I used to be a fan of Barclays (LSE: BARC ) (NYSE: BCS.US). The bank has several valuable franchises which should prove to be nuggets of gold, once economic growth feeds through into a healthier banking sector and ‘blame the bankers’ wears thin as an all-purpose political rallying call and perma-excuse. Bob Diamond snapped up a bargain in the form of Lehman Brother’s investment bank; the UK commercial bank is a one-way bet on Britain’s economic fortunes; Barclaycard has a premium competitive position and, to top it all, Barclays’ African business is a frontier market growth play par excellence.
I lost faith in March when CEO Antony Jenkins announced that he had run out of patience with the investment bank. I thought investors would eventually lose patience with him, but there would be much re-strategising and treading water in the meantime.
Mr Jenkins seemed a safe — and saintly — pair of hands when the bank was mired in multiple scandals. However, lacking the gall to either bring the American investment bankers to heel or spin off the investment bank wholesale, he resorted to salami-slicing it in the most value-destructive fashion imaginable.
I was premature in my analysis: incoming chairman John McFarlane lost no time ousting Mr Jenkins. So how will the latest management changes play out for investors?
Mack the Knife
Mr McFarlane installing himself as executive chairman is welcome news, certainly if he repeats the fantastic performance he pulled off in similar circumstances at insurer Aviva. Expect a forensic business-unit-by-business-unit strategic analysis, followed by ruthless disposal of ill-fitting units and a slash and burn campaign on costs.
True, Mr Jenkins had not one but two bites at the strategic review cherry and Project Transform was eminently sensible, but paraphrasing Barclays’ own announcements, he ‘lacked the skillset’ to do it fast (or effectively) enough.
It may not be much fun to work for a man whose nickname is ‘Mack the Knife’, but Mr McFarlane appears to have the ability to push strategic decisions through the treacle of middle management whose main raison d’etre in large organisations such as Barclays and Aviva is to preserve their own jobs and fiefdoms. Looking at the way Mr Jenkins was ousted — with deputy chairman Sir Mike Rake presented as having done the dirty deed — I suspect ‘MacHiavelli’ might actually be a better nickname for the new chairman.
So, as at Aviva, Mr McFarlane is likely to do the heavy lifting of re-positioning, and then install a competent CEO whose emphasis will be on implementation. That puts current finance director Tushar Morzaria in a good place to step up. With an investment banking background, he might have been the man to face up to the bigwigs of New York, but that didn’t work while he was in the number two slot.
Whoever Mr MacFarlane eventually chooses, it’s likely to be a strong leader who executes rather than debates. One of the most energy-sapping things in large companies is when senior management are constantly questioning and re-visiting strategy, which seems to have been the case under Mr Jenkins.
Indeed if a report in the Financial Times is to be believed, it was an argument over the future of the investment bank between Mr Jenkins and investment bank head Tom King that was the immediate catalyst for Mr Jenkins’ departure, with Mr McFarlane and Sir Mike siding with Mr King.
Sans the saint, Barclays’ investment bank might be viewed as more than just a PR headache. It generates an appallingly low return on capital but it needs fixing, not death by a thousand cuts.
Exit Sir Mike
The bungling of Sir Mike’s hasty departure is illuminating. It’s no surprise that a forceful executive chairman and a forceful deputy chairman (who missed out twice on the top job himself) decided they wouldn’t make comfortable boardroom neighbours. But after the news broke Barclays was forced to stress that Sir Mike would remain until a new CEO is installed. It seems managers at the Prudential Regulatory Authority were uncomfortable with Mr McFarlane ruling the roost with no restraining influences — they have read their Machiavelli, too.
Meanwhile the bank’s shares remain cheap, trading at a 10% discount to tangible net worth. Successful turnarounds need two things: a good underlying business, and good management. If Barclays’ new leadership can get the franchise working again, that share price discount should go to a premium.