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Cooperate scandals/collapse of

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Cooperate scandals/collapse of

Royal Bank of Scotland

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Introduction

In this study I will present a report about the ethical issue and cooperate scandal associated with the Royal Bank of Scotland Group plc (RBS).

As a group, we will be discussing about the Cooperate scandal associated with the chief executive (Frederick Anderson Goodwin) at RBS, based on the research and the conclusion they had for it.

Royal bank of Scotland Group plc

Royal bank of Scotland Group plc (RBS) was found in 1727 which is a British owned bank and insurance holding company, where 73% of the controlling share is owned by the government of United Kingdom. The Royal Bank of Scotland is based in Edinburgh, Scotland, and is the world's largest company by assets of £ 2.40 trillion in 2008, also they have more than 170,000 employees and over 40 million customers around the world; over half of these customers (25 million) are in the United Kingdom. (http://www.rbs.com/about-rbs/g1/what-we-do.ashx).

The Royal Bank of Scotland, is the largest banking group in Scotland controlling Royal Bank of Scotland Plc, National Westminster Bank (NatWest) and the Ulster Bank in British isle. The RBS Group operates in a wide range of banking brands offering personal and business banking, private banking, insurance and corporate finance throughout its operations located in Europe, North America and Asia. In the UK the main subsidiary companies are The Royal Bank of Scotland and National Westminster Bank having more than 700 branches and organisation of RBS.

Business ethics

A corporate scandal involves accusations of unethical behaviour by people acting within or on behalf of a corporation. Corporate scandals can be directly linked to the business ethics, some business ethics involved in banking can be misleading financial accounts, frauds, scams, manipulation of the financial markets, excessive payments made to top managements and Chief Executive Officer’s.  Business ethics are a system of moral principles applied in the commercial world. Business ethics provide guidelines for acceptable behaviour by organisations in both their strategy formulations and day to day operations. Corporate governance is a way in which a company firm safeguards the interests of its financers. It is also used for a framework of rules and practices by which a board of director ensure responsibility, fairness, simplicity in the firm’s relationship with its stakeholders. (www.businessdictionary.com/definition/corporate-governance.html)

Cooperate scandal associated with chief executive  

Although we found out through research that many ethical issues could be classed as a corporate scandal, we decided it was linked to the case of Sir Frederick Anderson Goodwin and the responsibilities he held for the loss and the political media criticism it caused when his pension was made public. Another ethical issue which is part of this report is executive compensation. This issue involves the financial compensation that an executive in the organization receives. Executive compensation has increased dramatically over the years beyond the average workers wage. This issue is an important element of corporate governance and is frequently decided by the company’s board of directors. Sir Fred’s Pension was an issue that was raised because of how high it was.

Sir Fred Goodwin

Sir Fred Goodwin qualified as a chartered accountant in 1983. His first job role at Royal Bank of Scotland in 1998 was deputy Chief Executive Officer to the then-chairman Sir George Mathewson. After impressing investors with his attentiveness and ability Sir Fred was promoted to Chief Executive in January 2001. The role of a Chief Executive Officer is to apply the strategic goals and objectives of the company and to give direct leadership. Sir Fred has been nicknamed “Fred the Shred” for his ruthless generation of cost savings and efficiencies and his last job. (Wikipedia)

Takeover of ABN AMRO

After working for The Royal Bank of Scotland for 10 years he stood down from the job in 2009. Sir Fred also presided for Royal Bank of Scotland between 2000 and 2008. Sir Fred officially handed in his resignation a month after the Royal Bank of Scotland announced that their total annual loss for 2008 was £24.1billion. The loss of £24.1billion is said to be the biggest UK loss in corporate history. This appears to be directly linked to the purchase of ABN AMRO. ABN AMRO is a holding company with subsidiaries which perform commercial banking operations, investment banking and other related financial activities. ABN AMRO had invested in risky assets, mainly subprime mortgages. These are mortgages whose borrowers have poor credit history or even non existence credit history. Not surprisingly the borrowers defaulted on their payments. The credit market write downs were at a staggering £5.1 billion. This contributed to a huge part of the £24.1billion loss. Sir Fred was at fault for the loss as it was his decision to invest in ABN AMRO, knowing how risky the company runs. (www.abnamro.com)

Attempt to recover the losses

In an attempt to recover some of the losses the decision was made, with the approval of a majority of shareholders, to sell shares under the rights issue. The rights issue is a secondary market offering so that a company can release new shares creating new capital. Shares are offered to existing shareholders only and in proportion to how many shares they currently have invested. The rights issue is used by companies on a high gearing to strengthen their financial position. However this procedure can be a bad sign as it indicates a company that could be running at a loss and therefore reducing any potential for future profits. The decision was made to release 5.8billion new shares at 200p each. This appears to have been unsuccessful for the company. This is an ethical issue for the company as it is seen as misleading financial analysis. When financial analysis is used to misrepresent the company, its situation or its prospects, it is classes as misleading. This deception is used to sometimes obtain money by misdirecting people in investing into the organization.

Shareholders

Shareholders are people who own a share of the company and Stakeholders are people, groups or organizations who are interested in the running of the company. Both parties are affected by the running actions of the business. Shareholders are affected because they get a dividend having a share in the company. This means that the success of the business is concurrent to their dividend and also the value of each share they hold within the company. 73% of The Royal bank of Scotland is owned by the government with the remaining 27% owned by shareholders. Therefore they are affected by what the company does or doesn’t do. Very recently the shareholders of RBS have had some issues between two stakeholders, board of directors and the shareholders. The shareholders are preparing to sue the former directors of the group for compensation for being misled. This ethical issue is known as misleading financial analysis. The shareholders are demanding a compensation of £9 million because of Royal Bank of Scotland’s former chief executive, Sir Fred Goodwin, and other board members. The company gave the wrong impression to the shareholder of the company and misled them in doing so. As the government owns 73% of the company it means that 27% is owned by other individuals. They are concerned on the way the company runs as they are the investors in this company. So the loss the bank makes means that they end up with a loss in dividend and they would be paid less of it or none at all. The value of the shares would drop as it has recently been doing so.

Royal Bank of Scotland announce 9000 job cuts

After the loss and Sir Fred Goodwin’s departure from the company, Royal Bank of Scotland announced 9000 job cuts in attempt to save the business from being forced in to nationalisation. In October 2008 the government injected £20billion in to the Royal bank of Scotland and now own 73% of the business with the remaining 27% owned by shareholders.


Wrong decisions by the chief executive of royal bank of Scotland

The near collapse of the Royal bank of Scotland is associated with the strategy Sir Fred used; this was the strategy of rapid expansion, mainly through acquisition. This strategy involved the takeover of ABN Amro for overpaying between 15 billion and 20 billion to take over the ABN Amro he also did spent £20 million of the bank’s money sponsoring the Williams F1 team, this was happened after the RBS announced in February it will not renew the agreement with the team when its current contract runs out in 2010. He did this purely for his self interest and not for banks beneficial.



Political and media criticism about Fred’s pension

Sir Fred’s pension caused political and media criticism after it was announced that his pension had an annual pay out of £703,000.  Sir Fred even experienced a personal attack to his home and Mercedes, fortunately no one was hurt. The reason why it caused media criticism is that the public believe they work hard and pay their taxes, just for their money to be paid in to Sir Fred’s ridiculously large pension. Executive compensation is an ethic associated with accounting and finance, this concerns excessive payments paid to the corporate chief executives and top management. This shows why the company and the public found it morally wrong for Sir Fred’s large pay out after being associated with such a huge loss. Lord Myners, the treasury minister has allegedly indicated to the royal bank of Scotland that there should be “no reward for failure”.  


Conclusion by Sir Fred Goodwin

In June 2009, Sir Fred Goodwin volunteered to make a considerable cutback to his annual pension. Sir Fred’s annual pension will now be £342,500. Sir Fred Goodwin has now moved on to start his new job as a senior advisor for the architectural company RMJM.

Bibliography

http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article6028800.ece (Accessed 14 December 2009)

http://www.rbs.com/microsites/gra2008/governance/report_of_thedirectors.html#code-of-conduct

http://www.socialistparty.org.uk/articles/7006

http://www.socialistparty.org.uk/articles/7001

http://www.mirror.co.uk/news/top-stories/2010/01/16/former-royal-bank-of-scotland-boss-sir-fred-goodwin-gets-a-new-job-115875-21971557/

http://www.bankingtimes.co.uk/06112009-rbs-posts-2-2bn-pre-tax-loss/

http://www.bankingtimes.co.uk/11102009-rbs-shareholders-plan-9bn-legal-action/

http://www.guardian.co.uk/business/2009/mar/31/royal-bank-of-scotland-remuneration-report-fred-goodwin

http://www.rbsactiongroup.co.uk/

http://news.bbc.co.uk/1/hi/business/7980512.stm

http://www.telegraph.co.uk/news/newstopics/politics/scotland/4680824/Royal-Bank-of-Scotland-taken-to-court-by-shareholder-over-insolvency-claim.html

www.businessdictionary.com/definition/corporate-governance.html

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