The McFarlane exit interview: part III

This is the third and last instalment from an exit interview with John McFarlane, managing director of ANZ who retires from the bank at the end of September after 10 years at the helm of the company.

McFarlane gave the interview last Thursday, September 6.

Ian Rogers: Someone in their 20s and 30s with talent and ambition, who works here, what chance do they stand of becoming CEO at ANZ? What's your advice to this group, and how many people would fit into this group at the bank?

John McFarlane: It's interesting, I get that question from our grads when they first join, and I get it a lot. It comes in two forms. It comes in a constructive form like that, what are the important things, and how do I get on. For reasons which I cannot explain, how much bigger we've got in Bangalore, and the increasing sort of South Asian population in Australia in the bank, they express it as, how can I be the CEO of ANZ? Not the others, just that group.

So 99 per cent of the time, if that question comes up, it's come from somebody, somewhere, from either India, or from the Indian subcontinent. What I usually say to them is, the first thing is to be good at what you're doing now, because opportunities come to those who deserve them, and you deserve them not by being … having great potential, but having some confidence that you know what you're doing now and you're successful at it. Success breeds opportunity.

In order to be successful in what you do now, you're more likely to do that if you're passionate about what you're doing, so don't do something that isn't going to lead you somewhere, and don't do something that you're just not so excited about that it's the one thing you want to do in life. And then the third part of that is that it's got to lead you somewhere, and therefore it'd be better if you decided where that somewhere is, before you decide it, rather than just accepting what you're doing now, and hopefully that's going to lead somewhere else. And so I think if you do those things, then you'll be in a position to do greater and greater things.

The other point is, you need to prepare yourself for the next step. It's all very well being good at what you're doing, but people are considering you for something bigger, and they've got to be sure you'll be able to do the bigger thing, as well as the thing that you're doing now, and just being good at what you're doing now isn't … necessary, but not sufficient.

So the bigger things, so you need to prepare yourself for the thing there. And then finally, people appoint people, not organisations. It's a boss that appoints the subordinate in companies like this, and so there isn't this committee somewhere who all meets and discusses and should agree and things. One person makes that decision, who might be me at the very top, or it might be somebody else. If you want a particular role, make sure you get to know the person who can make that decision, and get them to like you.

You need a bit of longer-term planning. I had a coach once who talked to me about this, and they said look, where do you want to be when you're 60? I mean what do you … what do you want to do when you're 60? And what does that mean for you when you're 45, and where would you have to be then? And then what does that mean for you when you're 35? And what are you going to do about that next week?

Ian Rogers: How many people are there in their late 20s and early 30s that you and your senior team might think well, they are looking at it?

John McFarlane: I think we recruited about 500 graduates. We're creating hundreds of graduates ourselves this year, because we've said that ideally you can't be appointed to a managing position, that's 8000 positions, unless you have a degree, or currently studying for one.

So having the intellect, or the ability to actually use your brain to tertiary capacity, is actually quite important as a foundation. So there are quite a substantive number of graduates who have got great potential. They fall into a normal distribution, and also, that changes with time, where somebody who's very good at one point in their career, they're not always good later on, where there are early starters that are you know, that are late finishers, and early finishers, and you know. So what you need to do, is you need to have a sense at any stage, as to who are the really good people, and you need to ventilate the organisation; either grow or ventilate the organisation to greater capacity, so that people get sucked up.

One of the big problems when I first came here … having been at Citibank for 18 years, as a graduate, and we recruited great graduates at Citi, it took me seven years to get to vice-president. If you didn't get there in seven years, you were out. And some people could get there earlier, if you were an MBA, it was five years. But you had to get there.

At ANZ, it was 16 years. Now, what happens to your best people in that environment? They soon find in the organisation they don't go anywhere.

Ian Rogers: Well they move.

John McFarlane: And they go, the best ones go and you keep the other ones. So basically, one of the things I wanted to do was create a suction up in the organisation for the most talented people, which meant two things.

One is that we had to create opportunities for people, so that they existed, and we do that in two ways. By growing the organisation, but also by moving on the weaker people. So we systematically identify [among] the officers, 8000 category; the top 20 per cent of people at any level, and the bottom five per cent of the people at any level.

Ian Rogers: And the bottom five got cleared out?

John McFarlane: We managed them out. We managed the bottom five there, and that plus natural attrition plus growth, actually creates quite a capacity for people to be sucked up or imported from outside, and that then increases the dynamic of people through the organisation.

One of the reasons it was 16 years, was we couldn't get people to release people to other departments. So that somebody would get a job, the managers would say, well I'm not listening. But they didn't offer them a job themselves.

Now that happed to me with Citibank. The HR director called me down, and said, I understand you want to see me. So I went up there, and they said, well I'm glad you've come to see me, I just wanted you to make me aware of something, and I said well what's that? He said, do you realise that we've offered four jobs for you in the last year and your man just turned them all down?

Ian Rogers: And you hadn't heard about them?

John McFarlane: And they were all promotions, and I didn't know about any of them. Now that happens systematically in organisations.

Ian Rogers: Well how successful do you think you have been in sorting that out at ANZ?

John McFarlane: We created an internal free market for jobs. If you've been in your job a year, or if you're a client relationship person two years, you can apply for any job that you're skilled for. You don't have to tell your manager you've applied. If you get it, your manager can't stop you taking it. We've placed it absolutely in the hands of the employees, so bosses choose subordinates, subordinates choose bosses, and the existing managers don't get in the way.

We've created the capacity for people to develop quickly, now it's up to them to demonstrate, and it's up to us to ensure we're choosing the right people.

Ian Rogers: What explains why no insider got the job as CEO at either ANZ and Westpac, and what lesson is there in that, for those with aspirations?

John McFarlane: Australia, it's a very sharp pyramid in Australia. The CEO's job is twice the size of the next most senior person. Not 10 per cent bigger, 20 … it is twice the job of the next level. There are very few of those jobs in Australia this size.

I mean the difference between the top company and the tenth company is quite substantial in Australia. We would be more than twice the market cap, and it's been as high as three or four times the market cut with the tenth company, and we're fifth or sixth, we've really... It's improved more recently, because there's been consolidation.

So there are very few very large companies in Australia, and therefore, there isn't a huge amount of talent sitting and waiting, ready for those jobs. That's the problem.

Possibly because ANZ's become much more international; we're reasonably large in banking terms, and you know the challenge is to get the best person available to you, to … to run it. And the best person available to you may or may not be inside Australia, it might be somewhere else, and that's what's happened to us.

Ian Rogers: What's worked out in your tenure of ANZ, what are the achievements?

John McFarlane: I think it's transparent to everyone that, not necessarily from a pure shareholder value standpoint, because that's always, depending on when you count it, we've outperformed, and we've been below, and yeah, at the moment we'd probably be below, because you know, we've taken a medium-term view, we're not trying to maximise our earnings; but I think it's fair to say that if you asked shareholders which is the best regarded major bank, in terms of how they're handled, I mean it's ANZ.

I think if you ask customers which, they'd say ANZ. If you ask who's got the highest staff satisfaction, staff engagement, where do you least lose people, and where do you most attract people? They say ANZ as well.

Ian Rogers: So what are the disappointments, what hasn't worked out?

John McFarlane: I think our strategy in the early days was flawed trying to create an investment banking business out of a commercial banking culture, particularly globally. Also the consumption of time and capacity in South Asia and Middle East, which meant that we ignored Australia, was problematic strategically. And the fact that [our] business was balanced too much towards the wholesale, and not enough towards the retail, which was a much more sustainable core position, was problematic.

And then I think we also took too much risk as an organisation more generally. Our beta got up to about 1.5, whereas bank betas are 0.48 to one? And some of that was under my work, some of it was inherited. And then more recently, the institutional business is not in as good shape as it needed to be. It's not … the franchise is not in bad shape, you know, our capability, it's just that they're just not performing well.

Ian Rogers: Well that's really my next question, what's really going on in institutional banking?

John McFarlane: It's just under-managed.

Ian Rogers: Well how did that come to be?

John McFarlane: It's just the management did not manage it as it needed to be managed. It's as simple as that. What's the logic for growing assets at seven per cent in an environment that's growing at 14 [per cent]?

Ian Rogers: Well, you're watching over managers?

John McFarlane: No.

Ian Rogers: No?

John McFarlane: No, no, well, we were, we are, but that's not the reason. I think their budget was higher than that. So that's an execution issue, that's not a target issue or strategies. I take responsibility for everything, that doesn't bother me.

I think if you're to say what happened, I think they were so consumed about changing the business model, towards a new paradigm, that they lost sight of having to produce on the way, I think. But it's only one year. But it makes next year a lot easier.

Ian Rogers: Okay, well to what extent did the institutional bank achieve the shift to the new paradigm that you think that management was looking for?

John McFarlane: Well the question is, what was the issue? Now, there's been statements about the business not being in very good shape.

Bob Edgar happened to run that business, and I have to tell you, he is probably the leading banker in Australia, over all other bankers. He is an incredibly talented banker, and I can assure you, the banking side of that business, the international trade, the cash management, the business banking, corporate banking, you know, and basic institutional lending, all of that, was doing really quite well.

In fact, we were the number one bank, I think we won Bank of the Year or equivalent on the institutional side that year.

So transparently the business was not in bad shape. Now there were issues in the business, in that it probably needed to be less asset-reliant. It probably needed to create far more added value than perhaps would've been created in the corporate finance, structured finance area. And the markets and distribution side needed to be accelerated, simply because you want to originate, underwrite, distribute, as that's not necessarily originated to whole, which was probably the problem.

There has been quite a shift, but it's actually overseen a little bit of deterioration in the performance of the pure banking side of the business.

For some unknown reason organisations get consumed by sexy transactions, in this case, tax-based structured finance.

And my question is, where's the franchise associated with that? Who are the clients that are going to be there next year with exactly the same requirements? And what has happened nine times out of 10 is that eventually the tax authorities become very unhappy about these. They all have positive tax rulings, and/or opinions at the time. But then circumstances change and they change their mind, and law changes, common law changes, you would end in that position where the rules have changed, and you end up paying the tax.

And so we've actually swallowed oh, I don't know, tens of millions, possibly 100 million dollars, just unwinding stuff that was making money then, but doesn't make any money today, simply because we ended up paying the tax that we didn't think we should be paying.

But I think it's in good hands, 'cause Peter Hodgson's a very, very talented banker, he's also a very good manager, and if he says that's the bottom line, that's what it is.