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Bradford & Bingley Transformation & Decline

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Bradford & Bingley Transformation & Decline Bradford & Bingley Transformation & Decline: 1995 – 2010 Matthias Hambach PhD University of York The York Management School October 2014 Abstract The recent financial and economic crisis, which affected many financial institutions in the UK, created the need to investigate and understand how the crisis affected these institutions. Consequently, numerous official reports and academic studies have been written, particularly on Northern Rock, examining the financial impact on, and business strategies of, these institutions. However, comparatively, there has been little empirical investigation into the board processes that contributed to the decisions made by the management of these affected institutions leading up to the crisis. Of particular interest to research are the demutualised building societies. They were unlike the large universal banks, who engaged heavily in investment banking and were trading on their own account; yet their organisational outcomes, in particular receipt of government support, were similar. This study focuses on the case of the former Bradford & Bingley Building Society (B&B), the last building society to demutualise, and investigates its transformation and decline over the period 1995 – 2010. The investigation adopts a novel approach by combining the Corporate Governance Life-Cycle with the Upper Echelons Perspective to examine structural and behavioural changes of the board and its governance functions, during the transition of Bradford & Bingley, from building society to bank and nationalised institution. Using a variety of sources, including interviews with directors, official documents, financial records, and newspaper articles, the transformation of B&B is examined through a historical lens. The thesis argues that life-cycle stages should not be seen as periods with well defined boundaries, but rather overlapping periods of varying length, where each period has distinct characteristics that distinguish it from another. Furthermore, the importance of each corporate governance function changes gradually over time within each stage. Moreover the interviews revealed that directors considered there to be a general hierarchy of governance functions, where determining strategy was considered to be their prime responsibility, contrary to what is suggested in agency theory. In addition, the context of Top Management Team (TMT) decision-making using the upper echelons perspective is analysed. The findings suggest that firm culture and i wider economic environment are important factors impacting the constructs of the upper echelons perspective and hence decision-making. In particular, the corporate governance functions are central to describing the state of the firm. Also major external events, as well as management decision-making, influence the life-cycle progression of the firm. In summary, the study reflects different life-cycle stages, ownership patterns and regulatory environments in its exploration of board processes and transformation at Bradford & Bingley. This thesis thus contributes to the ongoing debate on the shifting UK corporate governance code, which recognises that appropriate board structures and non-executive director independence are not sufficient to have an effective board, but that board effectiveness depends on TMT behaviour. In this context, boardroom culture has emerged as the major determinant of the effectiveness of board processes. ii Table of Contents Abstract..............................................................................................................................i Acknowledgements...........................................................................................................x Author’s Declaration........................................................................................................xi 1 Introduction....................................................................................................................1 1.1 Introduction.............................................................................................................1 1.2 Scope of Research...................................................................................................5 1.3 Research Aims and Objectives................................................................................6 1.4 Research Questions.................................................................................................6 1.5 Contribution............................................................................................................7 1.6 Structure of the Thesis............................................................................................8 2 History of Building Societies in the UK: The Research Context.................................11 2.1 Introduction...........................................................................................................11 2.2 General History.....................................................................................................11 2.3 Competitive Environment.....................................................................................13 2.3.1 Background...................................................................................................13 2.3.2 Competitive Environment.............................................................................15 2.4 Demutualisation in the United Kingdom..............................................................18 2.4.1 Reasons for Demutualisation........................................................................18 2.4.2 The Effects of Demutualisation.....................................................................22 2.4.3 Governance and Strategy..............................................................................23 2.5 Conclusion............................................................................................................24 3 Literature Review.........................................................................................................26 3.1 Introduction...........................................................................................................26 3.2 Codes of Governance in the UK...........................................................................26 3.3 Case studies of corporate governance failure.......................................................29 3.4 Theories in corporate governance literature..........................................................33 3.4.1 Agency Theory..............................................................................................33 3.4.2 Resource Dependency Theory......................................................................35 iii 3.4.3 Stewardship Theory.......................................................................................37 3.4.4 Summary.......................................................................................................38 3.5 The Corporate Governance Life-Cycle.................................................................38 3.5.1 The Origin of the Corporate Governance Life-Cycle...................................39 3.5.2 Previous Research on the Corporate Governance Life-Cycle.......................41 3.5.3 The Resource Function in the Corporate Governance Life-Cycle................43 3.5.4 Application of the Corporate Governance Life-Cycle to this Research........44 3.6 Upper Echelons Perspective.................................................................................46 3.6.1 Foundations of the Upper Echelons Perspective...........................................47 3.6.2 Refinements of the Upper Echelons Perspective..........................................48 3.6.3 Limitations to the Predictive Strength of the Upper Echelons Perspective..50 3.6.4 Critique of the Upper Echelons Perspective.................................................51 3.6.5 Implications for Research.............................................................................53 3.7 Complementarity of the theoretical perspectives..................................................55 3.8 Conclusion............................................................................................................56 4 Research Methodology.................................................................................................58 4.1 Introduction...........................................................................................................58 4.2 Research Design and Method...............................................................................58 4.2.1 Single Case Study Approach.........................................................................59 4.2.2 The Choice of Semi-Structured Interviews...................................................60 4.2.3 Interviewing Elites........................................................................................61 4.2.4 Secondary Data and its Use as Empirical Evidence......................................64 4.2.5 Ethical Risks and Ethical Approval...............................................................65 4.3 Data.......................................................................................................................67 4.3.1 Interviews......................................................................................................67 4.3.2 Documents.....................................................................................................70 4.3.3 Data Analysis................................................................................................72
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