Leadership and Governance

1. Leadership and Governance Innovation from Investment in Human Capital- A Turning Point for Financial Services

2. Themes • Crisis in Governance • Excessive focus on shareholder value • Weak leadership • Transformation • Focus on customer value • Investment in human beings

3. Lessons from the UK • Two and possibly three generations of retail banking • Governance is about stakeholders • Customers, Shareholders, Staff, Regulators • Type 1 • Pre competition (say pre 1990) • Regulation by eyebrows • Winners: employees, regulators, • Losers: customers, shareholders

4. Type II banking in the UK • Driven by competition (HSBC etc…), and technology • Contested takeovers • Scale and Consolidation • Promiscuity and churn • Acquisition vs retention models • Poor structures for dealing with this • 40million mail shots • Winners • Shareholders • Customers (a little) • Losers • Staff • What does a type II bank look like?

5. The Operating Model of a type II bank Savings Mortgages Consumer loans Moments of Truth Service Delivery Customer Insight Branch Call centre Contact centre Intermediaries

6. The problems with type II banks • “Product pipelines” push sales • But consumers cannot be separated into transactions • Channels manage (cut) costs • But there are linkages between the two • Eg driving service out of the branches • Driving sales in call centres • Type II not • A service proposition • A customer focussed proposition • What would a type III bank look like?

7. Leadership in Retail Banking

8. A Model of Leadership Vision Capability Leadership Management

9. Vision: Can you see it? • Managers think about doing • Reasoning from solutions back to problems • The doing drives the thinking • Task Cultures • Much management activity is about persuasion • Emotional • Rhetoric • Highly intuitive

10. Capability: Can you do it? • Robustness • Broadening your range of behaviours • Personal growth in this • Dialogue • The ZOUD • Maturity • Discretionary CEO type behaviour

11. Customer Focussed Innovation

12. Focussing on the Customer Who has been here before: loads of people Industry relaunchIndustry Decline Cinemas 1980s – Megaplex First Leisure, RankFashion retail multiples: Hepworths, High Street Names Next/River Island Chelsea Girl Grocery Retailers – Tesco* Fine Fare, Co-op, Sainsburys Hotels – Travelodge ThfPub venues – Wetherspoons Brent Walker, . . . Financial Retailers Big 4 Banks TK Max & Others M&SBudget Airlines Swiss Air, BA, etc 1980s 1990s 2000s

13. Four Ways to Value Innovate Raise Well beyond industry standardSpectrum raising New ValueProposition Eliminate Create New factors not yet thereSpectrum widening Factors no longer requiredSpectrum focusing Reduce Hygiene factorSpectrum lowering

14. Value Curve of Formule 1 in the French Low Budget Hotel Industry High Raise Eliminate Reduce F1 2 Star Offering Level 1 Star Low ArchitecturalAesthetics 24-hourReceptionist Room Furniture/Amenities Eating facilities Lounge Appeal Room Size Bed quality Hygiene Silence Price* Key Success Factors

15. Value Innovation: The Simultaneous Pursuit of Radically Superior Value and Low Cost Costs What factors should be eliminated that our industry takes for granted? What factors should be reduced well below the industry standard? What factors should be raided well above the industry standard? What factors should be created that the industry has never offered? Cost savings from eliminating & reducing Valueinnovation Cost advantagesfrom high volume Superior value by raising and creating Buyer value

16. But you need to continuously do it . . .Repeating Value Innovation Leverage the Product, Service andDelivery platforms over time Do this by continuously investing in knowledge – human capital

17. How has Compaq stayed on top of the Server industry? By following its first value innovation . . . Expandability Expandability Expandability Generalapplicationcompatibility Generalapplicationcompatibility Generalapplicationcompatibility 1989:Systempro File & printcompatibility File & printcompatibility File & printcompatibility 1993:ProLiant 1000 1992:ProSignia Performance Performance Performance Elements of product or service Elements of product or service Elements of product or service Price Price Price Reliability Reliability 1992:ProSignia Featureinnovations Configurability Configurability 1994:ProLiant 1000Rack mountable server Manageability Manageability 1993:ProLiant 1000 Storability Serviceability Featureinnovations Security Low High Low High Low High Relative Level Relative Level Relative Level

18. Transformation by Investing in People

19. Poaching and Under-investment in Training- No excuses Pay w2 w1 Supply of labour Demand for labour after learning Demand for labour before learning Q* Labour

20. Determinants of Business Performance:How Strategy Contributes to the Bottom Line Value Logic:: AGENCY - lower cost capital due to strong financial management Assets Liabilities PVEA PVGO Debt Equity Value Logic: SCALE: Take out cost  cross functional working Value Logic: SCOPE: Add in revenue (eg cross selling) Value Logic: LEARNING:Develop new businesses

21. Existing Big 4(5) Strategies Cost savings: consolidation + scale – exit definite Inertia not branding Ruthless HR Models Retention Recruitment Reward Type II HR model Financial incentives

22. Global Inequality • Three desiderata (UN) • Development • Economic and Social • including Life expectancy • Peace • Human Rights • Africa does much worse on these measures than other developing countries

23. Africa in particular • 1820-1998 Africa share of world gdp declined, much of this since 1950 • Africa from 1/3 European GDP to 1/13 • Of the decline in extreme poverty 1980 –2000 (1.5bn to 1.1bn <$1per day: none in Africa, all in China)

24. Participative Growth • Unaimed opulence (the market alone) • Brazil, Oman, South Africa all have much higher gdp than China or Sri Lanka but do much worse on deprivation measures • Aimed non opulence • Health and education cheap in developing countries • China’s improvement in life expectency all came before 1979 (no improvement since then)

25. What do you aim at? • Kerala (India) Life expectancy 70, Indian average 56/58 • Kerala has very high levels of literacy and especially female literacy • Sri Lanka: • Lower infant mortality than the US • Higher adult literacy than the US • Health and education only occurred in Europe as a result of state intervention and only a century ago

26. The Heart of Darkness Stylised facts are: • Resource rich, labour poor - capital intensive growth path - relative high cost labour • Small domestic markets & lumpy investments needed - public sector ownership thus normal • Rents - these are available in natural resources (imperfect global markets) - these are politicized (often ‘pleasantly’)owned taxed

27. The Heart of Darkness • Resource prices downturn - PSBR rises (tax take falls) - tax burden intensifies - concentration of ownership in return - twin deficits, no FDI • Economic nationalism - new nation building - expensive • Colonial legacy