Ian Smith says one of the most important traits of a finance leader is the ability to learn from one’s own or others’ mistakes.
He is now part of team driving the expansion of CYBG, what was formerly the Clydesdale and Yorkshire Banking Group, drawing of those lessons of holding senior finance roles in banks HBOS and then Lloyds Banking Group.
Smith is also at the forefront of CYBG’s game-changing £1.7bn acquisition of Virgin Money. To undertake the deal, that was launched in May, Smith was able to draw on the experience of working with financial services companies as an adviser.
Smith’s early career included working with film and TV giants when he took a two year posting in Los Angeles while at accountants Deloitte, Haskins & Sells, which became Coopers & Lybrand, where he experienced a big cultural difference and learnt to thrive in an atmosphere of “sink or swim.” It set the scene for how things then unfolded.
Returning to the UK, a move to Coopers & Lybrand’s Edinburgh office saw Smith advising Royal Bank of Scotland (RBS) before its ambitious Natwest takeover in 2000, an early experience of financial services that he confesses to hating.
He then crossed over to rival Deloitte to work on the Scottish energy market before returning to financials when the firm decided to bulk up its arm in the sector, winning the audit of demutualised bank Abbey National.
“I was involved in helping build the team, which coincided at the end of 1999 with Deloitte advising RBS develop its model for the acquisition of Barclays,” says Smith. “It’s a similar process to what we have done here at CYBG in terms of thinking about how we approach the Virgin Money acquisition. You think about how you might put the businesses together, the synergies and the financial consequences,” says Smith.
No sooner had RBS’s approach for Barclays been rejected, than arch-rival Bank of Scotland announced its bid for Natwest, which RBS responded to with a ready-made plan that had been developed for the tilt at Barclays. “Change the names, change some of the numbers, and RBS had the model for a rival bid for Natwest,” reveals Smith.
A dramatic chain of events soon followed with RBS winning the battle for Natwest led by its aggressively ambitious chief executive Fred Goodwin, who was the CEO of minnow Clydesdale Bank before being hired by RBS’s chairman Sir George Mathewson.
Smith came into the picture when Deloitte was appointed auditor of RBS, just as it was completing the Natwest takeover in early 2000. “I spent seven years helping to run the audit of RBS, through to 2007, a period in which RBS grew rapidly through acquisition,” he says.
That period of massive expansion, which saw Goodwin’s drive to become the world’s biggest bank, saw it eventually collapse under the weight of a massive balance sheet, which was at one point bigger than the UK economy. The period is regarded as one of the great acts of corporate hubris.
It culminated in the acquisition of flawed Dutch bank ABN Amro, which brought RBS to its knees as the financial crisis exposed the combined group’s fatally weak capital structure, resulting in one of the world’s greatest corporate failures. Although Smith says he had moved off the RBS audit bythe time of the ABN Amro acquisition, he has plenty of years of auditing RBS to reflect on.
“Although I never had any questions about integrity at my client, I think there were members of the management team at RBS that were aggressive and ambitious, all of those attributes that can sometimes lead to dysfunctional or unhelpful behaviour. But I never encountered an issue of integrity, transparency or anything like that,” he says.
To those who say the actions of RBS’s leaders and those that should have acted as checks on its behaviour are central to the disastrous experience of the UK in the years of the crisis, Smith says: “It was never any kind of intent to mislead or anything like that- it was about the ambition trumping competence and capability occasionally, with some poor choices on risk.
“Part of the challenge of the leadership culture at RBS, and I suspect it was something that permeated at other institutions in the lead-up to the crisis, was a little bit of ‘we know what’s right, we’re brilliant, we really don’t care what you think’,” says Smith.
Heeding the lessons
Reflecting on that time, Smith says: “One of the things I have admired about other people that I have worked for is their ability to take advice, to stop and allow themselves to be questioned on what they’re doing.
“I think that the smartest business leaders can take advice, admit to shortcomings and perhaps recognise that should cause you to pause and think your way through things rather than believe you’ve got the right answer,” says Smith. “I’ve recognised the need to seek views, welcome challenges and be prepared to modify,” he says.
As the financial crisis was growing with intensity, Smith joined the mortgage bank HBOS as deputy CFO in June 2008, “an institution that knew it had some issues to deal with, and was determined to deal with them,” he says. “Part of it for example was strengthening the group finance function, risk and the central function. It was a recognition by Andy Hornby and chairman Dennis Stevenson of what needed to be done,” he adds.
Smith was hired by Mike Ellis, brought back from retirement as finance director, to address the challenges. “We went through the period of June 2008, through to January 2009 of unprecedented developments in banking and financial services. What sunk HBOS was Ireland. Not enough has been understood about that but the losses from Ireland incurred were greater than the losses from its corporate book,” says Smith.
HBOS was saved by being acquired by Lloyds TSB, which then became Lloyds Banking Group, in that first month of 2009, but another massive bail-out soon followed. “It was genuinely unprecedented in terms of the scale of the crisis and the measures that were taken to deal with it. Nobody knew quite how deeply things would go and how quickly things would go. The stabilisation of the banking industry was Gordon Brown’s finest hour,” he acknowledges of the former UK prime minister.
Although he had stayed on through that period, Smith decided to leave the bank to re-join Deloitte in 2010 to work on M&A transactions across financial services. “It helped re-establish a little bit some of my confidence. Going through 2008-9 with all of the slings and arrows we had to deal with, I did feel a little bit knackered at the end of it all,” he confesses.
That personal rebuilding process, aided by insights from a professional coach, went well until Smith realised he was clamouring to be back in a corporate role. “I realised I wanted to get out of the commentary box and back onto the pitch,” he says.
Back on the pitch
The opportunity to become a group CFO of a major company came when CYBG’s parent National Australia Bank decided to look for a UK CFO to work with CEO Andrew Thorburn. Having previously advised potential acquirers of CYBG, Smith knew the bank well but initially shunned the idea of running finance there because of its poor image of being unloved and underinvested.
Everything changed when Smith was asked to meet Thorburn again who revealed NAB’s interest in spinning off CYBG. “You don’t often get the chance to float a business, and it just seemed like a really interesting thing to do. I joined in November 2014 and we floated it in January 2016 after a period of me leading the work on the IPO and everything that came with that,” he explains.
Smith says that the breadth of the group CFO role required a huge amount of learning and development. “I had learned a lot from some of the mistakes I had made in HBOS and Lloyds in terms of how you lead in the commercial environment, including understanding a vast range of staff motivations”, he says.
Smith says learning to make decisions without perfect information was also important, as well as picking up new finance skills. “Treasury was a big addition to the portfolio, there’s a degree of technical skill and capability in there that I had less experience of and so I’ve worked very hard to learn about that,” he adds.
“The big piece for me was investor relations. I’ve learned an awful lot about how equity and debt markets think about companies and the way they invest. Putting things through a shareholder lens and really understanding how investors think about your business, and then persuading those providers of capital to invest in your business, has been an important learning curve for me,” says Smith.
“You have to take the time to understand where each of those constituencies is coming from, and what they care about. It’s not necessarily that you tailor your answers to audiences, but you do have to understand what is important to them, and therefore how you speak to them. With analysts you don’t have to answer all their questions and you have to leave yourself some wiggle room,” he adds.
When it comes strategy and the business model, Smith says its crucial in the relationship with the CEO for the CFO to be clear about the performance targets for the business. “It’s about where we think we need to get to and that’s an important part of understanding and responding to the requirements of stakeholders- particularly investors,” advises Smith.
“We’ve done a lot in the last three years in restructuring our business to create capacity to reinvest where we can do the things we need to do. And we’ve invested a great deal of shareholders’ money over the last three years to improve our business,” he says.
CFO as dealmaker
The decision to acquire Virgin Money resulted from what Smith describes as setting out a three year journey that resulted in thinking about what was important to the business. “That was brand, scale for resilience and filling in gaps,” he says. “What we liked so much about Virgin Money was that it brought all three of those things,” he says.
“There’s also a question of scale,” says Smith. “Being a bit bigger, a bit financially stronger as a result means you’ve got sufficient resilience to withstand difficult times and create capacity for investments.
“When it comes to filling in the gaps, Virgin Money’s mortgage business is a little bit different to ours. When you put the two together you get a much nicer, more rounded business in terms of proportion of buy-to-let, and they had a really good credit card business, that has been invested quite heavily in over the last three years,” says Smith.