Low growth, tough regulation, legacy misconduct and the march of technology make it harder than ever to run a large investment bank profitably. But both incoming bosses fingered committees as the new villain.
Comparing and contrasting Deutsche Bank and Barclays has been a favourite sport for the financial press. Both had chief executives called “AJ”, both had business models which were heavy on leverage with pre-crisis expansions fuelled by bond and derivative trading, and both have struggled to find a profitable niche in the post-crisis world.
Now both firms have new bosses. Anshu Jain left Deutsche of his own volition, leaving behind a wave of conduct issues, while Antony Jenkins was booted out by the board.
New Deutsche boss John Cryan is taking 100 days to get his feet under the table before announcing a strategy, while new Barclays executive chairman John McFarlane has already started (he’ll tell the market what his plan is at the end of the month).
But both are oddly hostile to committees.
Cryan, in his first day letter to staff, said: “We absolutely must wean ourselves off the proliferation of committees. Of course committees can sometimes play a useful role, but they cannot be used as a substitute for personal accountability.”
He continued: “We are too diversified and too complex for our own good. We must simplify our business model, break down internal barriers and instil a culture of co-operation.”
Cryan said: “Our recent efforts to impose the highest standards of behaviour across the bank have had the unwanted effect of rendering our decision-making slow and cumbersome. We have become inward-looking and bureaucratic. Our confidence to engage with the outside world has been dented .”
McFarlane, commenting on the flaws of the Jenkins regime, said there was a lack of direction and energy in the organisation, and pointed to the 375 separate management committees within Barclays.
“The biggest problem in the organisation is clunkiness of processes and businesses,” said McFarlane. “Our managers want freedom with responsibility and personal accountability.”
They’re not wrong.
Most people in the workforce will have direct personal experience of the energy sapping effects of endless meetings, status updates and bureaucratic obstructionism.
Senior investment bankers, for the most part, would rather be on a plane, heading to see their clients and to win business — the job for which they were hired — rather than discussing other people’s deals or clients, or demonstrating their commitment to the latest box-ticking initiative.
Certain committees — credit committees, risk committees or compensation committees — are more valued because they are more powerful. Membership of one delivers access to the firm’s resources, be it the balance sheet needed to win mandates, or the compensation needed to build teams and reward loyalty.
But it is, presumably, the other sort of committee which Cryan and McFarlane despise — committees which diffuse responsibility, restrict autonomy, and delay action.
They both want, instead, to give business heads more personal freedom and personal responsibility. Partly this is out of regulatory impulse. The UK’s new Senior Managers Regime forces banks to clearly divide up responsibilities, and to delegate clearly and comprehensively.
But mostly it is a pendulum swinging back the other way.
Managing an investment bank is all about managing the tensions between individual, team and institutional loyalties. Individuals have the relationships which bring in the business, but executing transactions well means working in a team, and extracting the maximum revenue from a relationship means working institutionally.
Only in the smallest boutiques are all of these impulses aligned, while the larger the institution, the harder it is to link everything together.
A coverage banker or corporate financier might feel comfortable handing off his client to the M&A group, and sanguine about DCM, but banks are pushing to do ever more with the same clients.
Transaction banking clients are supposed to be introduced to advisory capabilities at the same bank; medium-sized corporates with a revolving credit facility are encouraged to take their first steps into derivatives at the same institution. Synergies and cross-selling are the buzzwords of the age.
Of course, all of this has to mean committees. Management can exhort bankers to co-operate with their far flung colleagues all they want but making it actually happen probably means putting bankers in a room together to discuss co-operation and share progress. It takes time out of client work, but it ought to mean more pulling together for the benefit of the institution, not just the individual or desk P&L.
Personal responsibility, on the other hand, tends to push institutions apart. When business heads spend their time winning mandates and managing their own business line — and are compensated according to its performance — the incentives for co-operation diminish. The bank as a whole becomes more “dynamic and energetic”, as McFarlane wants Barclays to be, but also more fragmented.
There are ways to escape this trade-off — cultish loyalty to the firm, as inculcated by Goldman, is one answer, which is enhanced and buttressed by frequent and deliberate sideways transfers, so that bankers touch more of the firm outside their own silos.
But it is still a trade-off. Co-operation means committees; cutting them out means less cross-silo cooperation, and more eating what you kill.
Investment banks have historically been at the extreme end of the personal-institutional spectrum, with personal responsibility and reward vastly elevated above the interests of the firm, and have only tentatively tiptoed into the semi-cooperative middle ground more usual in non-financial corporates.
Now it looks like banks are already tiring of the experiment. Bring on another era of delegation.