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Banking on cultural change

Home / EOS Case Studies / Barclays

Leon Kamhi, Head of Responsibility at Hermes investment Management

In the years since the financial crisis, the UK’s largest banks have experienced successive misconduct problems and Barclays has been no exception. These scandals have included manipulating the global benchmark interbank exchange rate LIBOR, mis-selling protection insurance (PPI) and relaxing investigatory requirements, which safeguard against fraud and money laundering for ultra=high-net-worth clients, resulting in multiple fines from the UK and US regulators.

The offences, combined with revelations about the bank’s tax avoidance strategy, pointed to a fundamental cultural problem that would need to be addressed throughout this complex organisation and led with unrelenting commitment from the board and senior executives.

Barclays’ reliance on its investment banking division, which after the crisis was required to hold much higher levels of capital by regulators, was also strategically challenging. This increase in capital intensity resulted in an inability to fully cover its cost of capital, impairing its capital adequacy ratio, as the loss-making unit carried £79 billion in legacy risk-weighted assets (RWA).

Hermes EOS has had an ongoing engagement with the bank, seeking to ensure that it is run in the interests of long-term investors. We identified several key issues that the bank needed to resolve: chair and CEO succession, board composition, employee conduct, alignment of pay, performance and portfolio strategy, with a particular focus on the restructuring necessary to ensure the investment banking division is able to achieve economic returns.

What we did
While we have been engaging with Barclays since 2008, we only began to make tangible progress in 2012 when several incumbent board members stepped down in the wake of the LIBOR scandal. The bank’s chair and the then-CEO aimed to reform the culture of its workforce and took senior executives on an away-day designed to kick-start this change and address the underperforming parts of the bank. However, it took the bank’s senior team some time to execute the plan devised in 2012.

In early 2014, we raised concerns about the profitability of the investment banking division, which did not justify its capital requirements. Furthermore, we raised concerns about the apparent anomaly of increasing bonuses for employees in the investment bank despite its falling performance in 2013. Barclays defended these payments as necessary in the short term to ensure the retention of key employees and allow it time to initiate plans to restructure the division. As a result, we recommended that investors support the remuneration vote by exception.

In May 2014, recognising the concerns of investors, Barclays presented a clear plan for reforming its investment bank, highlighting its competitive advantages and vowing to reduce the less commercially viable elements. However, the departure of the retail banking-focused CEO in mid-2015 raised fresh concerns about these plans. The bank’s senior management team assured us that progress on restructuring and culture change would not be impeded by the change in personnel – instead it would be accelerated.

Barclays has made substantial changes in all of the areas we engaged on, particularly its culture. It has targeted positive behaviours, including three-year citizenship plans, and has focused on issues such as making financial products more accessible to a wider range of people and sustainable investment. It has also made efforts to improve the diversity of its workforce, which has been shown to improve performance across the business world, through mentoring, thought leadership programmes and strategic headhunting.[1]

Wider events at the bank have suggested that its governance has changed for the better. In particular, the appointment of a new CEO in late 2015 was relatively efficient, following the departure of his predecessor. This left its chair in an executive role for a limited time only, a situation which could have become problematic if it had continued for longer.

In an effort to lower the capital intensity of its investment bank, Barclays pledged to reduce the division’s RWA to no more than 30% of the entire lender’s total and successfully reduced this by £37 billion, or almost 47%, between 2012 and 2014. It has focused on its debt and equities businesses, where it has existing competitive advantages, while significantly reducing headcount in other areas and improving its advisory franchise, which does not demand a lot of capital. The bank committed to further streamlining its operations in its 2015 full-year results, announcing that it would sell its African business and expedite the disposal of non-core assets.

The bank’s improving capital coverage was demonstrated when it passed the Bank of England’s stress-tests in 2014 and 2015. In addition, Barclays’ retail and commercial banking arms now contribute as much revenue as the investment bank, helping to smooth earnings volatility and strengthening the company’s ability to service its debts. However, its profits fell in 2015, due largely to the ongoing costs of addressing PPI mis-selling.

Notwithstanding the positive progress, we believe that Barclays still has much to do. Its cultural transformation continues as it deals with the conduct issues of its past and the cost/income ratio within its investment bank is still much higher than that of its peers. However, the bank’s senior management says it is motivated to rectify these matters. This, together with its commitment to addressing employee conduct, corporate governance and other ESG concerns makes it more likely to be sustainable as a business and serve the needs of its customers, support growth in the real economy, as well as provide a long-term investment returns.

[1] McKinsey & Company, ‘Why Diversity Matters’, January 2015

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Leon Kamhi Head of Responsibility at Hermes investment Management Reporting into Hermes Investment Management’s CEO, Leon Kamhi is responsible for developing and directing the programme for integrating responsibility across the Hermes group, overseeing its delivery and accountable for its success. This includes ensuring investment teams are aware of and integrate ESG performance in investment decisions and that engagement is effectively incorporated alongside investment activities. In addition, in this role he oversees and contributes to how the firm’s responsibility activities and performance are integrated into Hermes’ client relationship management and reporting, the delivery of its corporate citizenship programme and the development of responsible structures and processes for the firm. He also leads a number of corporate and public policy engagements. Previously at Hermes, Leon was responsible for the development and delivery of Hermes EOS’ global corporate and public policy engagement programme from 2012-2016 and acted as its commercial director from 2009-2012. Prior to that, Leon worked within the Hermes UK Large Cap Focus Fund for seven years, where he was responsible for executing the fund’s engagement programmes. He also has 12 years of strategy consulting and operational industry experience.
Read all articles by Leon Kamhi
Roland Bosch Roland Bosch is sector lead for financial services and responsible for corporate engagements in Europe and the US. He engages with corporate boards on relevant strategic, governance, social and environmental issues to foster long-term sustainable value creation. Prior to joining Hermes EOS, he worked as an investment manager at F&C Asset Management, where he was responsible for managing institutional equity portfolios, as well as providing investment analysis and recommendations. Before that, Roland was based in the Netherlands, working as an investment manager for insurance group Achmea and as an equity analyst at HSBC. Roland is a certified investment analyst (RBA), EFFAS financial analyst and holds a degree in Business Economics from Groningen University. Roland is fluent in Dutch and English, with a good working knowledge of German and French.
Read all articles by Roland Bosch
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Engagement objectives

Social: Culture change

Governance: CEO succession, Remuneration structures and outcomes

Strategy, risk and communication: Investment bank returns

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