30 Jan 2012

Sir Philip Hampton: the reluctant banker

Sir Philip Hampton says we should be "terrified" about the eurozone. The RBS chairman talks to Richard Cree about the economy, accountancy stereotypes, and why he never introduces himself as a banker

As chairman of one of Europe’s largest banking groups, Sir Philip has more to worry about than most. Although RBS took a nasty hit last summer when it wrote off £750m in Greek debt, he fears there is worse to come for everyone. “The majority of our business is still focused in Western Europe,” he explains. “We do have operations across the globe, but we are still very concentrated on Europe”.

It hardly needs saying that the crisis in the eurozone has knocked the entire European banking system badly. Indeed, banks all across the world have been contaminated by it. Sir Philip is clear that this remains his overwhelming concern. “We have lost a year or maybe two on the recovery," he says. “And as a bank our recovery depends very much on what happens in the eurozone. We remain a European-based bank with most of our assets in Western Europe. We have a good-sized American business as well and operations in the Middle East and the Far East. But the heart of the business is Europe and that is severely affected by the crisis in the eurozone.”

Sir Philip arrived at RBS in 2009 as the bank was recovering from the worst of the financial crisis that had almost seen it go out of business. He came fresh from an extremely successful spell as chairman of J Sainsbury, during which he and chief executive Justin King had effectively turned the business around. But he had also done a stint as the first chairman of UK Financial Investments (UKFI), the body that oversees the Government’s stake in the banks and was previously group chief financial officer at Lloyds TSB.

Far from being an industry outsider, he clearly knows his way round a bank balance sheet. Yet I ask him if he sees himself as a banker and he looks at me with mock horror. “Oh God no,” he says. “I never introduce myself as a banker.”

But then Sir Philip is anything but the archetypal macho City banker. Quiet, humorous and self-effacing, he is openly critical of the worst excesses of banking. Last January he talked to the BBC’s business editor Robert Peston about banking's “gangmaster mentality”, where superstars at the top attract a loyal team of less starry henchmen.


The level of Greek debt written off by RBS

“The star quality seems to filter down to people who don’t seem so star quality," he says. "There is a sort of gangmaster cultural phenomenon in this. You recruit top people to make a difference… but they associate themselves with people who aren’t such stars.” His main point seemed to be that the pay disparities between the top stars and some of what he dubbed “the journeymen players” are not big enough.

That’s a top banker describing some other bankers as overpaid and underachieving. For anyone in any doubt, he goes on to add, “The most peculiar thing about it all, actually, if you look at the last 10 years of massive increases in pay, is that the performance for shareholders has been pretty disastrous across most banks. Some banks gone out of business altogether and most have had a poor performance for shareholders.”

It’s not difficult to see why people who have worked with or for Sir Phillip rave about his honesty. Peninah Thomson runs the Mentoring Foundation, a charity that uses FTSE 100 chairmen and CEOs to mentor women in the so-called “marzipan layer”, just below board level in other FTSE 100 companies. Sir Philip has been a mentor since his days at J Sainsbury. Thomson says he is noticeable for both his commitment and understated approach to the role.

“He puts across very important ideas and recommendations without a hint of his own self-importance", Thomson says. "One of his key phrases is, ‘You might like to consider’, and even if you don’t know it at the time, what he suggests is usually something brilliant.”

The chairman role

Sir Philip is an expert in guiding large complex institutions, having had stints as group finance director at BT, British Steel and British Gas, as well as Lloyds TSB. He says as chairman his role is to guide and help CEO Stephen Hester to achieve the RBS recovery plan. The role of a chairman, as he sees it, is not quite that of the old Combined Code.

“The Code used to say that the chairman runs the board while the CEO runs the business," Sir Philip says. “I have always thought that was a bit peculiar. It isn’t as black and white as that.

“At its simplest level the job of the board and the non-executive directors (NEDs), led by the chairman, is to support the management to run the business and to replace it if they don’t.”

The current five-year plan was laid out for shareholders three years ago. But just as the global economy has been thrown off course, so Sir Philip says the euro crisis and its knock-on effect has hindered RBS’s ability to meet the targets laid out in that plan.

“In terms of the things we wanted to do, which were all spelled out to shareholders a few years ago, I think we have achieved a lot of them. Most of the levers we can pull we have pulled pretty effectively. But we thought that three or four years into the plan the economies we operate in would have started to improve. Banks are very reflective of their economies. If the economy is good, the banks are good because they have fewer bad debts. In challenged economies, banks are challenged.”

I never introduce myself as a banker
Sir Philip Hampton

But Sir Philip is clear that RBS is a different organisation to that which he joined in 2009 and to the one that failed so spectacularly. “The whole orientation of the bank is different,” he says. “The same is true of most of the banks in Europe and the US. The whole orientation had been limitless growth, in lending, geographical spread and product spread. Everything was getting bigger and wider and the financial crisis stopped that in its tracks. Most people are thinking in terms of stabilisation where they have a strong but stable franchise or retrenchment, particularly in investment banking.

"People are trying to cut back because capital requirements are much greater and the business is less profitable. We have gone from a bank whose slogan was ‘Make it happen’, which is not untypical of the time, to something more controlled and focused.”

Government ownership

The government owning 83% of the bank’s shares hasn’t had a significant impact on the running of RBS, he confesses. “It holds its shares as a commercial arms-length shareholder. That’s why RBS was kept as a listed company. The government could have taken 100% if it wanted to. But it wanted to keep a listed company for commercial disciplines and to make it easier to sell their shares in the market.”

And on the whole, he says, they have stuck to that pretty well. “Occasionally politics does intrude, but overwhelmingly they are a commercial shareholder.”

He’s reluctant to expand any more on that particular point, but the day we meet is the day after the chancellor George Osborne announced the government would be accepting most of the recommendations of the Independent Commission on Banking, including the suggestion that investment banking operations be separate from retail banking.

Sir Philip’s take is typically honest. “From a public policy point of view the case for separating banks is very strong," he says. "People are concerned about the exposure they have as ordinary people to international capital market activities.

“There is also a good argument that if you are going to have investment banking and international capital market activities, they ought to be able to finance themselves, and shouldn’t have to rely on sources of finance from government or ordinary people. The basic disciplines of the different businesses and the capital independence of the two businesses is a good principle.”

Yet he thinks it is doubtful whether the separation will be worth it in the end. “Whether it’s worth the cost is another question. It puts big costs on the banking system. The ways of dealing with that are either to become more efficient, which all banks need to be, or to pass them on to customers or shareholders. But nobody wants those extra costs.”

Sir Philip is less diplomatic when discussing the errors made by Sir Fred Goodwin and his former regime. “Clearly there was overexpansion by RBS," he says. “The substantial extra layer of ABN AMRO produced the biggest balance sheet in the world at just the wrong time. I’m not sure that was ever the aim, but that’s what it became. There hadn’t been a banking crisis or big credit losses in banks for a long time so people thought that the assets were largely solid. They didn’t realise that when the bubble burst, particularly in the global property sector, whether it was US sub prime or commercial real estate in the UK, Ireland, Europe or other parts of the world, what people thought were a safe, secure, collateralised loan ended up as a massive impairment.”

Banking has taken centre stage even in our personal lives - that was unthinkable a few years ago
Sir Philip Hampton

So was the crisis borne from incompetence? “No doubt that it was a misjudgement and with hindsight it’s an amazing misjudgement,” he says. “But for a long period of time property prices had been rising, whether people’s houses or commercial property and people just generally speaking didn’t see that asset bubble.”

'Bound to get better'

He speculates that just as people were caught up in the excessive optimism of the boom, there is something of a negative hype at play today. “It’s commonplace to think that you are experiencing normality, when at any one time you are not. And maybe while now we are all doom and gloom I hope that at some stage in the future we will look back and think, ‘Well, we shouldn’t have been so miserable, things were bound to get better and they did’.”

Asked whether there is anything shocking in the fact that the bank was led by accountants at the time of its collapse, Sir Philip dismisses the stereotype of the boring, cautious accountant.

“People in these professions are reasonably reflective of a wide range of attitudes. I have met some accountants who are incredibly cautious and I’ve met some who are real go-getters and risk-takers, " he says. "The only profession that is really stereotypical in my experience is the actuarial profession. They seem to fall into a much tighter spectrum of personalities and attitudes. But accountants come in a fairly wide range of shapes and sizes.”

Asked whether this is a good time to be in banking, Sir Philip looks aghast at the suggestion. “No. Absolutely not. It is a terrible time to be in banking.” But he quickly adds that it is also a fascinating time.

“As a business challenge, it is unmatched. The man in the pub can talk about bank capital and quantitative easing and that was unthinkable a couple of years ago. Banking has taken centre stage in our business and personal lives and it is fascinating. But the sector has had a terrible few years. For shareholders, it’s been terrible.”

He says his job, and that of everyone in banking, is to restore their reputation. “It can be done, but in time. It won’t be easy as the scars are deep, but there’s no reason it can’t be done with a concentration on giving customers good service, good value and by behaving properly. It’s a restoration of old-fashioned values in some ways.”


Richard Cree