01 May Co-operative Bank merger with the Britannia Building Society – Eyes wide shut
I’ve been reading Sir Christopher Kelly’s report which is published today on the near collapse of the Co-operative Bank (Co-op) brought about (in part) by the botched takeover of Britannia Building Society. For such a large institution to have made such fundamental and catastrophic errors comes as a shock – especially given that many of the warning signs were known beforehand.
It’s difficult to know where to begin, there are so many errors (the report lists nine) but a good starting point would be to ask if the management framework (governance, accountability, transparency etc.) was in a fit state to commence the take-over. Sir Christopher’s report is a very firm ‘no’; the management was in no fit condition to start this journey in the first place. What is clear that there was a massive failure in the management and governance of the Co-op which came together in a ‘perfect storm’ which could have been foreseen. In 2013 we carried out extensive research into the behaviour of senior management boards when undertaking M&A. Our Report shows how poor management behaviour quickly leads the type of M&A disaster exemplified in Sir Christopher’s report.
For me the biggest failure was a lack of supervisory oversight – where were the Board throughout all this? Their role and responsibility is foremost to the people who owned the bank and they clearly failed to stand up and challenge the executive team. This failure to raise and challenge poor decisions seems to have trickled down throughout the leadership hierarchy such that nobody asked the fundamental question – “We can buy the Britannia, but are we in a fit state to own it?” Management over-reach meant that there was a failure to understand that this was a major change programme, not simply a take-over. For instance, the IT-replatforming undertaken by the Co-op as a parallel activity would have been an ambitious challenge in its own right, but merging the IT platform of the Britannia at the same time was clearly outside the capability of the management team. Whilst they may have individually acknowledged this (and, I suspect, only in private), there doesn’t seem to have been a culture of openness either.
There were other issues too; poor risk assessment and management, over-optimism and focus on short term gains, poor due diligence, early exit of talented management, lack of proper – skilled – integration capability, poor processes, planning and information systems; the list goes on and, whilst the external economic conditions were clearly outside the bank’s control, only served to exacerbate entrenched problems.
In short: both sides should have seen it coming, and could have avoided the train wreck altogether by not proceeding with the merger. Overall I cannot but agree with the report that states that failures of governance at both group and bank contributed to the Co-op’s difficulties. Tellingly, the report also goes on to state that even if the board were very skilled, they could have had little chance of success against an ineffective Chief Executive and senior leadership team – compounded with a Board chairman with little relevant experience.
Get serious about good governance before doing M&A
So what could the Co-op have done in advance? I suspect not a great deal once the merger was underway given the catalogue of problems prior to the merger. Given Sir Christopher’s report and lessons learned, one aspect could be improved and will provide benefits beyond M&A; a root-and-branch review of the way the Board and senior leaderships work in a way that:
- Encourages openness and challenge
- Clearly attributes accountability and ownership of pre-and post-close activities and deliverables
- Enables a decision to walk-away from a deal and see this as a success
Our Report recommends several other areas where best practice in leadership behaviour supports and strengthens M&A success and include more operational dimensions too.
Oh and yes, they had 3rd party advice as well – J.P. Morgan’s acted in this advisory capacity. I wonder how much they were paid and whether this was truly value for money? Our experience tells us that, unless good governance is in place to control deal momentum and bias, 3rd parties’ contributions will typically reflect – even amplify – the culture and behaviours of their clients.