Shareholder wealth in Royal Bank of Scotland

Objective of each business is to maximize the value of the firm for its owners, that is to maximize shareholder wealth. It is successful if manager can maintain as well as balance rights and benefits of all stakeholders in the organization.

BBC News Journal published on January 30, 2012 mentioned case of Royal Bank of Scotland (RBS) as an example illustrated for the shareholders wealth, in which the issue was not concerned effectively.

According to Sternberg (1998: 95), “organisations, including corporations and particularly businesses, should not be run to serve the interests of their owners, but for the benefit of all their stakeholders. However, in the situation, Stephen Hester, chief executive of RBS received a bonus of £1m, irrespective of the difficulties of the organization.

Personally, I think that the reward is not reasonable because it just concentrated on benefits of the leader while ignore other stakeholders. A large amount of money was used with wrong purpose, instead of saving the situation of the organization. In 2008, at the moment Mr. Hester was appointed, the Bank was in its worst performance ever, which reported the largest loss in UK corporate history of £24.1 bn. It also is the year, the firm fully got loss. The performance still not got better in next years, with the continuous loss of £3.6bn in 2009 and £1.13bn in 2010.

“Shareholder wealth is represented by the market price of a firm’s common stock” (McGuigan, 2009). The chart below represented for the negative share performance under Mr. Hester management.

It is easy to see the downward trend of the share price through 2009 to 2011 of the organization. “Under Mr Hester, its shares have fallen substantially to about 27p currently. Its stock fell 48% last year. In 2007, RBS shares were worth about 370p”.

Another evidence shows the unfair of the Managers to different types of shareholder is the way of fund distributions. Except £1.2m base salary, chief executive of the Bank also was awarded a large amount of £6.5m of share, while staffs got difficulties with the decisions. Unable to manage number of employees, RBS announced a redundancy of 3,500 jobs from its global banking division. It means the firm had removed more than 11,000 employees, pre-credit crunch headcount of 24,000. David Fleming, national officer for the Unite union, considered it as an hypocrisy of the Board of Management, which has sacked over 21,000 staff, while still attempting to pay bumper bonuses to the bosses."

There is a huge criticism of the payment to Mr. Hester. More than 90,000 people had opposed violently this decision. Brendan Barber, general secretary of the TUC evenly describe the bonus as a “huge mistake” especially when the Bank met difficulties in operation as well as the freeze and cut down of pension entitlement.

However, an argument has been made to debate for the event. At first, we cannot deny the effort of Mr. Hester toward the recovery of the Bank. For the first 9 months of 2011, RBS made pre- tax profits of £1.2 bn. Management of the organization thought that the reward is worth his achievement of reducing the firm’ risks and made it less vulnerable to external shocks (potential meltdown of Eurozone). Chairman Sir Philip Hampton is even adamant that the bonus paid to him less than his peers.

On the other hand, the reward seems reasonable when making comparison with other rivals. Barclays, for instance paid its chief executive Bob Diamond up to £10m bonus, compared with a total payout £6.5m in the previous year.

When considering the case of RBS, decision of rewarding Mr. Hester £1m has both good side and bad side. It can be said that the decision is toward the shareholder wealth, at least the chief executive for his devotement to the Bank. However, it did not consider carefully other parties (employees) as well as the real situation of the Bank. Employees’ benefits were neglected. Although the reward could be worthy with the chief executive’s previous achievement, it still is a risk with the decreasing of staff number and slow recovery of the Bank. “Financial manager have the primary responsibility for acquiring funds (cash) needed by a firm and for directing funds into project that will maximize the value of the firm for its owner”. So, the decision could be a long term plan of manager for better performance of the organization as well as increase shareholder wealth.
Source of information:
McGuigan, J (2009) Contemporary Corporate Finance, 11th edn. Cengage Learning
BBC News