company”.
While Cave’s team has not been expanded – he has six people in his team in Edinburgh with a further six in community investment, who are, though not managed by Cave – it has at least remained unchanged while the total workforce is being downsized: a “show of support” by senior management, Cave says.
The involvement of people within business units, such as those working on environmental issues in the operations division and on diversity and inclusion within the HR function, increases the sustainability headcount further.
In fact, Cave says collaboration with the business units has increased since the crisis. “We’ve been able to work more closely with divisional teams. Right across the company now people are very attuned to the importance of reputation.” The ability to drive change is “greatly improved and increased” by the new leadership and culture at RBS.
The sustainability strategy is one of the principal reference points for RBS’s ethical positions on some hugely controversial issues for the bank, such as job cuts, executive pay, lending policy and the environment.
No issue has been more contentious than executive pay. “There’s been a huge public debate about remuneration, which we were drawn into mostly because of our ex-CEO’s pension arrangements,” Cave says. “That became in our view a bit of a lightning rod for general discontent with the sector and explains in many ways why RBS has been singled out a bit in the media.”
Given that the UK government has bailed out RBS by acquiring a 70% stake in the company, the attention from campaigners is hardly surprising. And the pay issue was bound to remain in the public eye when controversy over Sir Fred’s pension was followed by criticism of the high salary given to incoming chief executive Stephen Hester.
Gavin Hayes, general secretary of pressure group Compass, which is leading a campaign to create a high pay commission to examine executive salaries, believes the remuneration packages offered to Hester and other senior executives are “reckless rewards” and at odds with RBS’s corporate responsibility rhetoric.
Hester’s £9.6m potential package is a “phenomenal salary”, given that the bank “has just reported huge losses and been bailed out by the taxpayer”, Hayes says. He also questions the share options offered to two new RBS executives, Brian Hartzer and Nathan Bostock.
For Hayes, this is a sustainability issue. “Remuneration and performance-pay cycles are too short, rewards for failure are too great and this works to the detriment of the long-term sustainable future of these companies and the wider economy. It’s not just happening in RBS. It is business as usual all across the City and financialised capitalism across the globe.”
While there is a place for corporate responsibility initiatives, Hayes says, the risk to the wider economy necessitates “systemic change” led by government. “While having good corporate social responsibility policies can help, we have a huge institutionalised culture within the City of London that rewards short-term high risk over long-term sustainability.”
Cave says: “Much of the debate has overlooked a key change in remuneration strategy at RBS. The bank was one of the first to announce a change in approach to be based on long-term performance with deferred payments subject to claw back.”
High executive pay not only attracts criticism on sustainability grounds. RBS is in the midst of a huge redundancy programme, and many believe paying conspicuously high salaries represents a moral contradiction at such a time.
In June, Graham Goddard, deputy general secretary of trade union Unite, said the Hester pay award would be met with “absolute disbelief” by frontline staff. Staff and customers were “sick of seeing senior bankers earn such huge financial awards when every week hundreds of hardworking and loyal staff are losing their jobs”.
Cave says RBS is committed to handling the job cuts “as responsibly as possible” and in accordance with “high-level principles”. In its sustainability strategy, it undertakes “to keep any compulsory redundancies to an absolute minimum and consult in full with staff and their representatives”.
Consultation with Unite and other representatives began in April when RBS said its business plan could affect up to 9,000 positions globally over the next two years.
The union concedes that efforts to limit compulsory redundancies have allowed “large numbers of staff” to leave voluntarily. But a Unite spokesman adds: “The bank has publicly agreed to avoid compulsory redundancies wherever possible, and while there have been some good examples where these have been avoided, the sheer number of job losses means that inevitably there will be many individuals exiting the organisation via compulsory redundancy.”
More recently, changes to the bank’s pension arrangements have sparked criticism. In August, the company announced it would be limiting future annual increases in its final-salary pension scheme to 2% or the rate of inflation, whichever is the lower. “The test of the bank’s commitment to employee engagement will be the engagement with the employee representatives, Unite, to find a negotiated settlement in respect of pensions,” the Unite spokesman says.
Discontent with RBS is naturally exacerbated by the fact that the bank is now 70% state-owned. Undertakings on lending and executive pay were agreed with the government, through UK Financial Investments (UKFI), but campaigners have been critical of the latitude it has afforded the bank.
RBS is committed to making an additional £25bn available to UK borrowers in 2009, though Cave says meeting those targets depends on “demand from credit-worthy customers”.
There has also been pressure from campaigners for RBS, sometimes referred to as the oil and gas bank, to lend more to green energy projects. But Cave says there is a “pipeline issue” here too. “There just aren’t enough quality projects coming through the planning process for banks to be able to finance,” he says, adding that campaigners underestimate how much RBS already lends to renewable energy initiatives. “We have been the UK’s leading arranger of finance for the renewables sector for the last five years running, and have been consistently in the top five globally in that time. In 2006 alone we arranged over $2bn for the sector,” Cave says.
Critics believe the government should mandate RBS to invest in sustainable projects, with a group of campaigners even taking the government to court this summer in a bid to force it to act.
That lawsuit goes to the heart of the debate over how the government has managed its involvement in RBS. Cave points out that UKFI has been “very clear about managing the banks at arm’s length”. While many campaigners clearly don’t like that and feel the UKFI stipulations are inadequate, to a degree questions about whether UKFI should exercise more control over the bank are for the government rather than RBS to answer.
But by the same token, RBS’s ethical performance should not be judged against whether it is fulfilling these requirements. The bank may include the commitments in its sustainability strategy, but if they are being mandated by government they are analogous with legal requirements. Corporate responsibility, campaigners would argue, is about going beyond compliance. And the fact that RBS was effectively rescued by the taxpayer inevitably means more is expected of the company in this regard, something RBS acknowledges.
“We recognise that we’re in a privileged position with the restructuring of the company, with support from the UK government,” Cave says. “RBS and the other companies that have been recipients of government support do have responsibilities that have come with that.”
Given the opprobrium heaped on RBS, it is not surprising that Cave betrays a hint of discomfort at the idea of being charged with rescuing the bank’s reputation single-handed. “It certainly doesn’t all fall to us as a function, and nor should it,” he says. The media and customer relations teams, as well as the government and investor relations personnel, are focused on the task too, he adds.
However, Cave believes the corporate sustainability function is an important resource at this time. He jokes that “all corporate responsibility managers would like to think they’re relevant”, but adds: “A lot of sustainability issues have mainstreamed over the last year, have become very open public debates, which puts ethical issues at the centre of corporate thinking.”
The need for expertise in making sustainability judgment calls also puts the sustainability function centre stage. Cave says that as his team is engaging with stakeholders, and balancing their priorities, it is well placed to advise on some of the dilemmas facing company executives during challenging times.
In addition, the sustainability team can “challenge internally”, helping to embed the bank’s sustainability ethos throughout the company. In short, Cave believes the corporate sustainability platform represents “a programme of work whose time has come”.
So the enhanced corporate sustainability regime has a huge role to play as RBS looks to restore public credibility, but as is always the case, the ethos has to be supported by action, and on that score RBS can be sure it is being watched very closely.