Change Process at the National Australia Bank - Case Study Example

National Australia Bank Table of Contents Executive Summary……………………………………………………………………….2 Introduction………………………………………………………………………………..2 Change Process at the National Australia Bank…………………………………………..3 Perspectives on change at the National Australia Bank ………………………………….5 Institutional perspective (institutional isomorphism)…………………………….5 Psychological perspective………………………………………………………...6 Political perspective………………………………………………………………8 References………………………………………………………………………………...9 Executive Summary The National Australia Bank is one of the “Big Four” banks in Australia. Headquartered in Melbourne, it has operations spanning Australia, New Zealand, the US, the UK and the Asian countries of Indonesia and Hong Kong. In 2004, the bank went through a rogue trading scandal that saw it lose some $360 million, with its value dropping by 1% and its share price dipping 6% immediately after the scam broke into the public domain. Investigations into the rogue trading scandal by industry regulators the Australian Securities and Investments Commission (ASIC) and PricewaterhouseCoopers attributed the scandal to poor internal controls and supervision within the bank, an organizational structure that placed undue emphasis on profits and good news, and a breakdown in communication between the board and the management. To prevent the huge run on its share price and value that the scandal had triggered, and to avoid the recurrence of a similar event, the bank went through a process of change that saw it tighten its risk management systems, adopt stricter capital adequacy requirements that conformed to APRA’s guidelines, and the replacement of its entire management team with new people. In this paper, we examine the change process at the bank through three perspectives: the political perspective where we see the change as a result of a negotiated process carried out by the competing parties of the coalition, a psychological perspective, and an institutional isomorphism perspective where the change is enforced by regulatory and socio-cultural forces. Introduction: With the increased complexity of the business environment, change has become a pervasive feature of today’s organization. According to Anderson (2001), organizational change can be triggered off by a combination of change drivers, which may either be external or internal. External drivers of change typically include social and cultural changes (such as a shift in the tastes and preferences of the consumer), political-legal forces (such as new regulatory requirements), economic forces, and technological forces (such as the innovation of new processes, raw materials or equipment). According to Anderson (2001, p.17), the natural environment is also an external driver of change. Internal drivers of change on the other hand involve the organization’s culture and its people. Anderson (2001) identifies some internal drivers of change as including leader and employee behaviour, leaders and employee mindset, as well as cultural, organizational and business imperatives. One way of properly understanding change within an organization is by looking at the change process in terms of metaphors. Various perspectives exist, including the biological perspective, the rational perspective, the institutional perspective, the resource perspective, the contingency perspective, the psychological perspective, the political perspective, the cultural perspective, and the post-modern perspective (Dawson, 2003). In the section that follows, we shall evaluate the change process at the National Australia Bank (NAB) through three of these perspectives. National Australia Bank (NAB): The National Australia Bank (NAB) ranks among the four largest banks in Australia. Offering a wide range of financial services, it has operations in many countries including the UK, Australia, the US, New Zealand, and Asia. In Australia, it operates a network of 800 branches, while it has a total of 200 branches in New Zealand. Through subsidiaries such as Clydesdale Bank subsidiary and Yorkshire Bank, NAB has a network of 350 branches in the UK and only recently took over the Great Western Bancorporation in the US where it operates over 100 branches. In Asia, it operations cover Indonesia and Hong Kong (Hoovers, 2009; CNN, 2004). The company’s core values and beliefs include openness and honesty, accountability, teamwork and collaboration, fairness and respect, and efficient operations (NAB website, 2009). From its website, the company aims at “generating sustainable satisfactory returns to shareholders.” There are three levels of strategy, which include the corporate strategy level, the business level of strategy and the functional level. At the corporate level, we have three types of strategies that an organization can follow, including the grand strategy of growth, the grand strategy of retrenchment and the maintenance strategy (Porter, 2008). We therefore conclude that the NAB pursues a corporate strategy of growth. This growth strategy is underpinned by seven differentiating factors which include strengthening of the bank’s brand and improvement of its banking infrastructure, among others, suggesting a differentiation strategy at the business levels rather than an overall low cost leadership strategy or a niche strategy (NAB website, 2009). There are various organizational structures which a firm may adopt, including matrix, functional, or divisional structures. National Australia Bank has a divisional structure. Divisional structures may be broken down by geography, market or product. NAB’s structure is organized according to geography, with four key operational segments which include: “Australia (NAB and MLC brands), United Kingdom (Clydesdale Bank and Yorkshire Bank brands), New Zealand (Bank of New Zealand brand) and Americas (Great Western Bank brand) (NAB website, 2009; Daft, Allen and Sandburg, 2000).According to Fortune Magazine (CNN, 2006), the bank has over 38,000 employees and was ranked 226 among the top 500 hundred corporations in the world. The National Australia Bank is headquartered in Melbourne, Australia. It has total assets valued at A$397 billion (CNN, 2004). Change Process at the National Australia Bank: The change process at the National Australia Bank (NAB) was triggered off by internal drivers of change. It began after the bank lost some $360 million in 2004 courtesy of unauthorised trading in foreign currency options. Griffiths (2004, p.1) reports that part of the bank’s foreign trades were “tied to a bet on a rebound in the US dollar that went sour.” Almost immediately after the rogue trading scandal broke out into the public, the industry regulators ARPA and the Australian Securities and Investments Commission (ASIC) commenced investigations, with the bank also commissioning an investigation into the scandal that was conducted by PricewaterhouseCoopers. The reports from the investigations established that the scandal was largely made possible because of loose controls within the bank. The reports stated that rogue trading had repeatedly been carried out at the bank, with the main motivation of such trading being to maximize profits and recover losses that had been registered repeatedly. Additionally, the reports established that such rogue trading had been carefully and painstakingly concealed (Maiden, 2008). While the bank had in place strict requirements concerning the optimal value-at-risk ceilings that it desired, the PWC report showed that due to poor supervision, such requirements were often flouted, the result being that the bank’s currency traders constantly surpassed the maximum trading limits required of them. In addition to poor supervision, the PWC report also established that the internal controls at the National Australia Bank had weaknesses which the traders could exploit with ease. For example, there was a one hour delay between the time the trade was done and the time it was reported, a delay which the traders could exploit. Additionally, the PWC report also found that several warnings of a possible occurrence of rogue trading had repeatedly been made, but no action had been taken because the warnings had either been ignored or had been “lost in the system, right up as far as the boards audit committee” (Maiden, 2008, p.1). The report also attributed the rogue trading scandal to the bank’s organizational culture, which laid undue and excessive emphasis on the maximization of profits and expected nothing but good news. Additionally, there was a communication breakdown between the bank’s board and its management, with the board being kept in the dark on important issues within the bank (Maiden, 2008). As a result of the rogue trading scandal at the National Australia Bank (NAB), CNN (2004) reports that the bank’s share price plummeted about 6% with the bank also losing about 1% of its value. To curtail any further losses as well as to avert a recurrence of a similar event in future, the bank initiated a series of changes. It adopted ARPA guidelines which resulted in the bank maintaining “extra capital against assets, restricting currency trading and benching its internal risk capital assessment formula. APRA also oversaw cultural changes that included wholesale renewal of the board and senior management” (Maiden, 2008, p.1). In addition to raising its capital adequacy requirements, the bank also tightened is risk management systems. The renewal of the bank’s board and management saw its managing director Frank Cicutto and its chairman Charles Allen sent home (Lateline). A new executive general manager, Institutional Markets & Services (IM&S) was appointed. The Institutional Markets & Services (IM&S) division replaced the Corporate & Institutional Banking division (AAP, 2004). A new Chief Information Officer (CIO), Ian McDonald, replaced Ian Crouch. Additionally, key corporate development functions were handed to other members of the executive committee to streamline corporate headquarters. IM&S was restructured to “include all global business lines within the corporate banking business, custodian service and transactional services to be integrated within each region and reporting to the regional business heads in Australia, New Zealand and Europe” (AAP, 2004, p.1). Corporate Development was also restructured, with key functions being integrated under other members of the executive committee. The new structure included: “Lynne Peacock (EGM, People & Culture), Michael Ullmer (Group CFO), Ian MacDonald (CIO), Cameron Clyne (EGM, Customer Solutions), Ahmed Fahour (CEO Australia), Peter Scott (EGM, Wealth Management), Ross Pinney (CEO, Financial Services Europe), and John Hooper (EGM, IM&S)” (AAP, 2004, p.1). However, its overall strategic direction as defined by its grand strategy of growth and generic strategy of differentiation remained intact. Its overall organizational structure of a geographic divisional structure also remained largely intact, with its core values and principles being unchanged. Such a change in the bank can be elaborated by application of the three perspectives of the organizational change. These three perspectives include institutional, psychological and political. Perspectives on change at the National Australia Bank: Institutional perspective (institutional isomorphism): According to the institutional perspective, organizational change within businesses is dictated by and driven by a number of forces operating within the organization’s external environment. These forces may be political, economic, socio-cultural, or technological. Forces within the political environment that impact on the organization include employment laws, trade and business regulations, the political stability in the country, the prevailing tax and fiscal regimes, and the government’s position towards social corporate responsibility, competition and the environment (CMI, 2005). Economic forces which have the greatest impact on an organization include the country’s gross domestic, product, and key economic indicators such as the rate of inflation, exchange rates, inflation rates, the monetary policy and the kind of economic system around which the country is organized. Socio-cultural forces on the other hand include values and beliefs, while technological forces include changes in processes, raw materials and equipment (CMI, 2005). In the case of the National Australia Bank (NAB), the need for change was dictated by regulatory and socio-cultural forces. Banks and other financial institutions in Australia are required to conform to regulations and guidelines issued by industry regulators who include the Australian Securities and Investments Commission (ASIC) and the ARPA. Failure to conform to these requirements would result in legal sanctions and penalties being imposed upon the bank, including the possibility of having its trading license withdrawn. Therefore, in order to continue its operations, the bank had to carry out the process of change that culminated in the enactment of tighter controls and stricter risk management systems. For example, the company increased its capital in order to conform to the stricter capital adequacy requirements demanded by the regulatory bodies (Maiden, 2008). Additionally, the bank’s implementation of the change process can also be viewed as having been dictated by socio-cultural forces, and especially the changing values of the society. With the collapse of firms such as Enron, WorldCom, HIH, and others due to poor corporate governance practices, consumers have become increasingly demanding that organizations adopt best practices in as far as corporate governance practices are concerned. Organizations have never been under extreme pressure to pursue best practices in their financial disclosures, environmental activities, sustainability, and corporate social responsibility activities. A trend of ethical consumerism is emerging, where consumers are increasingly boycotting products of firms which they perceive as being unethical and patronizing those firms which they consider to be ethical. Without such support from the customers, who sit at the very heart of an organization’s success, the organization will not be able to meet its objectives. An indication of this can be seen in the market sentiment towards the National Australia Bank whose shares plummeted six percent as the rogue trading scandal broke into the open, with the firm losing both its value and market share (Maiden, 2008; Elkington, 1998). In this regard, the change process at the bank can be regarded through the institutional isomorphism perspective, where coercive political and legal forces as well as normative socio-cultural forces (the pressure to align the bank’s operations with best corporate citizenship standards, and to the accepted codes of social norms and values) forced the change upon the National Australia Bank. Psychological perspective: The psychological perspective focuses on individuals within the organization, how they experience change as well as their psychological reaction to the change. This is important because if it is not properly handled the change process will be viewed as a negative experience, leading to high stress levels among employees, which will eventually culminate in resistance to the change and thereby causing the change process to fail. Therefore, to manage change, the people have to be understood (Dawson, 2003). Kusmierek (2001) has identified five barriers to effective organizational change, which include value barriers, power barriers, practical barriers, psychological barriers, and resource barriers. Power barriers are manifested when the process of change threatens to reduce the influence or authority which some members enjoy because of the high level positions they hold in the organization. On their part, psychological barriers occur when the change threatens the emotional well-being, security and confidence of the members of the organization. Value barriers arise when the change results in the introduction of new values which conflict with the values already held by the members of the organization, while practical barriers are as a result of the organizational members being driven to resist the change for the reason that they don’t possess the requisite skills. Resource barriers on the other hand come about when inadequate resources are devoted to the change process (Kusmierek, 2001). One of the most common manifestations of psychological barriers to change occurs when the change involves some of the employees losing their jobs. Since the jobs are their source of livelihood, any prospect of being laid off in most cases is a traumatising experience for the employees. For that reason, many employees threatened with the layoff will resist the change as a way of holding onto their jobs (Kusmierek, 2001). At the National Australia Bank, we see a completely new team coming up to take over from the management team in place when the rogue trading scandal at the bank broke out. For example, we see the bank’s managing director Frank Cicutto and its chairman Charles Allen sent home, while four of the bank’s traders also laid off, with far-reaching replacements also being carried out. An indication to the resistance by the affected employees can be seen on Circutto’s insistence that he would stay on through the full term of his contract which was supposed to expire in 2006, in spite of the bank’s position that he would need to be replaced (Maiden, 2008). Kotter and Schelsinger (1979, p.85) have identified four main causes of resistance to change, which include “misunderstandings (inadequate information about the change, or due to communication problems), parochial self-interest among the organizational members (how they stand to lose or benefit, rather than how the organization stands to gain), low tolerance to change (most people prefer stability and have a fear of the unknown), and different assessment of the process by the organizational members.” Kotter and Schlesinger (1979) also identify several strategies that organizations can use in order to successfully handle any resistance to change. These strategies include persuasion, negotiation, education, communication, cooption, manipulation, facilitation and support, enabling the employees to be involved in and take active participation in the change process, and use of the coercion strategy. In the case of the Bank of Australia, we see the use of some of these strategies, a factor that led to the successful implementation and entrenchment of the change process. For example we see the bank’s former managing director Frank Cicutto being a handsome severance package in a form of negotiated settlement to see him give up his position to the incoming managing director (Ravlic, 2004). By understanding the grieving process that employees go through during the dismissal process, the organization can be able to better deal with the negative psychological impact affecting the employee lined up for dismissal. One such model is the Kubler-Ross model which views dismissed employees as going through five stages including denial, anger, bargaining, depression, and acceptance (Cameron and Green, 2004). On the flip side of the coin, research has shown that employees who work in organizations that are perceived as being ethical normally experience higher rates of job satisfaction leading to greater productivity, as opposed to those who work in organizations that are perceived as being unethical. Those working for unethical organizations usually have lower rates of job satisfaction, arising partly due to the conflict between their values and the organization’s values. In such an organization, the employees have only two choices: to quit and look for jobs in organizations where they will be more at ease psychologically, or to try and enforce the change from within. Even though the latter option rarely happens since management have greater say than the employees, the change at the National Australia Bank can be viewed as having occurred through as a result of the employees (Elkington, 1998). According to Ravlic (2004), Cathy Walter, who previously served as the head of the bank’s audit committee, played an instrumental role in enforcing some of the changes that were implemented. Cathy did this by releasing confidential documents that demonstrated PricewaterhouseCooper’s complicity in the whole fiasco, and which questioned the ability of the auditors to carry out an objective assessment of the bank after the rogue trading scandal. The documents demonstrated a conflict of interest between the bank and PwC, with the bank’s relationship partner also playing the lead participant role in PwC, the bank’s auditors. Additionally, PwC had earned fees that were more than twice in excess of what previous auditors KPMG had been paid by the bank (Ravlic, 2004). It can be argued that these disclosures played a part in ensuring that the final report on the scandal had a high degree of probity, on the basis of which the changes were made. On this understanding therefore, it can be argued that the employees were not merely reactive to the change process, but were driven by psychological reasons to be proactive in bringing about the change within the bank. Political perspective: The political perspective views the organization as being made up of a coalition of competing interests. Each party within the coalition has his own interests, which will usually compete with the interests of the other parties in the coalition. Therefore, any change that takes place within the organization will be as a result of a negotiated process (Dawson, 2003). Within the National Australia Bank, we identify various players within the coalition, some of whom include the previous management team who represent the status quo and who resisted the change because it would result in the loss of their jobs, and the change agents who were advocating for a new management team. We see the regulatory bodies such as the ASIC whose main interest is to see adherence to the best practice standards of corporate governance. We can see an active negotiation process, for example, when the previous management team are given attractive severance packages in exchange for accepting to step down for the new management team, leading to the new changes. References AAP, 2004, NAB names new team after rogue trading scandal, retrieved on 27 Apr 2009 from . Anderson, D, 2001, Beyond change management: advanced strategies for today's transformational leaders, John Wiley and Sons. Cameron, E and Green, M, 2004, Making sense of change management: a complete guide to the models, tools & techniques of organizational change, Kogan Page Publishers. CIM, 2005, "Carrying out a PEST analysis," Chartered Management Institute: checklists: marketing strategy, retrieved on 27 Apr 2009 from . CNN.com, 2004, NAB faces forex scandal probe, retrieved on 27 Apr 2009 from . Dawson, P. 2003, Understanding organizational change, SAGE. ISBN: 0761971602, 9780761971603. Elkington, J., 1998, Cannibals with forks: the triple bottom line of 21st century business. New Society Publishers. Griffiths, K, “NAB trading scandal claims another scalp”, The Independent, retrieved on 27 Apr 2009 from . Hoovers, 2009, National Australia Bank Limited, retrieved on 27 Apr 2009 from . Kotter, J.P & Schlesinger, L.A., 1979, “Choosing strategies for change”, Harvard Business Review, pp. 85-92. Kusmierek K, 2001, Understanding and addressing resistance to organizational change, University of Michigan, retrieved on 27 Apr 2009 from . Maiden, M, 2008, “Lessons for SocGen from aftermath of NAB’s trading scandal”, The Age, retrieved on 27 Apr 2009 from . Ravlic, T, 2004, “National Australia Bank”, Accountant, p.11, retrieved on 27 Apr 2009 from . Read More