Address by John Stewart, Managing Director and CEO, to the Securities Institute - 14 May 2004
EDITED TRANSCRIPT OF THE ADDRESS BY THE NATIONAL AUSTRALIA BANK LIMITED CEO AND MANAGING DIRECTOR, MR JOHN STEWART
THE SECURITIES INSTITUTE, MELBOURNE, FRIDAY 14 MAY 2004
View a webcast of John Stewart's Address
Bob Officer – Securities Institute of Australia:
My name's Bob Officer. I'm president of the Victorian division of the Securities Institute of Australia and this is a fine occasion: it culminates the end of the finance and investment week which we've been running very successfully, and today's event, I think, is a fitting climax to it.
It is, of course, with great pleasure to introduce the CEO of the National Australia Bank, John Stewart. He's had some torrid times recently - at least his bank has – and not only that, if you've been reading the press closely you'll realise that every sniffle gets reported and he's been suffering a bit from a cold or some malady of that type. So we are very grateful that he could find time to come and talk to us today.
John was appointed managing director and CEO of the bank in February. He was previously chief executive, Europe and principal board member – a position he's held since joining the group in August 2003. Before joining the National, Mr Stewart was deputy chief executive Barclays plc. His responsibilities included management of personal financial services and private client divisions, the wealth management business also and the successful delivery of Barclays' Woolwich integration program, which delivered ongoing benefits of some £400 million per annum to the group.
He was appointed to the board of Woolwich in 1995 as group operations director and became chief executive in 1996. As chief executive he led the successful conversion of the business from a building society to a bank, culminating in the listing on the UK FTSE 100 in 1997.
He also negotiated the merger with Barclays, which saw the Woolwich acquired for £5.8 billion, a premium of more than 30 per cent over its share price. So he has had a very successful career and I know, as most of us are shareholders in the NAB, we hope that he continues on with that former success.
So it's with great pleasure I'd like to introduce to you John Stewart. Thank you.
[Applause]
John Stewart – National Australia Bank:
Thank you Bob.
Well, I'd like to begin this afternoon by sharing with you some breaking news. The Australian Pharmaceutical Association this morning announced that they would no longer be carrying out experiments on live rats. Instead, they intend to use executives and directors of the National Australia Bank.
[Laughter]
They've given two reasons for this. First of all, there are more of them becoming available.
[Laughter]
And secondly, apparently the lab technicians become less attached to them.
[Laughter]
It has been a time of great distraction since I arrived here. I think it's fair to say I'm lucky if I've probably spent half of my time on operational issues with the bank. The majority of the time's been spent on things like PwC, APRA and board issues. That's certainly not a bad thing because most of my colleagues that I work with think the less time I spend on bank matters the better it is for the bank.
[Laughter]
In fact, I can remember a journalist in the UK once writing; "John Stewart is a man that doesn't know the meaning of the word failure," he said, "but don't get too excited, he's a Scot, and there are lots of words he doesn't know the meaning of".
[Laughter]
I arrived just over a hundred days ago on the second of February and I arrived at 6.30 in the morning and at 9.30 I was in a press conference and since then my feet haven't touched the ground. On 16th February the chairman resigned; 12th March the PwC report was published; 24th March the APRA report; and 26th March the board impasse became public.
So it's been rather a busy time but let me show you that, notwithstanding all of that, the management and the board of National Australia Bank are functioning and the bank is going.
During that time, though, I have managed to get out and speak to a lot of people. But more appropriately perhaps to listen to people and to get feedback from people – because it's true what they say that if you want to know what's wrong with an organisation, just go and ask people – especially the staff, and they will tell you.
So I spent a lot of time and I've spoken to shareholders in every geography. I have spoken with our staff and had meetings with the staff all over the place and I've had hundreds, if not thousands, of emails in terms of giving me feedback on the organisation. And of course, I've spent time with the management teams all across the functions of the organisation but also in terms of our businesses in New Zealand and Europe and Australia.
And therefore I feel I've got a much better idea of what needs to be done with this bank. What I want to do is to share that with you today, if I may.
In particular, I want to talk about the culture of the organisation – which is something that had a lot of airplay in the press – but I also want to tell you briefly about what's happening about risk management systems and our businesses in New Zealand, Europe and Australia.
So, let me start by talking about the culture because I know from personal experience what a difference getting the culture right in an organisation can make to the performance of that organisation. Probably, there are two important things I can do to get this right.
One is to get the right people into the top team so the right people are managing it and, secondly, to get the culture right so that it provides an opportunity for those people to be successful.
Now, as for the right people, we have a lot of talented people at the top of the National. Whatever you may read in the newspapers, we have a lot of good, exceptionally talented people and a lot more coming through the organisation. Having said that, though, I think they and the business will benefit from the world-class people that I intend to hire and to bring into the organisation because NAB is a fabulous franchise and therefore, it deserves a world-class management team.
Now, much of the culture of NAB is actually good. We have a lot of people with a high work ethic who set off every day trying to do the right thing but there are a few areas in which it could be improved. One is that, whilst we have a lot of excellent managers, we don't have quite so many good leaders.
Now, let me tell you, when I first discovered the power of leadership. In a previous life I was the union leader in a bank and we were in pay negotiations and we'd reached the time before you get into dispute.
We had a no strike agreement, so you couldn't go on strike. So we had to go to arbitration, and there was a three-week cooling off period before you went to arbitration. So, during that cooling off period we got the council of the union together and the night before that we got the executive committee, which is a smaller committee. So, the executive committee came to me, I was a chairman at the time, and they said, "John, do you think we're going to win?" So, being basically an honest guy, I said, "I don't know". I said, "we've got a good case, I think we should win but we might not, let's give it our best shot".
They started to back down. They said, "Well, John, you've already turned down offers" – now, this is in a time of high inflation, so we'd already turned down an 18 per cent pay rise – so, they started saying, "Well, what happens if we get offered something less than you've already turned down; is that possible?" I said, "Unlikely, but it might be possible".
We didn't resolve anything that night and I didn't sleep much that night. Next morning we had the full council meeting and I got someone to ask me the same question early on in the meeting, but I answered it completely differently. I said, "Of course we're going to win!" I said, "We've had a wonderful year – look at our results! We've had all these changes in the business and the management is completely dependent on the good will of the staff. Of course we're going to win!"
I got a unanimous vote to go ahead. Now, nothing had changed – I didn't know anything else the next morning – but I took a different attitude. A week later the company caved in and offered us 20 per cent, which I accepted, as you can imagine – but that's not the moral of the story. This is nothing about winning or losing – this is about the fact there are some times when you really can't show fear, you just have to be a leader and you have to lead from the front. And really, the moral of that story is to say, we need a few more leaders in NAB at all levels – not just at the very top of the organisation – who are prepared to have a bit more confidence and to lead and to be less worried about process and so on.
And talking about process, the PwC report made comment of the NAB culture and it said there was much more of a focus on process than the substance of the issue and, in some ways that's probably true. The other thing it said was that there were not, within the organisation, clear accountabilities and responsibilities and that's something we can fix.
And also, the report said that we have a good news culture. Now, a good news culture is fine apart from if it prevents bad news coming up and I think it does. And that's something that we're addressing just now because, obviously, everyone wants to know when a problem is a small problem, you don't want things to blow up.
Now, if you add those issues from the PwC report to the fact that we've got a rather bureaucratic culture and we've got a tendency to over complicate, you can see how by improving the culture of the organisation we can make quite a difference.
The first company I ever started was in the UK and it was a financial advice company. And we started the operations within the bank just as a division and it was reasonably successful – so much so that the board at the time gave us permission to set up a subsidiary. And we were quite young as well, in our thirties or something, and we were quite excited about setting up our own company.
So, I took the guys away for a workshop, and we wrote down the company that we wished we worked for. How would it treat its customers? How good would its service be? How good would its products be? Would there be top-class products or just average product, or products that maximise profit or give the customer a good deal? How would we recruit our staff; how would we remunerate our staff? Would we try and look after our staff for life or would we just see them as people who come and go?
I've still got the document. It's a bit dated now, but I've still got the document. What is interesting is that company for the next decade increased its profits at 35 per cent compound. It's now the biggest company of its type in the UK. The current MD is the fourth MD; I was the first one. It's got a fabulous culture.
So, what it tells me is the importance of culture. Now, when you lose your chief executive and your chairman, and a few other members of the board and the management team, I think it's clear to say you're at a strategic inflection point.
[Laughter]
And, therefore, we're in a situation where all bets are off; there are no sacred cows. So, we're in a wonderful position in the National, because we can actually run the company we wished we had. We can start again, we can re-base, and we can say, "how are we going to treat our customers, our shareholders, our staff?" And once we've done that - and we're working at that at present - I'm fairly sure it will happen in this order: You have happy staff, they produce happy customers, and the customers produce happy shareholders, and that makes you reasonably popular in the community.
So, the importance of culture really can't be overestimated. Good people and a good culture in an organisation, with the sort of franchise we've got, is a winning combination.
Let me tell you a little bit about the franchise, but I'll start off by just talking about risk management and APRA, because there's been a lot written about that as well. Let me tell you that risk management in NAB is not broken; it is, in fact, alive, well and very effective all over the organisation.
However, in the markets division, of course it broke down, and it broke down big time. And if any of you are not aware of what happened, you must have been in Antarctica for the last three months, I believe, but if you're not, read the PwC report, or the APRA report – it's on our web site – or if you want a really good laugh, read David Bullen's book when it comes out next week. He's the rogue trader who said "the money is not lost; it is just somewhere else".
[Laughter]
We're now well engaged with APRA. We know exactly what has to be done; we know who's responsible for doing it; and we know when it's going to be done by. And we believe that we'll finish all of the remedial work within 12 to 18 months, and the earlier milestones that APRA gave us, we've already met well within time. So we're comfortable about that.
Turning now to our businesses, and just speaking very briefly about them, we have a wonderful operation and a wonderful management team in New Zealand.
They have a very strong position in the business market, and also in the agri-market (the agricultural business market), and they're number one in cards. They are giving a terrific customer proposition in New Zealand, and that's particularly important, because the big opportunity for banks in New Zealand is, of course, the merger that's going on between ANZ and NBNZ, because that gives an opportunity for customer attrition, and we, of course, hope to be a net beneficiary from that customer attrition.
Let me talk about Europe, which has, again, had a lot of publicity. If you look at the history of our European banks, you'll see that they've enjoyed very high ROEs, higher than the average of UK banks. Unfortunately, that masks the fact that the banks have actually been run for short-term profit for a number of years, and that's been done by charging high margins, high charges, and not investing in the banks.
And, of course, once you do that, two things seem to happen. One is you get customer attrition – the customers vote with their feet, and secondly, growth stops. And if you look at the profit of the banks over the last few years, it's been well below their UK peers.
So, given that managing for a short-term profit has gone on for some years now, we will not turn those banks around in a year. It is much more likely it's going to be two or three years before we do that.
But is the prize worth having? I think it is. You've got a situation where the average of the UK banks has increased the profits at 11 per cent compound over the last few years. I'm fairly sure that some time in the future, if and when the Australian economy gets a bit more sluggish, we'll be very grateful for having an operation in the UK, if it could give us those sorts of returns in a strong currency.
The turnaround has started in the UK banks. We've got a fantastic, young executive team there. We've made some great hires of local top bankers in the UK, and we've put them into the growth parts of the business. And it's fair to say that we're seeing some early signs of success.
The customer attrition has slowed – it's almost stopped – and we're keeping hold of those customers that we want most. And we're investing a lot in sales training, and in regeneration, and we're starting to see the impetus come through in terms of growth for product sales.
Now, people have said to me, "John, given the state these banks are in and the fact that you've got quite a lot on your agenda in Australia, why don't you just sell them?"
Now, if you know my track record – Bob mentioned it earlier – if I think it's the right thing for shareholder value, I will sell anything. I grew up in a bank called Woolwich, and I was there for 25 years, before I became chief executive, and it was my baby – I loved that company. I had it as the highest rated bank in the country.
But Barclays offered a 35 per cent premium over a bank trading already on a premium. I sold it – and I gave up my job to do it – and it was the right thing for the shareholders. And therefore, we would do exactly the same thing in the UK, but I do not believe that is the right thing. I think we can create more shareholder value out of fixing these banks, in developing them in the UK. If that changes, then we'll look at it differently, but that's our current view.
Let me turn now to Australia, and there are three businesses really based here in Australia. There is the wealth management business, MLC; a corporate and institutional business, and, of course, there's Financial Services Australia.
Our wealth management business continues to do well. We're number one in the protection market. In terms of retail funds under management, we've got the number two position. But we don't really see ourselves as a retail funds manager; we see ourselves much more as a platform provider. We provide the platforms for the financial advisers and in that market, we're number one.
But the big opportunity for MLC and for our wealth management business is to really penetrate the customer base and the distribution systems of National Australia Bank in Australia, and that's something we've only done moderately well so far, and something that I have a lot of experience of, and so do some of my colleagues, having come up that side of the business in the UK. So, we're hoping we can get more synergies there in the future.
Now, as for the Corporate and Institutional Bank, clearly, it's reeling from the effects of the FX scandal – but you can be assured there won't be any knee-jerk reactions there.
Our short-term priorities are to stabilise things, and that means looking after our customers, protect the franchise, and look after our people. We don't want to lose any of our good people.
In the medium term, we see our future as being dependent on client income, and so it's getting closer to our clients, and a relationship and a partnership with our clients, and we prosper as they prosper. We will also operate in some niche markets where we think we have particular skills.
Now, Financial Services Australia is probably the jewel in the crown. It's produced superb results over the last few years. It is number one in the business market; it's number two in the personal sector. It's got a customer relationship management system as good as anything I've seen anywhere else in the world, and yet, I don't think they're fully leveraged as yet. But there are some signs that over the last twelve months it's come off the boil. But we can do something about that. After September 11th we, as a bank, took the view that there would be a global economic slow down, and what we did is we started to de-risk the bank.
Unfortunately, our enthusiasm got the better of us, and we de-risked the bank too much, so that we've almost become a little bit risk averse. So we need to increase our risk appetite a bit.
What I'm not talking about is a complete reversal of our de-risking. What I'm talking about is touches on the tiller; so, going back to where we expect it to be, because we overshot our target and went too far.
That will give us the advantage of being able to get more margin, more fees, and also hopefully have happier customers by giving them a better service.
Another thing is – for reasons that I won't bother going into – Financial Services Australia has not been able to develop new products for about a year. And, of course, that puts them behind the ball in the sense of customer propositions. Now that's coming to an end and, with a bit of luck, we can do something about that soon.
Also, we need to invest a bit more in that business. But none of these things are particularly difficult. These are things we can do quickly, and we can get the engine of the organisation, which is Financial Services Australia, back humming again fairly quickly. And within that, the thing that's probably most important is that we get the customer service and the customer propositions right. I had personal experience with the customer service just a few weeks ago because I phoned up one of the local branches, because I needed some money. And I tried to explain to this young man that I had money in the Clydesdale Bank, which is one of our banks in the UK, and I really need money at the National here, and could he do something about that. And he said, "No sir, I can't help" and I said, "Well, maybe I should explain that I'm John Stewart and, well, it's the same bank. I'd like you to transfer money across". And he said, "I'm sorry sir, I just can't help". So I said, "Do you know who I am?" And he said, "No". And I said, "Well, I'm John Stewart. I'm Chief Executive of the Bank, and I want you to transfer the money". He said, "Do you know who I am?" And I said, "No". And he said, "Well, thank God for that!"
[Laughter]
So, in conclusion, with the exception of Europe, this is going to take two or three years to fix up. There's not really much wrong with these banks. Not in a structural sense. But really, to get them moving, to get them giving the best, we've got to get the people things right. We've got to get the right people in. We've already got great people; we just need a few more people to help them. We've got to get the culture right. Once we do that, we've got a great wealth business; and the New Zealand business is pretty strong.
We've got FSA that in maybe a year to 18 months you'll see taking off, and for different reasons, Corporate and Institutional Bank, probably at the same time scale.
Europe, I've mentioned, is two or three years. I think the culture and the other bits we have to sort will probably be about 12 to 24 months to get a lot of that stuff embedded.
So, I see a situation where we'll be in a position, within about 12 to 24 months, where we can put National Australia Bank into the position where it's in for a period of sustained growth. And now, I'm not talking about just a year or two, I'm talking about a situation where we can grow and have a healthy, virtuous spiral.
I mentioned earlier about the distractions, and the fact that it's been a rather unusual three months I've been here … but I did manage to get one weekend off. I really wanted to get away from it all, and I went into the bush. It was in the middle of no place, so for the first day and a half, I didn't see a living soul. And then there was a knock on the door, and I opened it. There was this guy who was about seven foot 12, a big hairy guy.
He said, "My name's Bruce". He said, "I live in a, sort of, cabin, across over there," he said, "I'm having a party tonight, how would you like to come?" I said, "That sounds pretty good".
And, so anyway, he then said, "Well I think I should explain that usually at my parties, there's a lot of drinking". I thought, hmm mmm. I can handle that. So then he said, "Sometimes they're a bit wild, and there's fighting as well". And I thought, well, I'm Scottish, I can handle that. And he got to the door again, and he said, "John, I think I should say, often there is wild sex at my parties". And of course we got a grin from ear to ear on that one. And he got to the door, and I said, "Well, hold on Bruce, what time do you want me to come around?" He said, "John, any time you like, there'll just be the two of us".
[Laughter]
So just to finish off, what we have here in National Australia Bank is probably … well, it's the biggest financial institution in Australia, and one of the biggest in the world. My task is probably not to make it just so much the biggest, but the best; to make it the best, against of all of the shareholder measures I was talking about earlier. Get the right thing done for the shareholders, for the staff, for the customers and for the community. Thank you.
[Applause]
Bob Officer:
Thanks very much John. He's kindly agreed to take questions from the audience, and I'd like you to, of course, introduce yourself. There are three roving microphones, introduce yourself and indicate what organisation you're from, and you may have to stand up and signal. I'm sure not all of the issues have been covered. There are a couple of questions over there on table 33.
Question:
I wonder if you could just talk a bit about the M&A strategy that you might deploy.
John Stewart:
We've had a reputation, in the organisation, of being M&A focused. And that reputation's actually not been welcomed by our shareholders, because they've seen it as an acquisition risk. Now, I don't think that it ever was, but that's the way it was seen. Now, I don't see M&A as a strategy, to be perfectly honest. What I see is that we have a strategy to do something. So we want to grow in a certain market. And you start off by growing, by developing your company organically. If on the other hand there is something you can acquire that will get you there more quickly, so it's like a shortcut, then you can - as long as the numbers make sense – then you can acquire it. But M&A is just a means to get there, it's not a strategy in itself.
Question:
Just in the last decade or so, when bank executives have talked about cultural change, positioning for growth… In our experience that has resulted in job losses and a loss of banking services. In that context, could you please outline your vision for cultural change in the NAB group?
John Stewart:
When I was chief executive of the Woolwich, with culture there, again, it was very similar. There were a lot of great things about the culture, but there were things that weren't good. We were bureaucratic, we had lots of meetings, and no one would make a decision. There was certainly no accountability. I mean, the only way you could possibly lose your job would be to expose yourself in the banking hall.
[Laughter]
Being lousy at your job was no reason to get the sack, or to be reprimanded. So we started changing the culture there. What that means is that, you know, you have to decide the type of organisation you want to be. What I've got to tell you is that, for the first year, I though I was losing. So for the first year, I was talking to people, they were all agreeing with me, saying that's the kind of bank we want to be, and then bugger all happened. Then, at the end of the first year, it got faster and faster, and then it became almost vertical. And then it got to a point where we were a very fast, innovative company. But it's tough work.
Now, how do you do it? How will we do it in NAB? Well, the first thing is to get a set of values, a set of behaviours, because basically, we should measure people on two scales, if you like. One is performance, and I think everyone's familiar with performance management. And the other one is behaviour and style, how you behave. Jack Welch is famous for talking about this, and making a four box model, where you say the person who's good at both, you don't have a problem with. Actually, you don't even have a problem with the person who's bad at both, because you know what's going to happen to them. But the person that gives you a problem is the person who is really good at performance, but has the wrong behaviours.
So it could be someone that drives their people too hard, bullies them, whatever. And you've got to can those people. We have to set values in NAB. Now we do have a set of values, but you have to live them. Which means that once we've agreed to set values, the top team - so the top executive team - has got to be role models. And they have got to behave that way. And then you go down every team after that until you get the whole organisation behaving in a certain way. And that's what I meant, when I said earlier, about the company you wish you worked for.
Because if you actually write down the way you want the company to run - and we've got that opportunity here – then it's a bit like saying, if you want to behave differently, that's great, but you ain't going to work here. I'll meet you every Friday night for a drink at the pub, but you're not going to work here with those behaviours.
So, I'm talking about behaviours like getting in, making the place faster, getting more innovation in, getting people who are not frightened to make decisions, getting rid of the bureaucracy. Now, getting rid of the bureaucracy might save me some money. I accept that.
Question:
I was wondering if you have read in the paper, since you've been here, a lot of discussion in this country about company boards. Now, I was wondering if you could give us an insight into what you look for in your board.
Stewart:
I think, in the main, a broad range of experience. What a CEO looks for really, is people who have been round the block a few times, who have seen things before, often in different industries.
The running of companies isn't too different, whether it's a bank or manufacturing company, or a mining company. The people problems, the strategy issues are much the same. So it's just high-quality people who are prepared to challenge the executive, but also coach and help the executive. And it's when boards are functioning at their best it should be a partnership between the non-executives and the executives. And whilst I appreciate that you've got to have good corporate governance, I think it can be overdone. I think that you'll find that in most really successful companies, the boards are really engaged with the company and they feel as if they've got a bit of skin in the game and the success for that company.
Question:
John, just looking forward, I'm just wondering if you can, having had your experience now, just tell us about how you see the landscape, financial landscape, going forward and what your road map is, if you like, over the next three years in terms of the competitive environment.
Stewart:
Yeah. Gosh, if I could answer that one I could be rich, couldn't I? We're in a fairly benign economic situation just now. I mean, it doesn't get much better here in Australia, especially for a bank. Things have been going well, no bad debts, good growth period in the economy. It will come to an end some time but it doesn't appear to be on the horizon just now.
As for the world economy, it looks to me as if it's coming back fairly strongly. Of course, we're always dominated by the US, so the US tends to drive the agenda, but that's looking fairly strong. I think the thing that could spoil that would be something again like September 11, something that scares the hell out of the Americans and just pulls everything back. But that apart, it looks as if the world economy is going quite well and you've got China coming up very strongly and one of these days, I don't know when it will be, another 20 or 30 or 40 years, but China will be the biggest economy in the world, not the US. So I don't think there's too much to worry about just now. I don't see too many clouds on the horizon.
As for the competitive situation, it's pretty competitive here in Australia in terms of banking, but I think it's more competitive in other markets. So competition's good. I don't mind competition at all. I like it because basically you've got to keep giving the customer a better and better deal because if you don't, someone else will take your customer. But I think it's a pretty good time.
END OF SEGMENT