ASB-4904 - Critically assess the impact of the 2008 global financial HRM Assessment Answer

Human resource management - Case Study Assignment

Assignment Task

Critically assess the impact of the 2008 global financial and economic crisis on HRM practices in organizations.

The assignment question reflects some core themes addressed during the ABP HRM module. The aim of the assignment is to encourage students to combine theoretical and practical aspects of HRM by referring to organization case study examples when assessing the core themes in the HRM academic literature. In particular, students are expected to engage in critical analysis of relevant HRM academic literature, from sources recommended below, in the module outline, at the end of lecture slides, or sources derived from their own wider reading. It is not enough to rely on lecture notes or non-academic internet sources. Students that can show evidence of critical thinking and engagement with academic literature, and illustrate this with practical ‘real world’ examples, are more likely to achieve favourable grades.

Background:

In 2008, the most serious financial and economic crisis to hit the global economy since the Great Depression began in the US and spread rapidly to Europe. Many economies are still experiencing negative or declining growth rates and economic restructuring, as well as unemployment and austerity (ILO, 2014). While various studies have explored the impact of financial and economic crisis at the macro and micro level - examining issues such as firm growth and survivability, financing, market investment, and organisational strategy - less attention has been given to the human resource management (HRM) and employment relations implications of the global economic downturn, how this has affected organisations, HR management in organisations, the employment conditions and living standards of workers, and so forth.

SELECT ANY ONE ORGANIZATION CASE with which you are familiar – one that you can access relevant HRM information about (for example, one you have worked for, an organisation familiar to family/friends, or that you have been able to find detailed information about in journal articles, books, newspapers, internet).

In completing the assignment question, you are expected to address the following issues:

1. Broad political economy context: start by providing a general summary of the overall impact of the 2008 financial and economic crisis on HRM practices, jobs, work and employment in the country or countries where your chosen case organization operates;

• Impact on strategy in your chosen case organization: then, assess the impact of the 2008 financial and economic crisis on the case organization’s overall business strategy and then its overall HRM strategy.
• Impact on HRM policies and practices: next, analyse the effects of the 2008 financial and economic crisis on the various specific components of HRM policy and practice in the case organization under the four main HR functions covered in the module: resourcing the organization, human resource development (HRD), employment relations, managing performance and reward. The list of HRM policies and practices that might be assessed under these four areas include: talent management, recruitment and selection, organizational culture, training and development, employee voice and participation rights, pay and reward, performance management and appraisal (these might have other labels).
• Context: Another theme to be discussed in your assignment is how different organizational, sector/industry, country, and international contextual circumstances might influence and mediate the impact of the 2008 financial and economic crisis on your chosen case organization.
• Finally, provide a conclusion summarizing your arguments, and, if appropriate, identify any practical recommendations relating to HRM practice.

Introduction

This paper focuses on the impact of the 2008 financial crisis on the HRM practices and policies of companies. The financial crisis 2007-2008 was a global financial crisis which is regarded as the worst financial crisis since the Great Depression of the 1930s (Dean, 2012). The financial crisis of 2007-2008, which began in the US loan market, affected most of the world in mid-2008, mainly due to an overvalued and over leveraged housing market in the US. In several parts of the world financial crisis led to several years of recession, where entire countries were in danger of going bankrupt and also the Euro was threatened. The crisis lasted several years and even five years later efforts went on to clean up in the aftermath of the crisis, including through ongoing litigation and asset sales of bankrupt estates. The aim of this paper is to assess the broad political context of the crisis, evaluate the impact of overall strategy and HRM policies in a chosen organization, analyze impacts on HRM practices and assess the context can affect the impacts of the crises (Wray, 2015). The organization chosen for this paper is the Royal Bank of Scotland.

Broad political economy context:

As per Dean (2012), the problems for the banks and the increased risks in the financial sector began to emerge in August 2007 in interest rates in the market for loans between banks and financial institutions. When banks lend to each other, they pay normally the same interest when the state borrows money, plus a small mark. In the first half of 2007 and the time before that, this mark usually stood at 10 basis points (0.10 percentage points) or less. This mark, called yield, spread on the interbank market. In the autumn of 2007, it was between 50 and 100 points in many financial markets. This was a sign that lending to other banks began to be seen as significantly more risky than before, because of anticipated problems with the bad housing loans. After having looked to have stabilized the markets in mid-2008, interest rate spreads again increased in September and October 2008. According to Wray (2015), in the UK, there were interest rate spreads of between 150 and 200 points, and in the United States, between 250 and 300 points. A precursor, or a first sign of the economic crisis in Europe, was actually seen well before it actually reached there. Already in autumn 2007 the British bank Northern Rock entered into financial problems and a bank run occurred. The bank was rescued quickly by the state, so that the crisis does not spread further. Once the crisis hit the UK market, the so-called buy-to-let arrangement became popular. This means that individuals buy single family homes for rent or sublet. The market for buy to let has exploded since the 1990s, but are at high risk for the investors. The number of buy to let loans increased at the same pace as house prices in the UK. The prices increased from an average price of about £ 60,000 in 1999 and peaked at £ 200,000 in 2007 (Slater, 2013). The said price increases (and thus the height of fall) on the properties contributed to the financial bubble size. In its beginning point itself the financial crisis threw UK economy to an unforeseen low with £51 billion lost from the biggest companies of the country. The biggest mortgage loan company of UK, the Halifax Bank of Scotland, had its value reduced by 13 % and profits were negatively influenced due to the credit crunch. The values of Barclays and Royal Bank of Scotland reduced by 9% and the FTSE 100 index dropped by 4%. The Bank of England entered £5 billion to the financial markets in order to reestablish faith in the banks of UK, but, the interventions were not enough to stop the impacts of the crisis. According to Savor (2013), it reduced the values of share holdings of millions of general people. It also reduced pension funds of millions of people due to the 4% drop of the FTSE-100 index has serious implications for pension funds. Due to the crisis, retail sales decreased significantly in UK, mainly in the furniture and DIY industries. The businesses not only suffered from low sales and reduced profits, but, they also faced challenges in getting support from banks. This led to a lot of businesses closing down. Numerous companies had to close down numerous stores and reduce the scale of their businesses. For example, companies like MFI, Woolworths, etc. closed a lot of stores. Unemployment increased significantly, mainly in the age group of 18- 24. Low sales and high unemployment led to low tax revenues for the UK government. In 2008’s last quarter, the GDP of UK reduced by 1.5%. This was the official starting point of the recession in UK. The recession went on till 2009. In the last quarter of 2009, the UK economy started to show signs of recovery with GDP growing by 0.3% (Slater, 2013).

Impact on strategy in Royal Bank of Scotland:

According to Finch (2014), Bank of Scotland of Royal Group is a PLC and Direct British holding company, which provides banking and insurance services. Headquartered in Edinburgh, it was formed in 1969 through the merger of Royal Bank of Scotland with the Commercial Bank of the National Scotland. In 2008-2009, during the world financial crisis, a significant portion of shares of RBS Group (84%) was purchased by the Royal Treasury of the United Kingdom. Royal Bank of Scotland was founded in 1727 in Edinburgh. The first part is Edinburgh was opened in 1783 in Glasgow. In the first half of the XIX century there were separating and in other cities of Scotland. In 1825, Royal Bank of Scotland acquired the house of Lord Dundes, which has become the new headquarters of the bank. In the second half the bank expanded by absorbing other Scottish banks. By 1910 the Royal Bank of Scotland had 158 branches and about 900 employees. The first branch of Royal Bank of Scotland in London was opened in 1874. After the First World War RBS swallowed several British banks: Drummonds Bank (in 1924), the Williams Deacon's Bank (1930), Glyn, Mills & Co. (in 1939). The first foreign branch was opened in 1960 in New York, it was followed by offices in Chicago, Los Angeles, Houston and Hong Kong. In 2007, RBS Group has entered into a consortium (together with Belgian bank Fortis and the Spanish bank of Banco Santander), and bought the Dutch bank of ABN AMRO. RBS Group share was £ 10 billion from £ 49 billion paid for ABN AMRO. However, in the following year, 2008, RBS Group incurred a loss of £ 24.1 billion which was the largest loss in the UK corporate history. £ 16.2 billion, of these losses were the write-off of assets, most of which were related to the ABN AMRO. To stabilize the situation, the British government bought 58% stake in RBS Group for £ 20 billion (out of the £ 36 billion spent on the refinancing of the UK banking system), including preference shares of £ 5 billion. Later preferred shares were exchanged for a simple option, but the state's share reached 70%. In 2009, the state's share in the RBS Group was 84%, all were bought for the sum of £ 45 billion in 2008-2009 RBS Group shares. It also laid off about 20 thousand employees of the group. In October 2015 it was sold to Citizens Financial Group; its sales began in 2014 through an initial public offering. In the same way it has been sold in the 2012-14's insurance division Direct Line and Churchill. Following the commencement of the crisis, RBS changed its strategies and policies significantly. On 22nd April 2008, RBS declared that it would raise £12bn of capital in order to deal with the shortage of £5.9bn caused by credit crunch. The goal was to increase reserves due to depleted resources following the acquisition of ABN AMRO. The bank also stated that it would divest some subsidiaries in order to gather more capital, particularly its insurance businesses, Direct Line and Churchill. Also, it sold off its stake in Tesco Bank to Tesco itself for £950 million. In October 2008, in order to re-stabilize the bank, the British Government bought 58% stake in the company (Conan, 2009). This was done to give the bank an opportunity to restructure itself and make its resources stronger. This was done under the recapitalization strategy of the government. A rights issue followed in which the shareholders failed to have the minimal holdings needed to run the company. Ultimately, the government ended up owning above 57% of the capital of RBS. The treasury invested £37 billion (representing £617 for each UK citizen) into organizations like Royal Bank of Scotland Group, Lloyds TSB, etc. The government pointed out at the time of implementation of this strategy that this was not permanent public ownership and that the banks would get back to private ownership eventually. The government stated that the tax payers of UK would get benefits from this strategy as the government would have significant control over RBS. If the shareholder take up was 0%, the government would own 58% of the bank (Finch, 2014). If it was 100%, the bank would own 0%. Unfortunately, following the crisis, only 56 million fresh shares were bought by people, which stood for just 0.24% of RBS’ value. Following the implementation of the rescue plan, the CEO of RBS, Fred Goodwin, resigned and the chairman Sir Tom McKillop, stepped down from his role as soon as his contract ended. Stephen Hester became the new CEO. In early 2009, the government invested more funds in RBS to restart the personal and business loans. It also developed an insurance system which allowed RBS and other banks to insure loans which get defaulted. This was done to increase the confidence of banks. The government also transferred the preference shares owned at RBS to ordinary shares. This removed the need for RBS to pay 12% coupon on shares, but, increased stakes of the government to 70%. RBS releases a statement that highlighted that it had faced losses of 7-8 billion Pounds. Also, it had to write down an amount worth 20 billion Pounds due to the takeover of ABN-AMRO. This made total losses 28 billion Pounds, the biggest loss in the history of UK. Due to this declaration, the share prices of RBS dropped by more than 66% in a day to reach just 10.9p each share. Eventually, the prices dropped by 97% (Savor, 2013).

Impact on HRM policies and practices:

As per Conan (2009) RBS had a contract to hold on to 4.26% stakes of Bank of China. This lapsed on 31st December 2008, and RBS sold the shares in early 2009. Exchange rate changes indicated that RBS had no profits in the deal. The shares were sold to focus more on the UK market and to increase the prospects of RVS’ expansion in China. According to Flanagan (2009), in 2009, RBS declared that it sold sub-prime securities led by Fred Goodwin. In September 2009, RBS declared that it would reduce non-payment and overdraft fess drastically. It also reduced the fee for unpaid item fee and the misuse of card misuse fee. The cuts were given as there were a lot of issues related to legal aspects involved in borrowing. The cuts would help account owners save £2.6bn every year. In 2009, RBS declared that it would let go of 3700 employees along with the previously declared 16,000 layoffs. This was due to the increased stakes of the government from 70% to 84%. In 2009 end, the board of directors went against the government and stated that they would resign if they were not allowed to give bonuses of £1.5bn to the employees (Cohen, 2012). It must be noted that rewards have been an integral aspect of HRM. The company uses rewards as a key motivation strategy. Even when under financial crisis, it wanted to pay the bonuses in order to keep employees motivated. This was important as due to the high numbers of layoffs, employees were feeling insecure. The board wanted to ensure efficiency by providing bonuses. Ultimately, around 100 senior employees got greater than £1 million in 2010 and the overall bonus payments reached around £1 billion. This was despite of the fact that the bank declared losses of £1.1 billion in the year 2010. Unions were confused by this strategy as even though the bank was owned by taxpayers, employees were getting bonuses. The losses were of £3.6 billion in 2009 and £24bn in 2008 (Seville, 2012). Thus, the £1.1 billion of 2010 was an improvement. The CEO Stephen Hester got paid £8 million in the same year. In June 2008, RBS sold its subsidiary Angel Trains in order to raise capital. It got £3.6bn for this. In 2009, it shut down its tax avoidance department, which had allowed the company to save £500m by channeling money in different tax havens. The closure was caused by lack of funds to run the operations and also due to the fact that 84% of the bank was owned by tax payers (Osborne, 2013). In 2010, the company GE Capital bought the factoring business of RBS in Germany. The UK government put pressure on RBS to stop risky businesses. This made the company fire 4500 more employees in 2012. It shut down many loss making businesses. This made the overall layoffs amount to 34,000. In 2015, the company sold its stake in the company Citizens Financial Group (Jones, 2013).

Context:

As per Flanagan (2009), different organizational, industry based, international, etc. contexts have a lot of influence on the impacts of the economic crisis. Within the organization, as mentioned earlier, RBS had to alter its strategies in order to sustain itself. It had to close a lot of businesses and had to let go of a lot of employees. Layoffs were one of the biggest negative impacts of the economic crisis on RBS’ HRM (Treanor, 2009). However, it must be noted that in order to ensure that its operations ran smoothly, RBS could not compromise on employee motivation even though it was laying off over 34000 people. Despite off the credit crunch and financial crisis, it paid bonuses to senior employees in order to make them feel secure. This strategy met a lot of criticism from unions and certain segments of media, but the board of directors stood by their decision and even revolted against the UK government (Mulholland, 2008). Rewards is a key motivation strategy of RBS and it continued to implement this strategy even during the downturn. At the industry level, the company suffered as the entire banking industry suffered. Irrespective of its financial records and debts, RBS could not access credit due to the credit crunch that affected the entire banking industry. As per Winnett (2012), due to the burst of the real estate bubble, RBS suffered along with the entire industry. In the international context, RBS had to sell its stakes in Bank of China as its expansions in China were giving tough competition to the bank. Bank of China pressurized RBS to sell off its stakes so that its competitive edge would reduce in China. Due to the economic crisis, RBS stopped recruiting people and reduced its human resource needs. It lowered the number of human resources and let go of all redundant employees. It chose to give attention and focus to the existing employees and motivate them strongly with bonuses and rewards so that overall productivity and efficiency of the company does not get compromised (Jones, 2015).

Conclusion:

It can be concluded that the financial crisis 2007-2008 was a global financial crisis which is regarded as the worst financial crisis since the Great Depression of the 1930s. The financial crisis of 2007-2008, which began in the US loan market, affected most of the world in mid-2008, mainly due to an overvalued and over leveraged housing market in the US. In 2008, RBS Group incurred a loss of £ 24.1 billion which was the largest loss in the UK corporate history. £ 16.2 billion, of these losses were the write-off of assets, most of which were related to the ABN AMRO. To stabilize the situation, the British government bought 58% stake in RBS Group for £ 20 billion (out of the £ 36 billion spent on the refinancing of the UK banking system), including preference shares of £ 5 billion. The UK government put pressure on RBS to stop risky businesses. This made the company fire 34,000 employees in all. The paper concludes that even when under financial crisis, RBS wanted to pay the bonuses in order to keep employees motivated. This was important as due to the high numbers of layoffs, employees were feeling insecure. The board wanted to ensure efficiency by providing bonuses. Ultimately, around 100 senior employees got greater than £1 million in 2010 and the overall bonus payments reached around £1 billion. This was despite of the fact that the bank declared losses of £1.1 billion in the year 2010. Unions were confused by this strategy as even though the bank was owned by taxpayers, employees were getting bonuses. The losses were of £3.6 billion in 2009 and £24bn in 2008. Thus, the £1.1 billion of 2010 was an improvement.