Diamond Antithesis Seen as Key Step to Repairing Barclays
Diamond, 60, quit last week after the London-based bank was fined a record 290 million pounds ($449 million) for trying to rig the London interbank offered rate, the benchmark interest rate for more than $360 trillion of securities.
“The new CEO will have a lot less brash, investment- banking style than they had in Bob Diamond,” said Alan Beaney, who helps manage 200 million pounds including Barclays shares at RC Brown Investment Management Plc in Bristol, England. “They’ll go back to somebody from the retail bank to run it.”
The British lender faces a criminal probe and political pressure to curb or separate the investment banking unit that Diamond built up during his 16-year career at Barclays from the consumer bank. The unit generated 61 percent of the bank’s first-quarter pretax profit. At a Parliamentary hearing last week, lawmakers asked if the culture at the investment bank was “rotten” and if he lived in a “parallel universe.”
“It looks awful,” said Jim Preen, who advises companies on media relations and crisis management. “If you are in a crisis, the first thing you try to do is keep in touch with the public mood. Banks are clearly not in touch with public mood.”
The stock has dropped 31 percent, erasing 3.8 billion pounds of market value, since regulators announced the fine on June 27. The shares fell 2 percent to 164.75 pence in London trading on July 6 as Britain’s Serious Fraud Office said it would open a criminal probe into attempted rate manipulation.
Giles Croot, a Barclays spokesman, declined to comment.
The bank will also have to bolster its internal controls. Barclays announced on July 2 a “root and branch” review of its business practices and said it would develop a code of conduct.
The lender will have to convince politicians that the planned code of conduct is enforced, said Alan Stevens, managing director of Vector Consultants, which advises companies in regulated industries such as pharmaceuticals and aviation.
“They haven’t drilled down every level from the board room to the trading floor what matters in terms of actions,” said Stevens, whose clients include Vodafone Group Plc, Prudential Plc and British Airways. The bank will need to think how it can reward good values as well as profits, he said. “They need to ask: when was the last time a manager was promoted because he stopped someone doing something?”
Antony Jenkins, Barclays’s head of consumer banking, and David Roberts, deputy chairman of Lloyds Banking Group Plc (LLOY), Britain’s biggest mortgage lender, have been named by analysts as potential successors for Diamond. Both Jenkins and Roberts declined to comment.
Michael Smith, CEO of Melbourne-based Australia & New Zealand Banking Group Ltd., and Naguib Kheraj, a former Barclays finance director, may also be among the candidates, the Wall Street Journal reported July 6, citing people close to the bank.
Diamond, who joined Barclays in 1996, oversaw the 2008 purchase of Lehman Brothers Holdings Inc.’s North American unit and the expansion beyond fixed-income into equities and mergers advisory. He was appointed CEO in January 2011.
Whoever replaces him will probably have to accept a smaller pay package and forgo a bonus. The Massachusetts-born banker’s 12 million-pound remuneration, including a 5.75 million-pound payment toward his personal tax bill last year, made him Britain’s top-paid bank CEO.
Then-Business Secretary Peter Mandelson described Diamond as the “unacceptable face of banking” in 2010 over his compensation. In January 2011, the banker told Parliamentarians that the time for “remorse and apology” for banks needed to be over, prompting political outcry.
Diamond received at least 120 million pounds in salary, bonuses and share awards since joining Barclays’s main board in 2005, according to Manifest Information Services Ltd., a proxy voting firm that advises clients managing 3 trillion pounds of assets. That excludes the 26.8 million pounds he made on selling shares in Barclays Global Investors in 2009.
The lender is still to determine his severance package. He may be entitled to a payoff of 2 million pounds to 21 million pounds, according to Manifest.
Restoring public and political trust “isn’t an overnight process” said James Post, a professor at Boston University School of Management. “The new CEO needs to be separated from the bonus culture that is a cancer on the industry,” he said. “A fixed salary with some long-term performance shares makes good sense for now.”
The choice of an investment or consumer banker presents Barclays with a dilemma, Beaney said. A consumer banker may not have the knowledge to run and manage the culture of the securities unit, while the choice of an investment banker would suggest the bank is unwilling to change its ways, he said.
Barclays could opt for a co-CEO structure as the bank prepares to implement government-imposed rules that will force it to erect firebreaks around its consumer and securities units, Beaney said.
The government is putting into law the Independent Commission on Banking’s recommendation to partially separate consumer and investment banking. The panel, led by Oxford academic John Vickers, recommended that banks create separate boards for their consumer and securities units with at least two-thirds of their members sitting on only one. Banks will also be forced to have separate risk committees.
“That would fit in with the idea of ring-fencing,” Beaney said. Shrinking the investment bank would be a mistake, as it’s the only “credible” British investment bank, especially after Royal Bank of Scotland Group Plc (RBS) reduced its securities unit after its bailout, he said.
Barclays’s securities unit generated 44 percent of the bank’s revenue in the first quarter. The unit costs as a proportion of net operating income climbed to 71 percent in 2011 from 65 percent in the year-earlier period. Each employee in the division took home an average of 64,000 pounds in bonus for 2011, compared with the companywide average of 15,237 pounds. The operation accounts for about 17 percent of the bank’s staff.
The incoming CEO will need to reduce costs such as pay and bonuses at the investment banking unit, said Colin McLean, CEO of Edinburgh-based SVM Asset Management. That may require the bank to hire a CEO with investment banking experience who isn’t working at a securities firm. Royal Bank of Scotland CEO Stephen Hester joined the lender from real estate developer British Land Co. He had previously worked for 19 years at Credit Suisse First Boston.
“When we had Hester he didn’t come from a traditional background,” McLean said. “They’ll have to understand investment banking.”
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