Few business leaders will ever confront the challenge that Landsbankinn CEO Steinthór Pálsson faced in mid-2010, when he left a senior position with pharmaceutical company Actavis and signed on to build a bank worthy of respect out of the ashes of Iceland’s oldest full-service financial institution. In 2008, after the nation’s banking industry collapsed, the words “God Bless Iceland” appeared on blackened TV screens across the country as the government seized control of a greed-dominated sector. Excessive leverage and aggressive international expansion, combined with inadequate risk management and, in some cases, criminal executive behaviour, had brought the country to the brink of bankruptcy. Angry citizens took to the streets to protest massive personal and corporate losses. Creditors, shareholders, politicians, regulators and consumers all demanded change, especially at Landsbankinn, the largest of an untrustworthy bunch. Enter Pálsson. Over the past four years, he has systematically restructured Iceland’s oldest bank, which was recently awarded a stable outlook rating by Standard and Poor’s. And unlike the competition, Pálsson did it while also saving its historic brand. In this issue of IBJ, the change management expert discusses Landsbankinn’s restructuring strategy and why he took a significant pay cut to take on what appeared to be an impossible task.
IVEY: Describe the challenge you faced when hired?
Steinthór Pálsson: When I arrived at Landsbankinn the situation was difficult. The bank had no clear strategy or vision on where to go. All trust of financial institutions was lost and immediate solutions were being demanded. There was a long list of management procedures and processes that clearly needed to be dramatically improved along with the balance sheet and company culture. The quality of assets was terrible. The bank did not meet regulatory requirements regarding equity. It faced having to collect and take away assets from customers that were not servicing their loans because pretty much every business and consumer in Iceland had serious financial problems due to the bank failures and economic crisis. Inside the bank, pride was at an all-time low. Employees were broken. Many were so ashamed of working at the bank that they stopped socializing with friends and family. On occasion employees were attacked on the way to work. So much money had been lost. The market had crashed. Unemployment jumped. Businesses struggled and failed. Many of those who kept jobs saw their wages cut. Home prices declined while mortgages and interest rates rose as the currency crashed and inflation took off. Everybody—the general public, the media, politicians—was angry. It was a challenging environment for every business in Iceland, but especially bankers, who were unifying the nation because everyone really hated them.
IVEY: What did you hope to achieve by the end of Day One?
SP: I wanted to personally introduce myself to employees, get to know key people and start mobilizing consultants. I arranged for a video broadcast, so all employees would come to work on my first morning and see me live. I spoke for five to ten minutes, introducing myself and talking about the future, noting we would have to go through a lot over the next few months. Then I called on the management team to get their views on the situation. I knew I was not going to do this alone. I needed to build a strong team, so I wanted to meet the key people right away to get a feel for their capabilities, commitment and energy. Finally, I called in McKinsey to assist with enhancing risk management within the organization and help with restructuring the client base. I also called in a consultant to assist with a strategic review. I had experience in these areas, but it was important to get things going as fast as possible.
IVEY: How were you greeted by employees?
SP: It was a warm welcome in many ways. There was a lot of leadership turnover after the financial crisis. The previous CEO was only around for a short time and was on his way to retire. So people were pleased to have a new leader who was going to stick around and hopefully lead them out of the situation. But there was very little optimism. It was obvious that there would be tough times ahead in turning everything around.
IVEY: So what was going through your mind when you went to bed?
SP: After spending the day meeting a lot of capable people trying to come up with ideas for the future, I was excited by the general sense of urgency, eagerness for change and willingness to participate. What was missing was someone to coordinate the effort and take it forward.
IVEY: What was the goal for Week One?
SP: I wanted to map out the risk management and restructuring work and how we should go about building and executing a new strategy. I initiated some of this on the first day, but I wanted to really map out how everything would be executed over the next few months in my first week.
IVEY: And what were you thinking about at the end of the first week?
SP: Employee burnout was on my mind. By this time, it was clear to me that a lot of people just didn’t have enough energy left for what needed to be done, especially some of the key people in top management positions.
IVEY: So the challenge you faced was getting clearer?
SP: Yes, clearer and bigger. I had now seen a little bit into the quality of the assets and it was obvious that big measures were needed to clean up the loan portfolio. At the same time, I realized that we had taken over, or were close to taking over, control of a lot of distressed companies that also required attention. We had to figure out if we should let them go bankrupt. If not, we had to figure out who should run them. That was not something I expected.
IVEY: What was the solution?
SP: After a few weeks, I contacted a fund established by Icelandic pension funds to assist in the nation’s economic recovery. It existed to buy into troubled companies and ensure their survival to protect jobs and things like that. I managed to sell a lot of our portfolio of distressed non-banking companies to this fund.
IVEY: And that allowed you to clean up the balance sheet and focus on the bank?
SP: Well, that was my plan, but I then faced a political backlash. Politicians had complained when we were running all these unrelated businesses but criticism didn’t stop despite the sale. Much to my surprise, I was called before a parliamentary committee to explain why I did it and justify my authority. However, today, I don’t think anyone questions this decision. Time has proven it to be the right one.
IVEY: So at this point, you realized just how much you would be damned if you do something and damned if you don’t, at least in some areas?
SP: I always knew the job would be difficult. But I was surprised to have a logical move become so political. And that made me realize just how much of an easy target I was as CEO of Landsbankinn.
IVEY: Ok, so what was happening after Month One?
SP: I was starting to see the main pillars of a new strategy and starting to draw a draft structure for how to execute it. It was a live document with ongoing revisions. At this point, I had put together a strategy steering committee and was constantly meeting with it. The clock was ticking and everyone had to be very quick with findings and proposals. After the first month, I also started to meet in person with all employees. It was important to include everyone in the process, not just top management at headquarters. I wanted to hear everybody’s ideas. I also wanted to meet people to try and gain their trust. We had to restore trust with everyone, ranging from regulators to customers, but I decided it would be best to start with the employees. I had to get them to believe in me and convince them that there would be a light at the end of the tunnel. I had many, many meetings. I asked about what employees thought we needed to do. I asked what they thought I should do personally. I also started to contact opinion leaders from across the country. I needed to understand how people inside and outside the bank saw things, so I was listening and observing a lot while also working on drafting plans at the beginning.
IVEY: What was the best personal advice you received?
SP: I was advised not to lead like someone else, just be myself.
IVEY: Can you briefly describe the strategy?
SP: Sure. We first set out to listen and learn so we could serve Iceland in a way that was worthy of trust and respect. That led to a strategy that involved building four pillars to support a new Landsbankinn that we wanted to turn into a flagship for the Icelandic corporate sector. The first pillar was an elite executive team of good bankers with the right attitude and a real commitment to customers. The second pillar was strong infrastructure, efficient processes, good governance and quality assets. Thirdly, we needed to develop positive and strong relationships with our clients. Whatever happened inside the bank had to lead to something of value for our clients. At the same time, we had to build the fourth pillar, which was a rewarding relationship with shareholders and society as a whole, based amongst other things on a strong sense of corporate social responsibility. After defining these pillars we developed initiatives to build them while developing a caring culture that would constantly improve on our brand promise.
IVEY: You surprised everyone by opening up every senior management position to internal and external competition. Were you making a statement?
SP: Yes. After everything that had happened, we really had to do things differently. I wanted people to know we were serious about change and see it happening. I was not sure at the beginning whether I would require new people for every senior position. I wanted the recruiting done in an open way, so everyone could apply. After selecting top applicants, we used psychological tests to help us identify the best team, which turned out to be made up of almost all new hires.
IVEY: Did existing management see this coming?
SP: When I selected people to work on my steering committee, I did not take anyone from top management. So everyone knew the future was uncertain. Some were just waiting for the decision to be made. They had no fuel left. They were really burned out.
IVEY: The team you created was equal parts male and female. Was that part of the plan to surprise people?
SP: More or less. People talk a lot about gender equality. And when it comes to reaching the goals on this front, I believe it is more a question of will than legislation. I wanted to demonstrate that.
IVEY: Aside from gender equality, what were you looking for when putting together your team? What makes a good banking person?
SP: There’s no easy answer to this question. The psychological tests were designed to analyse the applicants, tell us what kind of people they were and how they would go about making decisions and use power. What I wanted was a group of different types of people that formed a great team when combined, so I was looking at people with potential to fit together and function well as part of the whole senior management group, rather than individuals who fit specific positions.
IVEY: How big a role did communications play in your strategy?
SP: It was very important. Inside the bank, we had to keep employees informed of what we were aiming to do and keep them informed constantly about how it was going. It was also important to keep them informed to get their views and input in developing what needed to be done. As for the outside world, you have to communicate progress and positive steps taken because nobody else is going to point out that you’re doing a good job. You have to invest a little bit in informing people of where you are heading, what you are doing and how you are doing it. And you can’t just claim to be making progress. You have to prove it. You have to do something that allows the public to see real positive steps are being taken.
IVEY: What did you do to show progress was being made?
SP: In early 2011, we published double-page ads in all the major newspapers listing 28 promises related to sensitive topics, ranging from restructuring customer loans to improving governance. In a way, we put a rope around our neck by doing that because we also gave deadlines. That allowed us to go back and say: “We have done it.” That got a very good response. People saw we were serious about what we were doing and they saw progress.
IVEY: Were you worried about failing to deliver?
SP: We had to take the risk. We couldn’t just operate in a comfort zone. We had to show we had the guts to address the burning issues. The promises came out of various discussions with staff, clients and the public. Some could be met with a stroke of a pen. Others were more challenging to keep. But they all indicated change was happening.
IVEY: What was the most challenging?
SP: Addressing household debt. That we did with all kinds of initiatives that went further than anyone else. It was a tough decision to make since we were breaking agreements and creating an initiative that didn’t follow the government lead on how this should be done.
IVEY: You also made a point of stating that the new bank was going to take corporate social responsibility to a new level, not use it as a PR tool. How did you do that?
SP: We have done all kinds of things, many not so common among banks, but first and foremost we have tried to change our mindset. We are working with authorities and other organizations on numerous long-term initiatives to protect the environment, to make society a better place and to ensure financial stability for our clients and the economy as a whole.
Ivey: When you started building trust outside the bank, you were warned against holding public meetings because the anger over what had happened posed a real threat to the safety of bank employees. Why did you ignore the warnings?
SP: The public meetings were a form of therapy. We had to show the public that the bank’s new management team was strong and ready to do what was needed to gain trust. Hiding would not have accomplished this. We had to meet people face-to-face and let them shout at us. We got a lot of credit for this. At the end of these meetings, many people thanked us for coming to their home town and giving them an opportunity to express their anger and disappointment towards the financial sector, even though they knew that it was the old bank that was really to blame, not the restructured one trying to become worthy of their trust. People talked about this. The media covered the meetings. As word spread, we eventually gained credit from people who didn’t even attend the meetings. Last but not least, it was the beginning of an era for our staff, they started really regaining their confidence. It was all in all a turning point, a key milestone in our journey to brand recovery.
IVEY: Why was it considered so important to maintain the brand?
SP: Our major competitors, the two other big banks in Iceland, rebranded themselves with a new logo and a new name. We considered doing the same. But I had consultants run focus groups and they found that you don’t actually change anything in the public mind with a new name or by putting a new logo on your door. So after working internally on a strategy, we decided to be different. We decided it would be much wiser to keep the historic name, keep the brand, and use the money that others spent changing signs to learn from the crisis and rebuild the brand by creating true value for customers and society and transforming the culture. We told the public that it’s about changing the industry mindset, not our bank’s name.
IVEY: At what point did you tell your wife that success was in sight?
SP: I would never have taken this job if I wasn’t an optimist, so I probably said that frequently. I was, of course, talking to her a lot about everything. But whether she was listening or not is another question. Either way, I got lots of support at home.
IVEY: Wasn’t there a low point?
SP: There were times when some bad things happened. I got lots of nasty phone calls and emails. That’s not so bad, maybe even expected. But angry people attacked employees outside the bank and some of them showed up at my house. When that happens and your family is under threat, it is difficult to pretend that nothing is going on.
IVEY: How do you manage that kind of thing?
SP: You simply stay focused and rely on the police and security guards.
IVEY: I’ve been told that you like to paint. Did you have any downtime to deal with stress?
SP: Not really. There was a day off here and there, short walks to get fresh air and the occasional weekend in the countryside with my wife. But mostly it was very demanding work almost 24/7, leaving not much time for other things.
IVEY: You took a huge pay cut to take this job. So how do you feel whenever some Wall Street banker walks away with hundreds of millions after being fired for not performing?
SP: I didn’t take this job for the money. But CEO compensation will always be an issue in situations like this. In Iceland, the government passed legislation that gave an external body the authority to set pay levels for the CEO of Landsbankinn. This is not good governance. The Board should decide on things like this. When I accepted the position, I thought the executive pay issue would be fixed after maybe two years. Now it is four years and it has not been fixed, but I don’t let it occupy my time. There is still work to be done.
IVEY: So why did you want the job?
SP: I was attracted to the challenge and Iceland needed people with banking experience that were not tainted by the collapse to help rebuild the economy and its financial institutions. I had more than a decade experience in the banking industry, but I was out of country working for the Actavis Group when the banks failed. So I felt I was a fit for what was needed and might be able to do a good job.
IVEY: Do you think the fact that you were motivated by the challenge and opportunity to do good, not money, helped you make the significant progress that has been made?
SP: I think the success of implementing the strategy so far comes from empowering the new management team and other people inside the bank to make change. I have not laid out all the details for the recovery. I built a team and managed execution. I introduced new frameworks, measures and methodologies, but I trusted everyone to operate and act within these methodologies, act within these frames, while deploying their expertise and judgment as part of a motivated team. If you don’t engage your employees, you’re wasting your investment in them.
IVEY: What do you consider the most important management lessons to come out of your experience?
SP: You need to have a reasonable understanding of what needs to be done and mobilize others to get it done. Everybody must count. You can’t do something like this on your own. You need to be able to trust people and draw on their expertise. And you need to allow your senior team to really disagree. I tell my team that it’s alright even if we almost have a fight so long as we reach a conclusion and agree to stick to it. If you take care of the inside, the inside will take care of the outside. But you do need to be ambitious. You may miss the bar when it is set very high, but then it is a good performance even if you are just close. You need to see risk management as management, not an afterthought. It has to be built in to the decision making process, so the experts from the risk team can criticize a bad decision before it is made rather than after. Finally, execution is critical. I like to say that good ideas are worth one point and a good plan is worth 10 points, but good execution is 100 points.
IVEY: What was the toughest single decision you had to make?
SP: Advertising the positions of the senior management team. It was quite tough, especially with all the existing managing directors working so many long hours, trying to deal with such a problematic situation. It’s always hard to lay off people, really hard, and we have been doing that across the organization to some extent to reduce costs. It’s one of the hardest things to do as a CEO.
IVEY: What would you do differently if given the chance?
SP: Nothing, although if given the chance there are some things that I’d probably do earlier. If you think about it, you can always find something that you could have done differently. But it is not helpful to dwell on things that you can’t change. It is better dwelling on things you can do.
IVEY: What is the state of the bank today?
SP: It’s in good shape. Landsbankinn is the largest financial institution in Iceland with a third of the market share for retail and corporate customers. Standard & Poor’s recently assigned us a BB-plus, or stable outlook, rating. Global Finance magazine has named us the best bank in the country. In the last year, we grew revenue and reduced cost. Although we grew the loan book only slightly, the quality of loans improved. We reduced market risk and debt. We improved liquidity, grew deposits and grew equity. Our return-on-equity and capital ratio are above target. Arrears over 90 days were down to 5.3 per cent at the end of last year. People now want to work at Landsbankinn, where employee pride has become a major strength. Public confidence is on the rise. We also now pay a dividend. But we still have challenges. We need to gain access to international markets. We need to work on the loan book more, take non-performing loans further down, and recalculate some loans made by the old bank that the courts have recently found illegal. Government legislation will require further reductions on some mortgages to individuals. We do owe a lot of money in foreign exchange to the old bank, which comes due over the next few years and we need to conclude an extension or refinance at some point. And we are still majority owned by a government that is deep in debt, so we need to be ready to list the bank when the politicians are ready to sell it or parts of it; hopefully that happens sooner than later. I think that could be a good next step. So despite our progress, we still have lots of work to do.
Ivey: You’re motivated by challenge and have now taken on one of the biggest industry challenges of all time. What could possibly come next?
SP: I have a full agenda right now just working on making the bank better, so I haven’t even thought about anything beyond that.
IVEY: Is banker still a dirty word in Iceland?
SP: The public isn’t as angry at bankers as it was four or five years back, at least not vocally. But the word banker is still a little dirty. The Icelandic financial sector lost trust overnight. Trust takes years to regain and you can only regain it by being trustworthy. That is what we are doing at Landsbankinn. But we need to prove trustworthy over a longer period of time before things will return to normal in the industry, especially when it comes to brand loyalty because Icelandic banking customers are much more demanding today as a result of the collapse.
IVEY: Do you think the industry at large is learning from the Icelandic experience?
SP: Maybe a little. But I’m not going to say the rest of the banking world is safe because of what happened in Iceland. People learn much more from mistakes made in their own environments.