NatWest confronts the investment myth
Sunday 22 June 1997
The biggest problem here is that no one can really define what an investment bank is. It was this lack of definition that prompted the creation of a global investment bank. No one knows what it is but by golly it's big.
Once you became a "global" investment bank, all normal rules of business could be dispatched out of the window. Forget about the cash flow, what about the deal flow? There was no need to concern yourself with boring management principles because this was a people business. As long as a team of investment bankers was permanently airborne in business class on its way to pitch for Britain, all was well in the world.
Unfortunately, the investment bank was not the only thing which went undefined. So did profit measurement. No one doubted that global investment banks were profitable - otherwise how could you justify those enormous bonuses? Rarely, though, was that profitability judged in terms of the capital it employed. No one dared ask the question of whether it might be better employed elsewhere.
Investment bank strategy was therefore dictated on the hoof. A series of myths grew up that have become locked into investment banking folklore. These include: "You have to be big to be a player", and "You have to have an equity business to be a serious contender".
All that NatWest is now doing is questioning that folklore. It has accepted that investment banking as perceived by investment bankers is incompatible with the demands of shareholders who require secure and sustainable earnings growth. It has accepted that investment banks need to be managed just like any other business. It has also accepted that big is not necessarily best and that investment does not of its own yield sustainable profitability.
This is not a U-turn but sound management practice. I read in one paper that the so called U- turn could lead to the demise of NatWest chief executive Derek Wanless. What rot. He is the one man who actually has the ability to lead NatWest Markets, the investment banking business, out of its current predicament.
The reason he can do this is because he is a professional manager. He brings to NWM the detached and objective eye of the outsider. He is deeply unimpressed by size and highly committed to creating value. No doubt the staff at NWM are feeling insecure at the moment, but it will not take long for them to realise they are in good hands. There may be some pain in the short term but the business that emerges will be stronger, more confident and clearly focused.
Stepping on the gas
BG (the part of the old British Gas responsible for the transportation pipeline) clearly needs to be battered, beaten and generally thrashed more often by its regulator. The comprehensive trouncing by the head of Ofgas, Clare Spottiswoode, aided and abetted by the Monopolies Commission, has done nothing but good for the company. The share price has soared magnificently since the dark days of last year, a victorious Ofgas is now much better disposed to its vanquished opponent and BG has even squeezed a few minor concessions out of the MMC. It is certainly no worse off than it was before the investigation.
Some have argued that it has cost time and money by demanding an MMC inquiry. The money is around pounds 10m, which is hardly material to BG, and I cannot see anywhere the time it has lost. The British Gas demerger was more of a distraction than the MMC investigation and that proceeded as planned. Elsewhere senior management has simply got on with business.
The important principle has been established that it is possible for there to be life during and after a serious spat with the regulator. It has also been established that these spats are not generally to be encouraged. Both sides, I suspect, have learnt a lot about each other and both will be better for it.
Hague's European drift
I was recently at dinner with a dozen or so captains of industry and City professionals when we were asked by a Tory MP who he should vote for in the party leadership election. Everybody around the table advocated Kenneth Clarke on the grounds of his performance as the former Chancellor and more importantly because of his stance on Europe.
The MP then rather stunned us by pointing out that Mr Clarke was actually unelectable, so we had to vote again. The second ballot produced a victory for William Hague.
Life has indeed imitated dinner, and it is William Hague who is now charged with the responsibility of restoring the Conservative party's fortunes. The question of most interest to the business community is not how successful he will be but where does Mr Hague stand on Europe. Given the Labour Government's majority, Mr Hague's views may be irrelevant unless you believe that the Opposition party can play some part in setting the tone for parliamentary debate.
That debate will be crucial. The European question is too often seen in terms of soundbite cliches rather than the thoughtful analysis that is a pre-requisite for a considered response to matters European.
The bookmakers' response to Mr Hague's leadership success was to lengthen the odds on a Tory victory at the next election. I suspect the odds on there being a sensible debate on Europe have drifted in the same direction.
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