Nobody will be sorry to see Sir Victor Blank depart as the chairman of the newly created Lloyds Banking Group, least of all its shareholders. The rushed merger with HBOS, cobbled together after a drink with Gordon Brown, will surely go down in British corporate history as one of the biggest financial catastrophes of all time. The only surprise is that he clung to his job all the way to May, rather than being forced out as soon as the mess became clear.
But Blank will be far from the last FTSE chief to walk the plank. Indeed, the next five years look set to be very rough indeed for the pampered executive class. Heads will roll on a scale that would make even the most blood-fevered Jacobin revolutionary feel queasy. Chief executives and chairmen have grown used to hiding behind a booming economy, while lining their pockets with salaries, pensions and bonuses that would shame even a backbench MP. But the harsher economic conditions of the next five years will sort out the genuinely skilled businessmen from the clock-watchers.
Blank is emblematic of the kind of executive who prospered in the bubble. He was a skilled networker: just about everyone in the City will have been to one of the summer cricket matches at his Oxfordshire estate. But there was little evidence of real commercial talent. He started out as a lawyer, becoming a partner in what was then Clifford Turner, before switching to corporate finance and dabbling with mostly non-executive roles. He was chairman of Trinity Mirror for many years, during which the Daily Mirror began its long descent into irrelevance. He was the architect of the merger with the Trinity local newspaper group, another disaster for shareholders. But it was at Lloyds that he really got found out.
It’s probably a good rule not to put lawyers in charge of banks: another lawyer, Lord Alexander, was chairman of NatWest for a decade in the 1990s. That ended up being sold to Royal Bank of Scotland, with results that are now plain for all to see. Blank certainly seems to have had little idea what he was wading into when he took control of HBOS last autumn. Lloyds had sensibly avoided the worst excesses of the bubble. But years of careful management were blown in a few days with the £7.7bn acquisition of HBOS. A career banker would have been far more cautious: there were already many stories circulating about imprudent lending at HBOS. Blank’s naivety, and his lack of hands-on experience of retail banking, were cruelly exposed.
He’ll have plenty of company in the next few years. In a bubble, all manner of weaknesses can be swept under the carpet. All that is about to change.
First, the bubble allowed lots of pretty ordinary businesses to look as though they were doing well. Since it burst, we’ve learned that British Telecom isn’t really a world-beating company on the cutting-edge of technological change. It’s a fairly dull utility, with big pension problems. Marks & Spencer turned out not to be a brilliantly reinvented retailer ready to conquer the world, but a slightly odd combination of an over-priced food chain with an underwear shop added on (or maybe it’s the other way around). Many more chief executives will find the next few years chastening. It wasn’t hard to push up sales and profits in an economy growing at 3%-plus a year. It’s a lot harder in one contracting by 3% a year.
Next, there won’t be much leverage to pep up performance. During the boom, CEOs borrowed tricks from private equity. Even if a firm wasn’t doing well, they could spice up returns by calling in some investment bankers and re-engineering the balance sheet. Debt could be pushed up. Properties could be sold and leased back. With the money, dividends could be raised or share buy-back programmes launched. None of that will be possible for the next few years. The cash won’t be there. And there isn’t much chance of a merger boom. A mega-merger allowed firms to promise growth in the future. Even if that didn’t materialise, you could strip out costs and grind out higher profits. GlaxoSmithKline has been playing that trick for years. But with the markets in no mood to finance big deals, that won’t be on the table either.
Lastly, investors are about to get far more demanding. Capital will be scarce, and the huge borrowing requirements of every major government will suck up much of the money available. For much of the last decade, shareholder oversight of big firms has been largely a fiction. Boards could essentially do as they pleased. But now firms will have to pay close attention to what shareholders want. If they don’t, they’ll find themselves quickly voted out of office.
The truth is that, of the British firms in the FTSE, only BP, HSBC, Tesco, RTZ and Vodafone could really be argued to have made much progress as global businesses in the last decade. The rest were just treading water, and that’s putting it kindly. Now the easy days are over. In the next five years, directors will have to understand their businesses inside out. They will need to know how to create new products, expand into new markets, and deliver improved returns for shareholders. Otherwise, they’ll find themselves keeping Sir Victor Blank company in the ex-chairman’s club.