Barclays: Jenkins preempts Salz review
Independent report into Barclay's pay, culture and reputation is perhaps a little vague and is unlikely to prove a game-changer for the bank, with CEO Jenkins already talking the talk.
Don’t anoint a successor without giving shareholders of a publicly listed company the confidence that you have scoured the globe to find the best person for the chief-executive gig. Don’t create a unit with the avowed purpose of aggressively structuring complex transactions that undermine the spirit of tax-compliance norms. Don’t have an unsustainable, pro-cyclical human-resource cost base when your return on equity barely meets your cost of capital. And, for heaven’s sake, if your balance sheet is systemically important to a given sovereign's GDP, do talk the talk about the importance of responsible, safe, socially useful retail banking – even as you expand your racy investment-banking unit.
Thus charged Anthony Salz on Wednesday, in his long-awaited independent review of Barclays. You could be forgiven for thinking these lessons are obvious enough for any publicly-listed company. But in a largely dispassionate 238-page report, Salz outlines Barclays’ well-documented failings and lists 34 concrete proposals on reforming governance, pay and societal trust. The pay proposals are pretty damning.
“Compensation for the ‘group of 70’ was consistently and significantly above the median compared to peer banks,” the report says.
“For example, in 2010 average pay to these executives was overall 35% more than the market benchmark for their positions. This level has come down over the past two years. In 2011 average pay for these executives was 17% more than the market.”
However, in what now seems a masterful act of reputational risk-management, it seems CEO Antony Jenkins has largely pre-empted the report, suggesting it is no game-changer for the bank. After all, Jenkins’ “transform programme”, which has identified cost-cutting and the closure of the much-maligned structured capital markets unit, already conforms to the spirit of Salz’s recommendations.
Analysts at Investec were distinctly unmoved: “It offers a pretty turgid read. The primary focus of the report is procedural, while much of the commentary and accompanying recommendations seem surprisingly vague.
“We continue to see Barclays as a cost-led recovery story. To that end, although Salz rightly identifies excess pay among the ‘top 70’, he is less specific vis-à-vis IB pay, which we expect to deliver the bulk of improvement. On revenue curtailment, there is little to scare the horses. We remain buyers.”
With Barclays’ shares down 2.7% at end of Wednesday trading, isn’t the market reaction overdone? After all, the biggest criticism was that of pay. But, as Investec analysts point out, the report is not particularly grim.
“One comment from the report which may surprise is that ‘on average, in both the investment and retail banks, compensation levels for most roles in Barclays have been in line with peers’,” they say. “Salz also observes that, within IB, ‘average salary plus bonus per employee in 2012 was down 30% over 2007’ [having been higher than 2007 in three of the four succeeding years].”
Investec analysts add: “In our view, part of the available improvement has already been seen, with BarCap’s cost:net operating income ratio improving from 72% in 2011 to 64% in 2012. However, there is much more to be done, and, benefiting from a broader industry correction, we continue to expect this metric to fall below 55% by 2015e. This is critical to improving the group RoE to c.10.5% by 2015e.”
The report naturally does not dwell on the broader environmental challenges the bank is facing, such as regulation, access and cost of capital as well as staffing. What’s more, in a sense, the review reflects a breakdown of market mechanisms for triggering corporate redress and a lamentable lack of shareholder activism in recent years, with issues such as the transparency of the bank’s earnings announcements, like other bulge-bracket firms, leaving a lot to be desired. In any case, the review bloodies Bob Diamond's legacy and confirms that Barclays is perennially vulnerable to reputational shocks.