Previously known as Abbey National.

A good mission statement should provide strategic direction and vision for a company, and should not have to be revised every few years.

A Rival Mission Statement

Halifax Bank of Scotland (HBOS) is one of Abbey’s main rivals, as it offers similar products and services.  Previously two separate banks, Halifax and Bank of Scotland merged in 2001.

Like Abbey, HBOS outline their mission in a small statement which tells of their reason for being.  

Their strategy further outlines where they plan to go, and how they plan to get there. Like Abbey, customer service is a high priority. Another factor that Abbey and HBOS have in common is that personal finance is a high factor in their strategic plan.  HBOS state their goal, who their customers are, and which products they will offer in order to achieve their goal.

As with Abbey, HBOS have recently revised their mission and strategy, and as such, should not have to review it in the near future.

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Agency Cost Theory: Moral Hazards and Adverse Selection

The problems that occur from agency in Abbey are mainly moral hazards.  The executives pursue growth, rather than company earnings.  Abbey is one year into a three-year turn around plan, due to previous attempts at expansion.

In the summer of 2001, Abbey began to experience serious problems.  It had lost over £54 million which was a modest amount for an institution that had made £1.7 billion in pre-tax profits the year before. Abbey’s investors, however, weren’t familiar to credit losses, and they started to ask questions about the business that had caused the risk: wholesale banking. 

Abbey’s head of the wholesale bank, Gareth Jones, had authorised the buying of things such as junk bonds, and aircraft leasing in Australia.  Executives, in general, receive more rewards for an increase in the firm’s size rather than for the growth of earnings, and as such, may recommend strategies which will accomplish this.  That is what Gareth Jones did. However, this was not consistent with the image of a UK mortgage lender, and Abbey were forced to cover the portfolio with over £2 million.

However, shareholders normally want to maximise earnings, and the failure of the wholesale bank, as well as the subsequent capital that went into covering it eventually resulted in a loss of £686m was exasperating to stakeholders, and Gareth Jones, and the chief executive, Ian Harley left Abbey.

Adverse selection was also a problem for Abbey. The wholesale banking illustrates this.  The shareholders did not fully understand how the wholesale banking works, and thus, did not realise the priorities of the head of the wholesale bank.  This resulted in both shareholders and the chief executive losing out.

Stakeholders

Abbey have five main stakeholder groups- customers, shareholders, business partners, employees and the wider community.  Their influence and power differ, as can be seen in a stakeholder map.

Communication with stakeholders has recently been a feature of the Abbey strategy.  Shareholders are inside stakeholders.  Abbey lost £686m during 2003, due to the refocusing itself as a retail bank.  Communication with shareholders is normally a focus point of Abbey.  There are annual general meetings (AGM), and shareholders are regularly sent information on the shares via post.  There is also a “shareholder centre” on the Abbey website.  This has a large quantity of information regarding shares and results of the company.

The wholesale bank problem could have been handled better by Abbey, with more benefits for shareholders.  As it moved more into the wholesale banking, Abbey was making less of a loss than other banks.  But the problem with moving into a new market, there are teething problems, and communication with shareholders can be seen as less important

But the massive loss suffered by Abbey in 2003 has affected shareholders.  At a time where other banks are making record profits (Royal Bank of Scotland recorded £6.2 billion profit before tax), the Abbey shareholders may not even receive any spare capital that has came from the sale of assets in the wholesale bank.  As Abbey sold off over 80 per cent of the assets of the wholesale bank, analysts were hoping that Abbey could return between £1.2bn and £1.5bn to investors via a special dividend or share buy back.  However, the chief executive of Abbey, Luqman Arnold was said to be “increasingly cautious” about the amount of cash that would be released due to regulatory changes.  Whether or not this will affect the position of the shareholders is still unknown.

Customers are an important group of stakeholders for Abbey. They are outside stakeholders. Communicating with them is a vital part of Abbey’s strategic plan.  They do this by advertising on various mediums, (television, radio, etc).  This has proved successful in the past, as Abbey have won various awards for their “Plain English” approach.  This strategy of not using banking terminology was very successful.  However, should customers not be satisfied, there is also a customer relations unit available to help solve disputes.

But a recent development regarding profits has upset many customers.  For the second year in a row, those customers with a “with-profits” policy will not receive their annual bonus.  There will also be higher exit penalties for those who choose to leave the with-profit policy, which could reach up to 10 per cent.  This affects nearly 400.000 of Abbey policy holders.

According to Abbey’s employee report “Employee involvement and effective communication remain vital to {our} success.”   There are various means of communication, from an intranet site, to a quarterly magazine (abbeyview).  

There are a growing amount of concerns among the staff in Abbey however, in the amount of job losses that are occurring within the organisation.  As part of their return to traditional banking, Abbey has been cutting a vast number of jobs, many in the fund management sector. Many jobs have gone abroad to India.  This has caused conflict not only amongst employees, but among the general public also, who are outside stakeholders of Abbey also.  They see it as downsizing and taking jobs away from Britain.

Recently, eight executive directors of Abbey have been paid £2.8 million made up of cash bonuses and shares between them, at a time when the company has suffered massive losses. The bank's staff got an average of about six percent of their salary as a bonus last year, which was a rise of two percent from a year earlier. A member of the ANGU, (Abbey National General Union) said “Staff were very pleased with the bonus that was paid out in a difficult year. However, in light of what management received it wasn't very much”.  This could lead to further problems in the future.

Conclusion

Abbey are still in the middle of a three year turnaround, so are asking their stakeholders to bear with them.  But with the massive losses, and the seeming disregard for employees, shareholders and customers alike, they may find that it will take longer than three years to have their strategy.

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APPENDIX A:

 

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