National Australia Bank Organisational Audit

INTRODUCTION

This paper aims to integrate the theories of public relations and contemporary corporate communication management theories to analyse and make subsequent recommendations for the National Australia Bank.

The National Australia Bank is a global organisation, which has experienced many crisis events throughout 2004 that have irrevocably damaged its reputation as perceived by its stakeholders.

This paper discusses the company’s key corporate communication issues and then applies relevant theories relating to organisational cultural change, management of corporate change and reputation management to recommend a means of repair.

RESEARCH

Secondary research was undertaken to complete this paper through magazine articles in business publications and the financial services industry publications. The corporate communication theories throughout the paper were derived from numerous textbook extracts and journal articles, which focus on core public relations theories and contemporary theories within corporate communication management.

KEY MANAGEMENT &

CORPORATE COMMUNICATION ISSUES

Undeniably, the National Australia Bank (NAB) has experienced numerous negative events throughout the year, which have resulted in dire consequences on the organisation internally, externally and in relation to its many stakeholders. Such events include:

Foreign currency trading scandal
Banking industry regulatory agency’s weakness in supervisory role
Senior Management and Board of Director resignations
Tax scandal in Ireland
NAB employee charged with money laundering
Chief Executive John Stewart being evasive on blueprint to fix NAB

Each of these occurrences has produced significant media exposure in a negative context and has also strongly effected NAB’s global reputation, internal corporate culture and its financial profitability.

The most recent media exposure for NAB is a BRW article written by Adele Ferguson dated 7th October 2004 (please see Appendix 1). The article highlights many corporate communication issues the company faces along with its recent management changes. The article also identifies the strategic direction proposed by the bank to ensure its future success.

Aspects of the strategic direction proposed include a complete over-hall of the bank’s organisational culture with the aim of eliminating the slow and bureaucratic processes that currently hinder effective customer service. Such changes will require a high level of management during the corporate change to ensure its effectiveness.

KEY MANAGEMENT &

CORPORATE COMMUNICATION ISSUES cont.

The importance of stable and effective management throughout the significant changes that NAB is about to commence is discussed in detail on page 10 of this paper, management of corporate change. Other key corporate communication issues relate to the organisation’s damaged reputation, which has been historically strong and positive. Another reputation issue the company faces is the negative press the financial services industry has received as a whole and also the scrutiny it’s subjected to within the political arena. This makes the task of repair all the more difficult.

The BRW article highlights the current situation for the National Australia Bank. The company has acknowledged the problems it currently has, it has undertaken an audit both internally and externally to research the exact issues and is soon to release a strategy to improve the prospects of the organisation. Therefore, the company is well on its way to establishing a competent strategic planning and issues management strategy as a means of counteracting the negative issues it have faced throughout 2004.

ORGANISATIONAL CULTURE

National Australia Bank’s new Chief Executive, John Stewart was hired in February of this year with the aim to identify the key problem areas within the organisation and to implement a strategic and timely plan to rectify such problems.

The most prominent issue facing the bank is its negative and inefficient organisational culture. Schein (1984) described organisational culture as “an organisation’s system of “social knowledge” that is shared among organisational members and transmitted by members across time”. Put simply, it is shared values, a particular way of thinking and a consistent way of behaving amongst employees of an organisation.

A strong organisational culture is imperative for the success of an organisation as it ensures the continuity of messages to stakeholders and decreases the need for company policies and procedure manuals because new employees are informed by the existing staff of the cultural expectations placed on them.

In the case of NAB, a strong organisational culture does exist, however it is driven by dysfunctional motives and therefore decreases the effectiveness of the company rather than supports its success. The BRW article details how Chief Executive John Stewart established what the cultural problems are within the company. Firstly, John Stewart regularly emailed the 200 most senior executives asking questions such as ‘what do you think is wrong with the organisation?’, ‘what is right with the organisation?’ and ‘what changes would you implement to improve the company?’. The Chief Executive also spoke directly with branch staff members to identify their views on the culture within the company.

The information derived from the questioning proved useful as many of the answers were consistent and therefore highlighted the issues that were problematic across the organisation.

ORGANISATIONAL CULTURE cont.

This feedback together with analysis undertaken by PriceWaterhouseCoopers in its report on the National Australia Bank, highlighted the following issues:

the bank is focused on process rather than achieving customer satisfaction
there is a lack of accountability by employees across the organisation
the culture is considered a “good news culture”, which results in important negative feedback being ignored and avoided
branch staff have minimal autonomy in their role or the ability to make decisions
competitiveness and internal politics exists between departments rather than a team structure, which results in increased bureaucratic inefficiencies

Such issues within an organisational culture have the ability to significantly reduce staff’s willingness and ability to satisfy customers therefore reducing the profitability of the company. Consequently, despite the NAB’s 40,000-employee strong culture, it is considered dysfunctional because the culture is driven by internal politics and it aims to maintain the status quo.

This is a highly process-driven structure and is considered a formal style as apposed to an informal style, which is dynamic and adaptive to environmental changes.

To convert the company to a less process-driven and a more dynamic player, the Chief Executive has amalgamated the bank’s three core domestic operations, which are retail banking, wealth management and corporate and institutional lending. The purpose of this merger is to promote team performance, to utilize the many cross-selling opportunities between departments and to decrease internal rivalries.

ORGANISATIONAL CULTURE cont.

Chief Executive John Stewart has also altered 80% of the management positions in an attempt to decrease the sycophantic and arrogant behaviour amongst senior and middle management staff, which in turn, should flow onto other levels of the company’s organisational structure and prompt a more positive culture.

Effectively, the new Chief Executive’s strategy in terms of altering the organisational culture is to decease bureaucratic barriers between departments and to promote a sense of cohesion among employees.

ORGANISATIONAL CULTURE - RECOMMENDATIONS

Attempting to alter the structure of an organisation is a complex task and even more difficult, when attempting to alter the organisational culture of a company with 40,000 employees that share an imbedded set of beliefs and core values. Therefore, it is imperative that National Australia Bank carefully research and implement the strategy that aims to promote such a change.

Firstly, NAB need to understand that employees seek meaning in their role and are significantly more productive when their personal attitudes and beliefs are aligned with the goals of the organisation. Therefore, NAB need to clearly and concisely communicate with employees on the core value of the company, which is to satisfy customers and provide them with optimal service in comparison to competitors. Satisfied customers equals increased profits, increased profits equals happy shareholders.

Also, a successful organisation increases in its level of success as employees maintain loyalty and a sense of belongingness to the company. Success breed’s success and employees are motivated and encouraged when the service encounter with customers results in a happy customer rather than an angry complaint.

Importantly, employees need to be acknowledged and awarded for their achievements in providing a banking experience, which is efficient, trustworthy and value for money to the consumer. Not a service bogged down with bureaucratic processes. Such incentives may include monetary benefits, time off from work, an award recognised throughout the company or extra benefits such as a car park. It is also imperative that employees are acknowledged and awarded for challenging the status quo and presenting innovative solutions to organisational problems. This helps the company remain dynamic, whilst improving internal relations with employees.

ORGANISATIONAL CULTURE – RECOMMENDATIONS cont.

A form of measurement is also recommended so that employees can evaluate their progress against set objectives and goals. Promoting a culture of goal setting is imperative in prompting enthusiasm amongst employees and to create a benchmark for the reward system.

This is a preview of the whole essay

ORGANISATIONAL CULTURE – RECOMMENDATIONS cont.

Unfortunately, regardless of an organisation’s skill in its ability to alter an internal culture, not all employees will be willing to change. It is common in this instance for some employees, particularly long-servicing employees to strongly resist change regardless of the positive arguments presented to them by the organisation. In this case, it is in the best interests of the organisation to cease the employment of these individuals. It is recommended that NAB take this relevant action if required, particularly if the employee is in a management position, where they exude influence over other employees.

MANAGEMENT OF CORPORATE CHANGE

In the context of organisational change, Arena stated, “never before has the pace of change been so rapid”. This statement describes the ever-changing corporate world, which is subjected to continual movement in technology, legislation, competition and social and environmental regulations. As a result of this turbulent environment, it is imperative that organisation’s are dynamic and agile in its business operations to ensure its ability to adapt quickly and competitively to changes.

In the case of NAB, it is currently being affected by macro changes such as increased competition and recent legislative changes to the financial services industry. It is also prompting micro changes within the organisation through cultural change. Dunphy (1996) systems theory suggested that planned change by an organisation is usually prompted by failures resulting from its inability to adapt to its changing environment. NAB has historically maintained an increasingly process-driven, bureaucratic company, which has become complacent in its success. Subsequent failures have prompted significant core structural change within NAB.

Hannah & Freeman argued, “Core structural change is precarious and leads to an elevated probability of organisational failure and death”. With this statement in mind, failure for NAB is inevitable if quick action is not taken to rectify numerous strategic problems.

Examples of organisational change include technological such as process reengineering, strategy and structure such as departmental restructures, cultural change including an increased customer focus and organisational change in products and services. NAB’s primary focus in terms of organisational change is altering the values, beliefs and attitudes of employees and restructuring the organisation to prompt such changes.

MANAGEMENT OF CORPORATE CHANGE cont.

The National Australia Bank has many shareholders, which rely on the success of the organisation. Excluding some long-serving employees who are resistant to change, the organisation’s key stakeholders are supportive of significant change within the company to rectify its many issues. As a result, NAB’s plans for organisational change are considered collaborative because the organisation does not need to coerce key interest groups to accept change in the company. The change is also considered transformational rather than a simple change because it is essential to the long-term survival of the company rather than a means of simple improvement. As illustrated in the below diagram by Dunphy & Stace (1988), NAB is described as an out of fit company with little time for rectification (p.31). The positive aspect is that key interest groups support radical change. Within the below diagram, NAB’s proposed change is a charismatic transformation.

Diagram 1 – Change Strategies & Conditions for Use

Source: Dunphy & Stace, 1988, p.31.

MANAGEMENT OF CORPORATE CHANGE - RECOMMENDATIONS

Effectively managing the extensive corporate change required within NAB will be the organisation’s most important task. Its ability to successfully implement such changes will determine its future survival, not only its success.

Prior to implementing corporate change, NAB must approach the change in a planned and strategic manner. This includes identifying all the corporate communication issues (please see Key Issues on page 3) through extensive research both internally and externally and also setting specific goals and objectives to be met.

NAB then need to determine the approach it intends to take, the particular action strategies it will utilize and the implementation strategy it will action including, which channels will be utilized and the exact message content. It is also recommended that NAB establish a control strategy to evaluate the success of the corporate change process (please see Appendix 2).

NAB’s main focus is to execute corporate change from the inside out. By altering it’s internal corporate culture, which if successful, will amend its key stakeholders perception of the organisation. Therefore, NAB’s focal point is its internal publics. Grunig stated that internal publics can be categorised to assist the organisation in tailoring its corporate communication efforts. Such categories include an active employee public, which is considered to have high problem recognition, a high level of involvement and low constraint. In comparison, a passive employee public has low problem recognition, a low level of involvement and high constraint.

By effectively identifying the characteristics of its internal publics, NAB can facilitate the change process through verbal communication and symbolic communication that is personalised and effective.

REPUTATION MANAGEMENT

Corporate identity, image and reputation are highly relevant factors for NAB in its current environment and are described as the most critical parts of the corporate communication function within an organisation (Argenti, 2003, p.57).

Argenti (2003) described corporate identity as the self-presentation of the organisation (p.58). It consists of the organisation’s behaviour, communication and symbolism, which form its expression. Corporate identity includes the physical and visual representation of the organisation such as a professional receptionist that is well groomed. It also projects a sense of trust to stakeholders and prompts the expectations they hold of the organisation.

In comparison to corporate identity, an organisation’s image is much more versatile and is dependent on the particular public receiving the message. Therefore, a company may have numerous different images resulting from its many stakeholders.

An organisation’s reputation differs from both its corporate identity and its image because it is based on the perceptions of all the company’s constituencies unlike corporate identity and because it is built up over time rather than a particular perception at a given point in time like in the case of its image (Argenti, 2003, p.71).

Argenti (2003) stated, “The foundation of a solid reputation exists when an organisation’s identity and its image are aligned (p.71). Once a solid positive reputation is achieved, an organisation has a distinct competitive advantage resulting from this intangible asset.

In the case of NAB, despite its historical long-standing reputation, its consistent lack of continuity between its identity and image in conjunction with the occurrence of crisis events have significantly damaged the organisation’s reputation.

REPUTATION MANAGEMENT cont.

The below diagram created by Argenti (2003) called the Reputation Framework illustrates how an organisation’s corporate identity, image and reputation relate to each other and effect each other (p.72).

Diagram 2 – Reputation Framework

Corporate Identity

Names, Brands, Symbols, Self-presentations

Corporate Reputation

Source: Argenti, 2003, p. 72.

There are many factors that can impact on an organisation’s reputation. These include the organisation’s vision, its policies, organisational culture, and communication both internally and externally and also a crisis event. The National Australia Bank has suffered negative retribution following its failures in all these areas.

REPUTATION MANAGEMENT cont.

Legitimacy Gap Theory

Once significant factors occur to damage an organisation’s reputation, a legitimacy gap may result. Sethi (1994) describes the legitimacy gap theory as gaps between societies expectations of an organisation’s behaviour in comparison to its actual performance. The greater the gap between stakeholder’s expectations and the company’s performance, the greater the pressure on the organisation to rectify the issue.

As a result of extensive negative publicity surrounding NAB’s crisis events, the organisation is no longer viewed as behaving legitimately, resulting in a breakdown of its reputation and relationships with stakeholders (please see Appendix 3).

The following diagram illustrates the legitimacy gap.

Diagram 3 – The Legitimacy Gap

Source: Sethi, 1994.

Legitimacy Gap Theory - Recommendations

To effectively counteract the legitimacy gap, it is recommended that NAB shift its corporate performance towards the expectations of its stakeholders, which can be achieved through the recommendations discussed throughout this paper.

REPUTATION MANAGEMENT cont.

In line with NAB’s strategy of improving the organisation by altering its organisational culture, NAB’s reputation also ties in with this strategy. Reputation can be considered a human resource issue for the company as it aims to alter the culture of existing employees. A strategy may include hiring new employees that are considered elite, with an already well-established reputation and a passion for the organisation.

An organisation’s human resource issues being considered, as an impacting factor on its reputation is a contemporary theory within corporate communication management. Concerns regarding the impact of poor human resources within an organisation on its reputation as a whole is illustrated in the following diagram.

Diagram 4 – Human resource issues & its impact on reputation

REPUTATION MANAGEMENT - RECOMMENDATIONS

The human resource diagram illustrates the effects of the company’s employee’s opinion of the organisation on its reputation. It is recommended that NAB measures and evaluates the internal opinions of the organisation as part of an identity audit, which should take place to periodically assess the progress of the company’s strategy.

Once an identity audit takes place, the organisation’s objectives need to be reviewed and altered by senior management to ensure they remain appropriate. NAB’s vision, mission and values can strongly impact on its reputation also, so it’s imperative that they are regularly reviewed and communicated to internal publics. Finally, implementation of any strategies and changes must occur as a means of ensuring the company is dynamic and adaptive to its environment.

CONCLUSION

The National Australia Bank has arguably experienced the largest amount of crisis events in such a short period of time within the financial services industry. As a result, it has a difficult task ahead of re-structuring and re-strategising the organisation in an attempt to repair the damage. The NAB will undertake this task through an inside-out approach, whereby the primary focus is to improve employee moral, empower employees and subsequently improve the customer service quality of the organisation.

Such changes will be achieved through organisational cultural change, extensive management of this change and also a strong focus on the organisation’s reputation. Through a stable, talented and passionate senior management team, together with the strategies and recommendations discussed throughout this paper, the objectives of repairing NAB is an achievable goal.

LIST OF REFERENCES

Argenti, P. (2003). Identity, Image and Reputation. McGraw-Hill and Irwin.

Arena.

Dunphy, & Stace. 1988, cited in Wilson 1992.

Grunig.

Hannah, & Freeman.

Schein, E. 1984.

Sethi, 1994.

APPENDIX 1 – BRW ARTICLE

John Stewart's vision for NAB
Getting NAB back on track will take some hard decisions, and the market wants to see some hard figures. Is John Stewart up to it?

By Adele Ferguson
BRW. 07 October 2004

John Stewart
Image:Jessica Shapiro

When John Stewart says he will fix the mess at National Australia Bank (NAB), he means it. "My aim is to consistently get the company into the top quartile of total shareholder returns. I want consumer surveys to come back with consumers being advocates for the bank and I want staff to be so happy and proud to be working for the bank that they ask how they can get their kids a job," he says.

Since Stewart became chief executive of NAB in February, the market has waited for him to release his blueprint on how to fix the bank. In an exclusive interview with BRW, he says he will unveil his strategy on November 10, the day he also presents the group's annual results.

APPENDIX 1 – BRW ARTICLE cont.

But he is unlikely to put the market out of its misery and give a definitive prognosis on the future of its four British and Irish banks. "It will depend on circumstances whether or not we will give chapter and verse on the UK. But the situation just now, and I don't see that changing, is that we are committed to staying and developing the UK, and work is going on to that effect ... A lot of what I've been working on is, what is the value that we can create for shareholders? And what are the variations of that? So there are different ways and different strategies we can employ to do that. And what is the potential to be created by disposal of any of the businesses, and checking that we are making the right decisions," he says.

But he will need to use more than just words on that day if he is to convince the market that he has what it takes to put the bank back on a path to growth. In the past 18 months, shareholders have seen more than $10 billion wiped from the company's market capitalisation, they have suffered seven big profit downgrades, a $360-million foreign exchange scandal, a draconian set of conditions from the financial services regulator, 70% turnover in the bank's board and senior management, poor performance from its British and Australian operations and quantifiable damage to its brand.

If Stewart's strategic vision shows any signs of weakness, if he decides not to attach a detailed timetable and financial targets to his strategy, if the write-downs are deemed to be too timid or the outlook for 2005 is worse than expected, Stewart's dream of fixing NAB and gaining the respect of staff and investors will be seriously damaged. "The most likely time [for giving a timetable and financial targets] is at the results presentation. But I'll have to think about that one. It will depend on the degree of confidence.

APPENDIX 1 – BRW ARTICLE cont.

I can understand why shareholders like these targets. But some of the things we are dealing with, it is very difficult to be precise on that timeline," he says.

Stewart is in a quandary. If he decides to give himself some elbowroom, he will send a message that the bank's problems have not yet stabilised. Most chief executives in similar positions have been bold and put timeframes on their financial targets. Even John Fletcher, who inherited a similar mess at the country's biggest retailer, Coles Myer, and who had never worked in the retail industry, set goals, such as achieving an $800-million profit by 2006. Fletcher joined Coles Myer in September 2001, when the profit was $333 million. As Wilson HTM banking analyst Brett Le Mesurier says: "The Common-wealth Bank was able to give the market a detailed costing and benefit program for its transformation program and it was able to do that within six months of the announcement. NAB and Stewart have had much longer."

For now, Stewart will not be pinned down. "It [the turnaround] will take as long as it takes. I don't mean that to be evasive, that's really one of the hardest questions. If you ask me, 'John, will you be successful?' - absolutely. I'm very confident we can make NAB great again, so what you can get is the icon that it should be. Maybe not while I'm here, I'll probably have retired. But it will get back there," he says.

Stewart's contract expires in February 2007, and he is unlikely to renew it. By then he would hope that the company is on a path to recovery and that he has an appropriate successor.

APPENDIX 1 – BRW ARTICLE cont.

However, his job will be a lot harder if he cannot win over the long-suffering investment community. According to UBS banking analyst Jeff Emmanuel, NAB, at a group level, has consistently under performed the banking sector in earnings per share (EPS) growth for the past 10 years. In that time, NAB outperformed the sector just twice, in 1998 and 2001. Comparing compound annual EPS growth of NAB with the sector, NAB has under performed by 4% during that time. Emmanuel says he cannot rule out the possibility of further earnings downgrades in 2005, or cuts to its dividend.

All banks are facing challenges

Stewart will be trying to fix the bank just as conditions in the sector start to get tough. The banking sector has enjoyed the fruits of more than a decade of uninterrupted economic growth, and credit growth of more than double the 3.8% rate of GDP growth over the past decade. But there is a question mark over how long the good times can continue. Slowing credit growth and the likely higher bad debt charges stemming from a turn in the credit cycle are two big challenges facing the banking sector as it tries to maintain profit growth.

Other challenges include the pressure on profit margins as competition intensifies between the banks in the home lending and business lending markets. NAB has the leading position in business banking in Australia, including about 25% market share in small-business lending and 26% market share in total business lending.

But rivals are eroding that market share. The most notable include ANZ Banking Group, St George Bank and Westpac Banking Corporation. In the past few months irrational pricing has started to appear in the sector, with some banks waiving establishment fees on personal loans, business loans and home loans, and offering reduced interest rates on credit cards. None of the banks will admit to starting the price war, however most point the finger at NAB. Stewart says NAB is a follower.

APPENDIX 1 – BRW ARTICLE cont.

"We were accused of reducing prices, but we didn't. What we did was match, in individual cases, the competitors. That was short-term stuff to protect the franchise. What happened was, when we were under attack, I said one thing we mustn't do is hurt the franchise," he says.

However it began, the discounting is hurting NAB. Stewart issued a profit warning on July 14, that cash earnings before significant items for the six months to September 30 are expected to be 10-15% lower than the March 2004 half-year result of $1.85 billion. As a reason for the downgrade, Stewart said: "In our retail bank in Australia we have forgone income and incurred expenses protecting the franchise." None of the other banks have had to come out with a similar profit warning.

David Spotswood, investment manager at Credit Suisse Asset Management, says the two main issues for the company are its inability to explain clearly why its profits are falling by about $500 million, or 10-15%, in 2004, when the sector is growing at 5-12%, and how the management and board plan to steer the company's strategic direction, financial targets and performance indicators. "Both these issues are about clarity or the lack of it," he says.

Stewart's decision to use discounting to retain customers is occurring at a time when NAB's board and executive team are in transition and the Australian Prudential Regulation Authority (Apra) has imposed a series of conditions that are hurting the bank financially. The most important is Apra's requirement that NAB must have a minimum capital reserve equivalent to 10% of its risk-weighted assets. To meet this requirement by June 30, as well as pay shareholders a dividend, the company had to make a $2-billion subordinated debt issue as well as a $1.2-billion equity issue, which the bank referred to as a fully underwritten dividend reinvestment plan.

APPENDIX 1 – BRW ARTICLE cont.

Direction and priorities

On November 10, Stewart is expected to outline the direction and priorities of the Australian business. He will also discuss the bank's overseas operations, reveal asset write-downs, cost-cutting objectives, and explain how the company plans to move into cross-subsidisation of banking and financial services.

As for the troubled British operations - Yorkshire Bank, Clydesdale Bank and Northern Bank in Britain and National Irish Bank in the Republic of Ireland - Stewart hints that they will be fixed up rather than sold. However, if there is a buyer out there, NAB is a willing seller. The reason is simple. The assets need a lot of work; they account for less than 4% of the market, and some observers are bracing for a halving of earnings from these assets over the next three years. In the six months to March 31, 2004, they accounted for 20% of NAB's earnings.

At the bank's interim profit briefing, Stewart said the profit margins in its British businesses needed to come down in line with the industry. Banking is like any other business: you either pitch your profit margins in line with the competition or you don't write much new business. The four banks have margins of about 4%, compared with the market average of 2.5%.

The British assets account for more than 25% of the total bank assets - $103.9 billion for the year to September 30, 2003 - but they do not have a national brand and are far from having critical mass. Nor do they have a presence in the south of England, which is the most lucrative banking region in Britain. Equally important, after years of neglect, the bank must now start spending money on technology to enable the regional banks to talk to each other. Analysts estimate the costs could balloon to $200 million to upgrade the technology, merge the back offices and make redundancy payouts.

APPENDIX 1 – BRW ARTICLE cont.

Changing the culture

But fundamental to fixing these problems are changing the bank's culture, which Stewart says is one of his biggest jobs. He says when he joined the bank he knew there were problems, but he thought they were confined to the British banks and the foreign-exchange scandal in Australia. "I guess when I first arrived, I thought that there was an over-reaction because the bank had lost $360 million. That's a lot of money, but it's not life threatening for a bank of this size. I then fairly quickly began to realise - and maybe I should have realised it in Europe - that the forex trading scam was only the tip of the iceberg. I took the job and had no idea of the minefields that lay ahead. They included the findings of the PricewaterhouseCoopers (PwC) report, the Apra report, the boardroom split, two profit downgrades and so on," he says.

To try to work out what was wrong with the culture, Stewart says he read the PwC report and also regularly e-mailed the 200 most senior executives to ask them questions about the bank. "I started off by saying, 'Guys, tell me what's wrong with the organisation'. What was amazing was the consistency of their answers. You didn't have to be a brain surgeon to work out what was said. Then I asked the other question, 'What's right throughout the organisation?'. There was inconsistency with those replies. Going back to the first question, 'OK, what would you do to put it right? What do you think it should look like?'. And that gets a bit hazy," he says.

The PwC report revealed that the bank was focused on process rather than on the substance of an issue, there was a lack of accountability across the organisation and that it was a "good news culture". "That was the most worrying, because what that meant was that bad news [had trouble] coming up in the organisation," he says.

APPENDIX 1 – BRW ARTICLE cont.

Other things came up when talking with staff and customers: the bureaucracy and the silos. "When I speak to customers they'll all tell me the relationship manager is fantastic, but the processes and the bureaucracy make it difficult to do business," Stewart says.

"To give an example, I spoke to a young business banker in Brisbane two weeks ago. He said, 'John, I have a delegated authority to sign things up to $200,000. There are, of course, some exceptions. There'll be some things that are a little bit over that that have to go to the rest of the people. What percentage within my authority do you think I can sign?'. I said 90/10. I assume you can sign 90 transactions but there will be 10 that you have to send somewhere else. He said, 'John, you're wrong, you've got it round the wrong way. The number is actually six'. So just think of this for a minute. He can sign six, and 94 are sent somewhere else. Think of the cost of that. Think of the customer inconvenience, and think of how demoralised that young banker is. When you start fixing this, and say this process cannot be right, you actually get wins on all levels."

To change the culture, Stewart says he has had to make sure he has the right team of senior executives. To this end he has changed 80% of the bank's senior ranks, which equates to eight out of 10 of his direct reports. "You've got to get a team that can play together, because a team should be more than the sum of its constituent parts," he says.

APPENDIX 1 – BRW ARTICLE cont.

It is not easy changing the culture in any organisation, particularly one with 40,000 employees. To make it easier, NAB's core domestic operations - retail banking, wealth management and corporate and institutional lending - have been amalgamated into one division, NAB Australia, to try to end internal rivalries, smash the silos and boost earnings growth. The new operation, which is headed by former Citigroup Australasia chief executive Ahmed Fahour, is designed to improve the cross selling of products across the bank's 7.8 million banking customers and 2.8 million wealth-management customers. "If you look at our Australian business, we have a great banking franchise and a great wealth-management franchise but we have made little progress on cross-selling between the two," Stewart says.

He will hope that his appointments are right. The bank is certainly paying for them. After handing Stewart a three-year package worth up to $21 million, the board announced that 37-year-old Fahour could pocket as much as $33 million over four years, and the new chief financial officer, Michael Ullmer, could earn more than $14 million in the same period. If they do not live up to expectations, it will hurt the bank's already-damaged staff morale.

A big job in a short time

Stewart has a lot on his plate. As Jonathan Reoch, banking analyst at ABN-Amro, says: "The UK banks are broken and the cycle isn't with them. In Australia, bringing banking and wealth management together, there is a potential earnings risk around that. There is no doubt that margins will be crunched in the Australian business. I can't over-emphasise the momentum that the other banks have. [They] are chipper about life."

APPENDIX 1 – BRW ARTICLE cont.

But Stewart is not there for the long haul. "When I first joined the company in Europe [in August 2003], what I said to Frank Cicutto [the former chief executive of NAB] was, 'I'm here for the war and not the peace'. What I meant by that was, we have to fix these businesses. I enjoy doing that. It's a challenge ... I'm not going to leave this company until I see it is well on the road to recovery. If I can see that clearly, and there's the right successor, then I can go and do other things in my life. I'm not going until then, but I certainly won't be here in 10 years' time," he says.

The question is, will the bank? Some believe Stewart will dress the bank up for a takeover or merger. This would not be the first time he has done this. When he took the top job at Woolwich Building Society in 1996, he dressed it up and sold it to Barclays in 2000, with a 34% takeover premium.

The hard road ahead

What National Australia Bank must do to win back confidence

CHANGE THE CULTURE

1 As the new chief executive, John Stewart's challenge is to smash the company's bureaucratic culture, end the sycophantic behaviour of senior and middle managers and wipe out the arrogance and mismanagement that has plagued the company. To do this, Stewart has changed about 80% of his senior executive team, the board has reinvented itself with a 70% turnover in directors, a new charter of values has been written and the bureaucratic processes and silo mentality are being broken down.

APPENDIX 1 – BRW ARTICLE cont.

Stewart says changing the culture has to start with the people. "You've seen there are a lot of changes and a lot of new appointments, new hires, and that will continue. Basically, what that's about is getting a nucleus. You have to get the right people at the top who are very talented and who have the right attitude. Attitude is critically important here, a winning attitude. Importantly with that, they have to be compatible. You've got to get a team that can play together, because a team should be more than the sum of its constituent parts. It's not just 10 people who are looking after the business, it's what is the value that that team has by working together," he says.

SPELL OUT THE NEW STRATEGY

2 At the results presentation on November 10, Stewart will outline his vision for the company. This will include the identification of non-core assets, how he intends to clean up the bank's balance sheet, how he plans to bring wealth management and banking under the one banner and how he plans to repair the bank's damaged brand. Numerous surveys have shown that recent controversies dogging the bank - including the $360-million foreign exchange scandal, the boardroom dispute with director Catherine Walter and seven profit downgrades in 18 months - have tarnished the bank's brand and reputation. The market also hopes he will discuss his prognosis for the company's struggling British and Irish assets.

APPENDIX 1 – BRW ARTICLE cont.

CLEAN UP THE GROUP'S BALANCE SHEET

3 When Stewart releases the group's annual results, the investment community will be hoping he has taken the tough decisions and cleaned up the group's balance sheet. Areas to be reviewed include capitalised software, mortgage broker commissions, bad and doubtful debt provisions, British capital expenditure and the British pensions deficit. All up, NAB could write off more than $3 billion, but it is more likely to be between $1.3 billion and $2 billion due to the bank's capital restraints.

It is important for NAB to make these write-offs to bring it in line with its peers. NAB has historically been more aggressive in its accounting treatment than many of its peers. This is shown by a higher level of capitalised software expenses, a longer period of amortisation of upfront mortgage broker commissions than its competitors and a lower level of general provisioning cover. (Other banks have a general provisioning of about 1% of risk-weighted assets, compared with NAB's figure of about 0.7%. This means NAB's bad and doubtful debt charges have been too low.) UBS analyst Jeff Emmanuel estimates that if NAB takes $1.3 billion in write-offs, it will lead to a $145-million increase in net profit after tax in 2005. Emmanuel says it will also increase cash earnings per share by 3.1%, from $2.15 to $2.22.

FIX NAB'S AUSTRALIAN BUSINESS

4 Besides a poor culture and a disappointing performance from its four banks in Britain and Ireland, NAB is also facing problems in its Australian banking operations. Competition is fierce and margins are being squeezed. At the last profit downgrade in July, the company gave general comments.

APPENDIX 1 – BRW ARTICLE cont.

Since then there has been considerable speculation about the extent of margin shrinkage. The question is whether the contraction of the net interest spread will continue at the same rate as occurred in the first half of the year, which was a fall of 25 basis points. Stewart has to address this problem and explain to the market why the Australian operations are performing so poorly compared with the rest of the banking sector. To this end, Stewart is restructuring the Australian operations to bring three divisions under the one roof: retail banking, wealth management and corporate and institutional lending, headed by former Citigroup Australasia chief executive Ahmed Fahour. The move is designed to improve the cross selling of products across the bank's 7.8 million banking customers and 2.8 million wealth-management customers.

SELL OR FIX NAB'S BRITISH BUSINESS

5 After more than six months of delays, Stewart will be under pressure to outline his plan for NAB's four banks in Britain and Ireland. The banks have been under review for more than a year. Whether NAB decides to sell or retain its four banks is the key determinant of short-term returns on the stock, investors say.

If they sell the banks, it could add as much as $2 to the share price, one fund manager says. Some analysts have speculated that NAB could divest its two Irish banks because they do not offer synergies with NAB's two bigger banks, Clydesdale and Yorkshire. The asking price is believed to be about $2.8 billion. All four banks are believed to be worth about $10 billion. However, if NAB keeps them it will have to spend at least $200 million fixing the IT systems. "The situation just now, and I don't see that changing, is that we are committed to staying and developing the UK, and work is going on to that effect.

APPENDIX 1 – BRW ARTICLE cont.

Work has not stopped in the UK, we are fixing it as we speak," Stewart says. "The important thing in the UK is that we get it right. So a lot of what I've been working on is, what is the value that we can create for shareholders? And what are the variations of that? So there are different ways and different strategies we can employ to do that. And what is the potential to be created by disposal of any of the businesses, and checking that we are making the right decisions."

GET APRA OFF ITS BACK

6 After the $360-million foreign exchange scandal, NAB lost its licence to trade forex options. The Australian Prudential Regulation Authority (Apra) followed with an 87-page report on the scandal, and demanded that the bank smarten up its risk management and corporate culture. It prescribed 75 separate remedial actions, and in effect put the bank on probation until it shows it can be trusted to run a currency options trading desk. One of the key demands was a move to force NAB to increase its total capital adequacy ratio from just over 9% to 10%, which immediately prompted the bank to abandon its share buyback to preserve capital. It raised $2 billion from a subordinated debt issue and $1.2 billion through an equity issue. Apra also forced the bank to abandon the internal model for calculating risk-weighted assets. Until NAB gets Apra off its back and is able to manage its own business, the bank will be constrained in what it can do.

APPENDIX 2 – MEASUREMENT & EVALUATION

Watson’s Measurement and Evaluation in the Planning Cycle Diagram illustrates the steps required to effectively plan, implement and evaluate changes within an organisation. Due to NAB’s focus on a long-term organisational program rather than a short-term campaign, it is recommended that NAB utilize an evaluation tool to measure the progress of its corporate change strategy.

Measurement & Evaluation in the Planning Cycle

Source: Watson (2002)

APPENDIX 3 – STAKEHOLDERS