Successful companies don’t stand still. They’re always evolving. Today, I’m looking at the changes taking place at FTSE 100 bank Barclays (LSE: BARC) (NYSE: BCS.US) — and what they mean for investors.
Some have changes thrust upon them
Ideally, companies change in anticipation of the future, rather than having change thrust upon them by events or trends directors didn’t see coming. Proactive management is almost always better for shareholders than reactive management.
Like most banks — but not all — Barclays was ill-prepared for the sub-prime crisis and credit crunch. It was caught up in what legendary investor Warren Buffett described in 1990 as, “the tendency of executives to mindlessly imitate the behavior of their peers, no matter how foolish it may be to do so”.
As such, the changes taking place at Barclays today have been largely thrust upon it — by post-financial-crisis capital and liquidity regulations, and the need to repair the bank’s bombed-out reputation.
Capital and culture
Last year Barclays continued to take measures to strengthen its capital base and manage risk. We saw capital bolstered by a £5.8bn rights issue and “substantial deleveraging actions”.
There is not much Barclays can do about the legacy costs of myriad past scandals, such as the mis-selling of payment protection insurance and interest rate hedging products, except take the hits.
Barclays acknowledges it has a big task to repair its reputation, and that words alone are not enough.
The company is implementing a cultural change in values and behaviour throughout the organisation, which is being embedded in day to day management processes covering recruitment, talent management, performance assessment and reward. In addition, in order to further de-risk the business for reputation and conduct risk, Barclays has exited businesses that are “incompatible” with the new culture of integrity and stewardship.
Looking to the future
Analysts are optimistic that the changes at Barclays will begin to bear fruit sooner rather than later: they forecast super-strong earnings and dividend growth this year and next.
However, the market is taking a far less rosy view. The shares are currently trading near a 52-week low of 234p — just eight times this year’s forecast earnings, compared with double-digit earnings multiples for all its rivals. The shares are also at a sizeable discount to tangible net asset value of 283p, while all rivals bar Royal Bank of Scotland are at a premium.
