Aviva Plc’s incoming chairman, John McFarlane, had a message for reporters questioning the insurer’s change of leadership 10 days after the departure of Chief Executive Officer Andrew Moss.
“As far as you’re concerned, I’m the CEO,” McFarlane, 65, said in a brusque Scottish accent on a May 17 conference call. The suggestion that a strategic review would make it harder to find a new CEO was “naive” and “clearly ludicrous,” he said.
McFarlane, who sang in a rock group called the Sekrets in the 1960s, will inherit on July 2 a company beset by the European debt crisis that has underperformed U.K. insurers by 25 percentage points over five years, and has lower capital reserves than competitors and a sprawling collection of businesses across the globe. His straight-talking approach has done it before, helping turn around Australia & New Zealand Banking Group Ltd. and trebling the share price over his 10 years as CEO, investors, friends and ex-colleagues say.
“He’s a pretty straight shooter from my experience,” said Siobhan McHale, who worked under McFarlane as global head of culture and change at ANZ Bank. “Through tough times he would drive accountability and hold people to account. Like most CEOs he’d be tough if someone was a serial underperformer.”
McFarlane announced a strategic review on May 8, the same day Moss, 54, stepped down from the U.K.’s second-biggest insurer by market value and he is due to announce the results on July 5, three days after he officially takes over as chairman. Aviva was down 60 percent during Moss’s five-year tenure and was the worst performer in the nine-member FTSE ASX Life Insurance Index in that period. Even so, McFarlane is in no hurry to appoint a CEO, a process that is scheduled to take the rest of this year. He is acting chief executive in the meantime.
“I don’t know whether it’s a U.K. phenomenon that there’s only one important person in a company and that’s the CEO,” he said on the call. “The board has the ultimate responsibility for strategy.”
First on the agenda is to improve Aviva’s capital position, which is lower and more volatile than its peers, according to Oliver Steel, a London-based analyst at Deutsche Bank AG with a buy rating on the stock. McFarlane will also consider selling underperforming assets and has pledged to mend relations with investors, 54 percent of whom voted down Aviva’s pay plan at its annual general meeting, precipitating Moss’s departure.
McFarlane is being spurred to act by the worsening sovereign debt crisis in Europe, where Aviva holds about 18 billion pounds ($28 billion) of sovereign debt, more than any other U.K. insurer. In 1997, he combated similar pressure at ANZ Bank, which was underperforming competitors, having lent more to Asia than any other Australian bank as the region went through its debt crisis, ex-colleagues say.
“He took over a bank that had serious cost problems and had been underperforming for a long time,” said Brian Hartzer, who was managing director of ANZ Bank’s consumer finance division under McFarlane. “He reduced costs dramatically, cut risk exposures and gave the business strategic focus and a performance ethic.”
McFarlane was born in Dumfries, a market town 15 miles north of the border with England where Scotland’s national poet Robert Burns died, and educated at Edinburgh University. He joined Ford Motor Co. before moving to Citigroup Inc.’s U.K. division, where over an 18-year career at the bank, he rose to become its chairman.
He then spent four years living between London and Hong Kong, working for Standard Chartered Plc before arriving as CEO at ANZ in Melbourne. After leaving ANZ Bank he joined Royal Bank of Scotland Group Plc as a non-executive director in 2008 after it received the world’s biggest bank bailout. He stepped down this year to take the Aviva job, which paid his predecessor, Colin Sharman, 569,000 pounds in 2011. McFarlane’s pay will be disclosed in next year’s annual report, Aviva said.
McFarlane said the strategic review will center on Aviva’s capital reserves, selling assets, improving operational performance and repairing relations with investors.
“We are looking for a cohesive strategy to emerge, focused on the strong business units, where they have a competitive advantage and add value,” said James Lowen, who helps manage 1 billion pounds including Aviva shares at JO Hambro Capital Management Ltd. in London. “We agree with the outlined new strategy that it would be positive to increase capital slightly and reduce its volatility. We would favor asset sales.”
While Aviva’s investors await a change of direction for the company, they already have a different personality at the helm. McFarlane, who plays guitar as well as sings, performed Bruce Springsteen songs at ANZ Bank staff parties and said in 2002 he preferred going to rock concerts than Australian football matches. Moss, who wore double-breasted suits, favored gardening and watching cricket.
McFarlane, who declined to be interviewed for this article before the investor presentation, has dealt with adversity before. When he joined Melbourne-based ANZ Bank in 1997, the lender was losing money in Asia, had the highest costs of any Australian bank and had lost A$200 million ($201 million) trading Russian bonds in London.
After four years under McFarlane, ANZ Bank had the lowest cost-to-income ratio of all of Australia’s banks and its return on equity rose 5 percentage points to 20.1 percent. McFarlane cut the bank’s lending in Asia to less than $8 billion as he focused on its Australian customers.
ANZ “had forays into Asia and lost a lot of money in that process,” said Will Malcolm, a former ANZ investor who helps manage $3 billion at Edinburgh-based Standard Life Plc, Aviva’s 10th biggest shareholder. McFarlane “helped re-establish the bank’s credibility and that was reflected in the strong performance of the stock price.”
During McFarlane’s decade in charge of the lender to September 2007, ANZ Bank stock rose 211 percent to A$29.70. Commonwealth Bank of Australia, the nation’s biggest lender by market value, rose 271 percent in that period as the Australian economy boomed due to Chinese demand for natural resources.
It wasn’t all good news. As part of the bank’s withdrawal from Asia, McFarlane sold its Indian unit to Standard Chartered for A$2.2 billion in 2000. ANZ Grindlays was one of the three biggest foreign banks in the world’s second-most populous nation and increased profit by 27 percent a year in the decade to 2010, when it made $1.2 billion. ANZ Bank re-entered the Indian market last year.
McFarlane’s strategic review of Aviva’s 45 businesses will be “much deeper” than anything carried out under Moss, he said in May. The company will exit any markets that don’t meet its targeted returns, McFarlane said.
A sale of Aviva’s U.S. business, the 14th biggest annuity provider in the country according to data compiled by Bloomberg, if accompanied by disposals of its stake in Dutch insurer Delta Lloyd NV and several smaller Asian units, would boost its reserves to 170 percent of the amount required by regulators, Deutsche Bank’s Steel said. That measure was about 145 percent in March. It could also be boosted by cutting the dividend, Steel said.
McFarlane said last month he will tackle these issues without a CEO. A primary external candidate is Andy Haste, 50, former RSA Insurance Group Plc CEO and the top internal one is Finance Director Pat Regan, 46, according to analysts Barrie Cornes at Panmure Gordon & Co. and Eamonn Flanagan at Shore Capital Group Ltd.
At ANZ, McFarlane was known for promoting young, internal candidates to positions of responsibility, suggesting Regan may be his preferred choice.
“John was willing to give young people an opportunity to develop in more senior roles, and there are several examples of his willingness to take a risk with this,” said Elmer Funke Kupper, who worked as managing director for Asia Pacific at ANZ under McFarlane. “Finding myself in such a role, I found him a good leadership coach.” Funke Kupper, 46, is now CEO of ASX Ltd., operator of Australia’s main stock exchange.
One of McFarlane’s strengths was motivating and retaining employees, according to McHale, who ran a cultural change program at ANZ Bank called Breakout, which became a Harvard Business School case study.
As part of his drive to improve productivity and accountability, McFarlane once had the firm’s annual report designed to put a photo of each divisional CEO above the accounts they managed, according to Hartzer, who is moving from RBS to Sydney-based Westpac Banking Corp.
“John believes in hiring good people, giving them clear objectives and letting them get on with it,” he said. “He is tough but fair on performance, and if you don’t deliver then you know about it.”
McFarlane gave each employee A$1,000 of free shares soon after joining and regularly organized leadership training sessions and recreational events for workers, where he would often play guitar, said McHale, now general manager of culture and executive learning at Transfield Services Ltd. One Christmas he sent a bottle of champagne and a card to employees working on the Breakout program, according to a report on corporate change by McKinsey & Co.
Such methods may be needed at Aviva, which announced its heads of Europe, North America, Russia and investment management were leaving less than a month before Moss stepped down. The firm, which is also cutting jobs in the U.K. and Ireland, mistakenly sent an e-mail in April dismissing the entire staff of Aviva Investors, its 1,300-employee investment unit.
McFarlane has also made mistakes. ANZ Bank, with other Australian lenders, paid radio broadcasters who had previously been critical of banks to say positive things about it and the industry without disclosing the payments in 1999. The “cash for comment” scandal prompted the Australian Broadcasting Authority to set out new license conditions for broadcasters.
“I was seriously embarrassed by that, and I have to claim, of course, I’m as guilty as anybody else here because I sat through the meetings,” McFarlane said in a 2002 radio interview with the Australian Broadcasting Corp. “The fact that I had just arrived in Australia and I didn’t know who any of these people were doesn’t excuse me from what was clearly a wrong type of decision.”
Another attempt at publicity also went wrong in 2002, when McFarlane made a low-ball bid to buy 56 rural branches that National Australia Bank Ltd. had earmarked to be closed. The offer was called “unrealistic” by NAB. McFarlane said in the interview with ABC that the bid was “cheeky” and that it was an attempt to highlight ANZ’s commitment to rural areas.
“On reflection I think I’d handle it a different way today,” he said. “But underlying it was something real.”
In any case, Aviva’s investors can expect a chairman who embraces change. Soon after arriving at ANZ Bank, McFarlane was told by a parking attendant that his flame-red Chrysler Jeep wasn’t allowed in the bank’s parking lot because the former CEO had banned red vehicles after his car was damaged by one.
McFarlane said in a 2004 interview he left his Jeep there for several weeks to make the point that things were going to change. “I make the rules now,” he said.