Customer Reviews

The Death of Gentlemanly Capitalism (Penguin Business)

5 star:		(0)
4 star:		(1)
3 star:		(0)
2 star:		(0)
1 star:		(0)

 

 

The City, London's financial district, is often described as being like the Wimbledon tennis tournament--held in London, staffed by locals, dominated by foreigners but still generating lots of prestige and money as well as jobs for the UK. Most City people say they don't mind that the district has become a "foreign affair". For them, ownership doesn't matter. "Show me a single statistic where the City is in decline", was how the governor of the Bank of England challenged the author to back up his argument.

But Philip Augar, a former City executive turned consultant, begs to differ. He says ownership does matter, as it confers power and influence. He argues that the current situation, in which many leading British firms have sold out to foreign owners, has left the City with no control over its own destiny. He sees the absence of a single British-owned investment bank with meaningful global aspirations as a serious deficiency. And he argues that London's position as the leading secondary financial centre is not as secure as it appears.

It may be unpopular to talk about national interest or national industry. But Augar's book raises the question of whether it is all right, in the name of globalization and market principles, to allow a nation's key industry to fall under the domination of foreign powers. For him, the analogy with the Wimbledon tournament is flawed: "Wimbledon is British owned, the performers are foreign; the City is foreign owned, the performers are British. Ownership brings control and it is the City's lack of control over its own destiny that creates concern."

Meanwhile, financial institutions and multinational firms have not become stateless entities. "Ask any London employee of Merrill Lynch or Goldman, or UBS or Dresdner Bank the nationality of the company they work for and you do not have long to wait for an answer. As we have seen in manufacturing industry, head office determines the strategy, the culture and the commitment."

Before the Big Bang reforms of the last half of the 1980s, the City was a simple, inward-looking world where everybody knew everybody. Most of the products handled were British. On the market floor, those who did not play by the rules were ostracized. The sense of family was cultivated by the partnership structure of most broking firms and merchant banks. Real time computer models, even spreadsheets, were years away. Notebooks, ledgers, and the backs of envelopes were more common risk-management tools. Broking was held to be a flair business which too much management would stifle. Appraisals, formal targets and training for staff were still in their infancy. Basic administrative skills were also in short supply so that record keeping and process--dismissed as red tape in the smaller partnerships--were not part of the prevailing culture.

Elements of a class system were also predominant. "Everything from the way people dressed, spoke and ate to the buildings and rooms in which they worked was derived from the standards of the English upper and upper-middle class," Augar writes. The City's institutions and values reflected three of the pillars of conservative England: the public school, the gentleman's club and the country house. The meeting rooms of merchant banks were adorned with classical paintings. Tea and coffee were served by deferential butlers. The gentleman capitalists worked gentlemanly hours. The stock market did not open until 9:30 a.m., and most people were on their way home by 5:30.

However, nothing could stop the flow of international competition, with gentlemanly capitalism being no exception. Coming under pressure, Britain chose to reform its securities sector in 1986, with the aims of strengthening the London Stock Exchange's position as the leading stock exchange in Europe, and increasing competition. Stock commission fees were liberalized, 100 percent foreign ownership was permitted, and jobbing and broking functions were unified. British clearing banks tried to take advantage of the situation by buying brokers and trying to build US-style investment banks, but the shareholders were unsupportive and cultural factors beset such marriages. The clearing banks were dominated by grammar school boys trained to keep records, fill in forms and to follow the procedures manual, while the British merchant bankers and brokers dismissed this as bureaucracy.

As events were to prove, the other newcomers to the City, the foreign banks and brokers, were best equipped to cope with the many changes that were to occur after the Big Bank. Over the following years the British banks and brokers gradually fell into foreign hands, sometimes spectacularly, as when Barings went bust and Warburg's profits collapsed, sometimes with dignity, as when Smith New Court sold out. The bigger banks like Barclays and NatWest soldiered on for a while before they too sold their equities businesses. The consequence is that at the time of the book's writing, all of the City's top ten brokers and nine of the top ten corporate finance houses were American or Continental European. Of the top ten merchant banks in London in 1983, only two, Rothschild and Lazard, were still independent at the beginning of the twenty-first century. Likewise, the top ten brokers from the same year have been through so many changes of name, management and ownership that nearly all are unrecognizable today.

These changes have brought the death of gentlemanly capitalism. As Auger laments, "The gentleman capitalist is about as rare these days as the gentleman farmer. The gifted amateur has given way to the dynamic investment banker.The day starts at 7 a.m. not 9 a.m., 70 percent of analysts work over sixty hours per week and designer water has replaced the boozy lunch. Dress down, not dress up, is the order of the day." Management, once despised as a burden on the cost base, is now recognized as an essential discipline. Information technology, formerly just a mechanism for doing the job better, is now also seen as an alternative to stock exchanges and a threat to the very existence of the broking industry.

A consequence of the success of US firms in London was that the American investment banking model became accepted as the norm. They focus on pan-European research rather than the traditional separation of the UK and Continental Europe favoured by the British firms. Teams of analysts are organized and share information on a world-wide basis. The principal characteristics of the American model is the subjugation of broking to corporate finance and capital markets and the elevation of transaction banking above relationship banking. Another characteristic is the inflation of salaries and the corresponding insecurity of job tenure. The American's ability and willingness to pay aggressively for top quality staff caused serious problems for all of London's investment banks. "Money replaced honour and short-term reward replaced long-term commitment."

The UK's investment banks were brought down by a combination of external forces and self-inflicted wounds, The trend to globalism and scale and the power of the Americans set a formidable challenge to the City. Its failure to respond effectively was due to negligence born out of a cultural system that inhibited good management and to the existence of a vacuum where the authorities should have been. Philip Augar doesn't mince his words when he concludes, with cold indignation, "I believe that the speed and totality of the submission of the City's leading firms is one of the most abject surrenders in business history".