CEO & MD Mr John Stewart's Speech to the Australian Institute of Company Directors - 30 September 2005

John Stewart
Managing Director and CEO,
National Australia Bank

(This is an edited version of the address)

Thank you, it’s wonderful to be here.  I'm a fairly regular visitor to Western Australia.  I think this is actually the fourth time in the last twelve months.

And it’s been difficult to resist coming here, because the place is so vibrant.  The economy is doing tremendously well, and you can see that in everything.  I mean, the leading export state, low unemployment…lots of the indicators…they’re just marvellous.

I won’t bore you with too much NAB business today, but our position in Western Australia is excellent.  We are the number one business bank here, we’re number one in mortgages…we’re growing … and have been growing, thanks to Geoff Greer and his team, hugely well, over the last twelve months. 

So we have a coincidence of interest here, that you have a very strong state economy.  And our business is excellent. 

But really, that’s not what I want to talk about today, because, I’m sure you have a limited interest in the National Australia Bank, and I’m very happy to be able to answer questions about the bank following my address. 

But what I really want to talk about was something that might affect everyone in the room, and that’s culture, because every organisation doesn’t matter how big, how small, has a culture.  And by culture, I mean how things are done around here.  And sometimes that’s good, and sometimes it’s not so good.  And, as you know, that was a major problem we had in NAB. 

What I want to do is just to read something to you, if I may.

This is a direct quote about a company that you all know:

This company had an increasing tendency to become disconnected from reality.

It had grown an internal culture of arrogance and complacency.

It had a good news climate, which discouraged honesty and challenge.

It had internal silos and was obsessed with process.

There was a loss of contact with the changing market dynamics, and customer needs.

They had persistent under-performance and missed targets. 

Now, let me tell you, when I arrived eighteen months ago, that fitted NAB like a glove.

But it wasn’t NAB.

It was IBM ten years ago when Lou Gerstner came in as CEO and began what was a great recovery story.  It is remarkable how often this happens when you look back at different organisations.

Companies are great companies but they start to believe their own propaganda.  They start to look internally instead of looking externally, and they get into a state that can, frankly, only be called self-delusion. 

Another example that you’ll all be familiar with is Marks and Spencer in the UK. Ten years ago you would have said it was the best retailer in the world.  Marks and Spencer again became internally focused and lost that place. 

So what happened with NAB isn’t that unusual.  The issue is how we do we deal with it?

Let me tell you a story about my own experiences with culture…

I used to be a CEO for a bank called Woolwich that was acquired by Barclays.

When I worked for Woolwich I set up quite a number of subsidiary companies.

The first subsidiary company I set up was a financial advice company.  We did a pilot and satisfied the Board it would work and they gave it the go ahead…

I’ve got to tell you, we got really excited about this, because we were all in our thirties, we were kids, I guess, and we could start our own company. 

So we all got together, and we wrote down the company we wished we worked for.

Not the one we did work for, because our company was going to be special. 

What we were writing down was its culture.  How will it do everything?  It is about eight or nine pages, I still have it.

For example, what will its products be like?  Will we sell anything we can get away with, or will we just sell products that are great for customers and add value? 

How will it remunerate its staff?  Will we have fixed pay, or remuneration variable with performance?  Can one of the sales people earn more than the Managing Director?  All of this was written down, talked through, worked through. 

That company then went on over the next decade to increase its profits at 35% compound.  It’s still the biggest of its type in the UK.

I was only MD for about a year and I went off to start another company.  But the culture, because it was written down, and because it was so strong, it stayed there.  The culture is hugely successful. 

And we have the same opportunity at the NAB.

When you use lose your chairman and most of your Board you are at a point of strategic inflection…

I’ve only been here eighteen months and Michael Chaney is now my third chairman.

If you’re going through all of that…why then set up a second-rate company?

We have the ability now to actually say, let’s create a company that considers all its stakeholders.  Of course, it must be good for the shareholder.  We’re going to aspire to top quartile returns, because that’s what you expect from a company like NAB. 

It is going to be good for the customers; customers have got to really be advocates.

It’s going to be good for our staff, they’ve got to be proud of working for us, and it’s going to be good for the communities for which we work and in which we live.

That’s why culture is so important to what we are doing. 

There are two things that drive that.  One is people and the other one is how they behave. 

Now, let me just start off with this second part of that, how they behave.

Something that pre-dated me was that NAB set up some corporate principles.  They’re not too different from the values or the principles that you may well have in your own company.

The principles say we will be open and honest, we will take ownership, hold ourselves accountable, and so on. 

Now what happens in most companies is you have these principles.  You might stick them up on the wall, and everyone then goes on to ignore them, and they get on with the way things were done before. 

The difference at the NAB is that those principles had been decided upon by five thousand staff globally, so we knew they described the company the staff wanted to work for.

What we did next was say: What are the behaviours that would reinforce that?

So, if I take an example: We will be open and honest.

We have said this means we will tell it like it is, with no spin.

We will speak up and be open to other points of view, and so it goes on.

And these standards are measured at least every six months, with behaviour gates, and with compliance gates.  So, we take this stuff really seriously. 

And finally it says:  We do not have room for people who do not live these principles. 

So, quite frankly, if people aren’t prepared to behave properly, then they don’t work here.

They could be a fabulous performer, and that’s great.

And I’ll see them every Friday night and go to the pub with them, but they ain’t going to work in my company, because we have to have certain standards.

Because that’s what got the company into trouble.  It was arrogance, and having a good news culture and not listening to things that were going wrong.  So, the first thing I had to do was address that. 

The second thing is the people.

Because it’s a truism, I’m afraid, that A players attract other A players.  And B players attract C players.  And we had too many of the latter. 

So, it is not by coincidence that you’ve seen huge change in NAB.  And, of course, we have a new chairman, as of about three days ago; Michael Chaney.  I think he might be known to some of you.

[Laughter]

You know, Michael’s wonderful.  He will be exactly the right Chairman to help us as we grow.  But there has been a huge change in just over a year. 

The executive committee, out of eight people that are on that, there is only one – with the exception of myself – who was in the same job twelve months ago.

I probably now have about two hundred executives that I would put up against any company in the world now. 

Probably my biggest achievement last year was actually getting and retaining talent; scouring the world for the very best talent.  Some of them were internal – you had to find them and move them around.  And there was recruitment to get new A players.

So, the key here is to get the A players, and get them behaving properly. 

Now, although we have a way still to go the signs are very encouraging.

I said, when I first really assessed what was going on within the bank, it was going to probably take about three years to turn this bank round.

And we’re, I guess, about half way through that, and I am really pleased with the progress.

We had our presentation to the market on Wednesday about the Australian businesses, all of our businesses in Australia – that’s our business bank; our retail bank; our MLC company; our corporate bank – and they are all coming on very well. 

And that’s true of the UK; it’s true of New Zealand as well.  So all the signs are now getting better.

But let me just take one example, which is our business bank, that is the heart of NAB.  If you work in NAB, and you say, what really makes the engine run?  It’s the business bank. 

This time last year it was losing market share, it was losing customers, losing margin.

In the last twelve months the banking system growth in business banking has been about 12 to 13%.

NAB’s business bank has grown by 19.8 per cent.  So not only did we stop it going the wrong way, we stabilised it, and have started to grow it.

We’ve increased our customers by about seven per cent.  So, a lot of that business is coming from existing customers. 

Now, what I haven’t spoken about today is all the other things that I found when I first came into the job.  The fact that our revenues had stalled, and we had to get them moving again. 

We had costs that were almost out of control.  We had a bureaucracy that had to be dealt with.  We had silos within the business.

But what I intend to do now is stop and take some questions.

Are there any questions on any of these subjects? Is there an issue that you are thinking about in your own business?

And if you don’t ask me questions, I’ll ask you questions.

[Laughter]

Question:

Given what you’ve said, what attracted you to work in the bank in the first place, given that you're now in a different role.  What was it that made you think that’s the bank I want to work with?

STEWART:
(Laughs) It was a completely different reason.  I decided that I wanted to leave Barclays and I would retire and go sailing. 

Frank Cicutto, who was my predecessor, is a good friend of mine, and Frank approached me and said: We have four banks in the UK and Ireland and they're broken; would you come and help fix them.  And that sounded interesting.  And he tempted me by saying I’d be on the board of the main company in Australia. 

Sounds pretty good.  So I agree to it and four months later he goes and resigns.  And I get a phone call saying, will you come out.  So it was for completely different reason that I joined in the first place. But I am still pleased to be here.

The NAB is a great bank.   NAB is seen as a global bank.  I think that’s the difference.  It’s not seen as an Australian Bank.

Question:

My question is about culture, and I’m really interested in that, I’ve been associated with an organisation for nearly sixteen years now, so the issue of culture is very important to me.

How do you come to terms with A players who really want to get experience only to go on to the next job.  How do you maintain the culture, when more and more people are really only using the opportunity that you give them to build experience and better knowledge, so that they go on to something else.

STEWART:
Okay.  That’s a good question.  Firstly, maybe I should explain what I mean by an A player.  They are about the top 15%, maybe 20% if you're stretching it, of your people doing any type of activity.  They could be the people answering your telephone. 

They’ve got the right attitude for doing what they do.

B players are the people that can get there if you work with them and coach them.

C players are the ones that are never going to get there and I would say, you know, you have to have a hard conversation with them because they’ll hold your company back.

Now, what you’re talking about is if you invest in people and you train them and then they move on.  You know, my own experience is that you’ve just got to address that as a business problem.

Say you’re running a graduate program and you’ve found that you are losing good people.  You’ve got to sit the graduates down.  You’ve got to sit the ones that are leaving down, and you’ve got to find out why, and then you’ve got to try and reorganise your company so that it doesn’t happen.

Otherwise you’re just making the investment and someone else is getting the benefit.

It may be that you need to find something that would take their interest.  I don’t know what it may be because each generation is very different.  Something you might do for an old fogy like me would be very different for a twenty-something now.  They have different ideas of what is fun and what stimulates them. 

But it goes back to the basics. Go and talk to them.  Listen to them.

Question:

With all the change in your executive team, did you create a culture of uncertainty, and if you did, how did you manage maintaining your productivity during that period?

STEWART:

Well, any sort of change produces uncertainty.  The uncertainty is the worst part.  Actually, most people are okay with whatever the result is.  The worst thing is not knowing how change is going to affect you. 

So you’ve got to try and minimise the period of uncertainty.

Last year, in between becoming an expert on all matters related to foreign exchange I spoke with staff regularly. They often said what was happening was good and bad. Good because the NAB would be a better place as a result but bad because they were uncertain of what it would mean for them personally. That is why we tried to move as quickly as possible with the change program.

Question:

On that topic of culture I guess you’ve personified the corporate being as subject to human mental frailty. 

So the first question is: To what extent were you able to find counsel and support and consultancy, or did you find those skills within the organisation to assist the organisation to come through. 

And secondly, you were talking in terms of culture, and culture, in my mind, is often evolutionary, rather than being prescriptive.  If we become too prescriptive, we lose the evolution of diversity and the extra dynamics that that brings to an organisation. 

Just appreciate your comments on those two. 

STEWART:

Sure.  As for the help, the culture has got to be owned by the business, so you can’t just have a department doing it, and with respect, you can’t have a consultant  or someone external to the organisation doing it.  Consultants can help but the business must own it.

So, we’ve got to get a culture that everyone agrees that is what we want. It’s not dictatorial, it’s not mine.

But there’s no silver bullet for it.  The only thing I would say is, what happened last year at the NAB is a big help

I tried to change the culture at Woolwich and it was really difficult because we were coming off about five, maybe even seven years of record profits.  So it’s really hard to tell people that they have to change. 

So, what I said to them was, the way you’re behaving now will not make you successful in future.

Woolwich had to innovate a lot more, it had to change, and they could really see that.

But at Woolwich, at about the same stage of the change program, if you had asked me how it was going I would have been thinking about throwing in the towel.

Everyone was saying the right thing, but nothing was changing.  It was not happening. It took longer to really kick in and then accelerate.

The NAB is totally different.  It’s much bigger.  It is forty thousand people across the globe.  But, you can measure the change.  You can see it. 

And the only thing I can put that down to is that we had a burning platform last year.  There was so much criticism in the press and elsewhere that we just had to change. 

That’s probably the biggest single thing for cultural change is to get that catalyst for change.  But yes, you're right; the culture does have to evolve as well.

Question:

You may have just touched on it but I'm a little confused.  Why do you think the culture was so troubled when you arrived?

STEWART:
That is a great question.  And can I tell you why?  When I got to NAB we had a policy for everything, it was shiny, it won awards, but not enough people followed them.

So it’s about doing it not talking about it. 

If you’ve got a really open and honest culture in a company your annual appraisal should be redundant, because you should know what’s going to happen.  If you were the boss you would have been coaching people all year, and there should be no surprises. 

If you get to annual appraisal and a person says, well, I’m just average and I thought I was outstanding, something’s wrong.

So that’s at the very fabric of it: Doing it, not just talking about it.

Ends