The Enabler Criterion "Leadership" of the EFQM Model: Six Companies of the Financial Services Sector in Comparison
Term Paper 2008 37 Pages
Quality is one of the key factors for success in any company. As Philip Crosby (1989) said “Not having a common understanding of quality puts more pain into an organization than anything else I have ever known”. There are several ways of measuring the quality of a company; nevertheless in this essay the EFQM (European Foundation for Quality Management) model will be used. EFQM is a brand which is recognized worldwide. Various organizations from diverse industry sectors use the EFQM as guidelines for their business strategy and operations in alliance with their mission and goals. The EFQM model is structured into 5 + 4 criteria: leadership, strategy and policy, people, resources, processes; and customers, employees, society, owners, respectively. Each one of the criteria play an important role for the total model and all of them are deeply related to each other. The criterion which will be the focus of this essay is leadership. “The bravest are surely those who have the clearest vision of what is before them, glory and danger alike, and yet notwithstanding, go out and meet it” (Thucydides, n. d.). There are different types of leaders depending on the qualities the person possesses. Yet, generally a leader is in general a person who can influence a group of people to achieve a certain goal. Having a good leader is indeed really important for the success of any company.
In the EFQM model, as mentioned before, leadership is the first criteria and it studies “how leaders develop and facilitate the achievement of the mission and vision, develop values required for long term success and implement these via appropriate actions and behaviors, and are personally involved in ensuring that the organization’s management system is developed and implemented” (Bergholz, 2008).
This criterion is divided into four sub criteria:
- 1a: Leaders develop the mission, vision and values and are role models of a culture of Excellence.
- 1b: Leaders are personally involved in ensuring the organization’s management system is developed, implemented and continuously improved.
- 1c: Leaders are involved with customers, partners and representatives of society.
- 1d: Leaders motivate, support and recognize the organization’s people.
The leadership criteria in the EFQM model will be used as a basis for the comparison of six different companies, namely the following banks: Citibank (USA), Deutsche Bank (Germany), Sumitomo Bank (Japan), BNP Paribas (France), Barclays (UK) and Commerzbank (Germany). These banks were chosen for their good solvency and position inside their own country as well as internationally. At the beginning of this paper, we will give a brief overview about the six banks by comparing their Balance Sheets and Income Statements. The insights gained out of this part will be relevant for the further sections. Followed by this, the banks will be compared in this essay using each one of the leadership sub criteria separately one after the other. Strengths and weaknesses of the six banks will be described, and each sub criterion will be analyzed in depth in order to draw meaningful implications. Finally, an overall comparative conclusion will name the relative “winners” and “losers” of this competition, pertaining to the EFQM criterion leadership.
Business figures: A brief look at the hard facts
The financial overview consists of a small analysis of the current financial state of the six banks. In order to do so, the Balance Sheet and the Income Statement of every bank were obtained from the Annual Report published by each of the banks (Annual Report, 2008). These two documents are considered the most important for this analysis. We are aware of the fact that there are two other important financial statements, namely the cash flow statement and the statement of changes in equity. Yet, they are not part of this analysis due to their complex structure which would require too much of further elaboration in this context.
The Balance Sheet shows what a bank owns, what it owes and what the amount of property of its shareholders is. It represents a picture of the situation of the bank at a specific date. The assets indicate what the bank possesses, for instance the money that it keeps in its vaults, the financial investments (e.g. shares of other enterprises) that it has, buildings, furniture, etc. On the other hand, the liabilities, amongst others, show what the company owes, for example the deposits that it has received from its clients. The assets should always be greater than the liabilities (otherwise, the bank, or any enterprise, in simplified terms, would go bankrupt). The difference between the assets and liabilities is the equity, which shows the value that is property of the shareholders.
The income statement shows what has happened in the bank for the last year. It represents the total income of the bank and its expenses during the year. As this project is treating with banks, the principal income is the interest that it receives because of the loans and the principal expenses are the interest that it pays for the money that the clients have deposited in the bank. Nevertheless, there are other important expenses such as the employees’ salary. If the income is greater than the expenses the bank has utility and that value raises the shareholders equity.
In order to make the analysis easier, the following tables compiling the most important information from the two documents mentioned above were created:
illustration not visible in this excerpt
The first table consists of the information taken directly from the statements while the second one has the same numbers translated to a common currency (USD) in order to have a clear comparison of the banks. Nonetheless it should be noticed that the values of the second table were converted by multiplying the data in original currency by the exchange rate as of November 15th 2008, using www.bce.fin.ec, in contrast to the complex process that should be done to translate the financial statements when all the information is required. The third table consists of some indicators/relations that are used for the analysis (obtained with the values in USD from the second table).It should also be mentioned that all the annual statements are taken from the year that ended on December 31st, 2007, except the one from the Sumitomo Bank due to the fact that it finishes its financial year on every March 31st, therefore the information was taken from March 31st 2007 to March 31st 2008.
Evidently the biggest of the analyzed banks is Deutsche Bank (which is shown by the sum of its assets), followed by BNP Paribas and Barclays, then Citibank, Sumitomo and Commerzbank. In order to make this comparison all the statements have to be converted into the same currency.
The bank with the most deposits is nevertheless the Citibank, followed by Sumitomo, Deutsche Bank, Barclays, BNP Paribas and finally Commerzbank.
As far as loans are concerned, the biggest bank is BNP Paribas, followed by Barclays, then Citibank, Sumitomo, Commerzbank and Deutsche Bank. It should be noticed that the greatest bank in number of assets is the one that gives least loans. This implies that this bank (Deutsche Bank) uses the money it receives for different financial activities rather than giving loans to people (which is what people think a bank does). It can be assumed that, actually, this bank is actively involved into investment banking.
A first analysis by means of direct comparison is that perhaps the financial structure of an enterprise, i.e. of a bank, often reflects they way of thinking of the leaders. That would lead to the idea that the board of directors of Deutsche Bank consists of more “aggressive” people, willing to get into new challenges or create new financial business. This makes a contrast with the directive board of the banks that are more conservative, meaning, dedicated to get deposits and give loans.
To corroborate what has been said about the bank with the most deposits, the first indicator/relation (in the third table) can be analyzed. This is the relation between the loans and deposits. The relation in the case of Commerzbank and BNP Paribas is high while the one of Deutsche Bank is the lowest one of the six banks analyzed. This shows the capability of doing traditional banking versus what Deutsche Bank does, which is an involvement in also another type of financial activities.
The second indicator in the Table 3 (annual provision for credit losses versus loans) shows the quality of the loans that the bank has given, but also implies how conservative the leadership is acting. The highest the value of the indicator (Citibank has the highest value for this indicator) the worse the indebted of the bank are or in other words the least likely that the people who got loans will return the money to the bank. The high value of this indicator also shows that the directive board of Citibank (as it has the highest value) is willing to recognize the losses caused by not returned loans more than the other banks. Every bank keeps a part of its utilities for possible losses that could happen in the future if the clients do not pay their loans therefore Citibank in this case is the one that reserves more money for this.
The next indicator in the table relates the cash the bank has left (including the one deposited in the Central Banks) with the value that it has received as deposits from its clients. It shows the capacity that a bank has when immediately facing large withdrawals of its clients. A greater value indicates that the bank is more capable of facing the unexpected withdrawals from its clients. In this case the best bank is Citibank followed by Deutsche Bank and Sumitomo Bank.
The indicator that relates loans versus total assets also shows the capability that the bank has in terms of giving out loans. It shows what percentage of the total of assets has given direct loans to its clients, in this case with Sumitomo Bank and Citibank ranking the highest.
In a similar way the indicator of total deposits versus total liabilities reflects what part of the bank’s activity is financed by deposits of the clients, for example, in checking or savings accounts, and in this case, also Sumitomo Bank and Citibank are financed comparatively highest in this way.
The next indicator is other assets versus total assets. Other assets consist mainly of buildings, furniture, patents and other possessions that are not necessarily being useful to the bank to get more money (if it needs more offices, for example, it could rent instead of buy). We therefore argue that the least the percentage in this indicator, the more efficient the bank is. According to this, the most efficient bank is Barclays.
The indicator equity versus the total assets shows what share of the bank’s overall investments is property of the shareholders. The difference until 100% reflects debts. Obviously the entity where the shareholders have invested more money is more solid, which are, in this case, Citibank and Sumitomo.
The two last indicators in the table are of profitability; they show how good the businesses the banks run are. The first one relates net income versus total of assets. It says how much the assets of the bank have produced. It is known in any enterprise as the ROA (Return On Assets). The bank with the highest ROA is BNP Paribas which means that this bank is the best one in making its assets more efficient. The very last indicator shows how profitable the equity of the shareholders has been and it allows to compare if the money of owners of the bank has being productive in front of other investment alternatives (for example buying shares in the stock exchange market or investing money in another business). It relates net income with equity. It is known as ROE, Return On Equity. The bank with the greatest value for the ROE is Deutsche Bank which means that this is the best bank in giving return to its shareholders.
After the short analysis it is important to notice that the hard facts, that were analyzed, yield different results for each bank depending on the factor that is being looked over. It is possible to say that each one of the six banks has its strengths and weaknesses and it is different in several ways from the others. Some ratios are not enough to explain the overall picture of the banks as they give no real insight. Therefore a deeper analysis considering other non financial criteria (like the leadership criteria) is necessary. Nevertheless using the two main financial statements at the beginning of this paper, one can obtain a first insight into the size, performance and strengths and weaknesses of the six banks in comparison. This will surely help evaluating the further results and outcomes throughout the rest of this work.
The EFQM Leadership Criterion 1a
Leaders in organizations are people who influence a group toward obtaining a particular result. They are people, possessing adequate personal qualities to match the authority, given to them, appointed to managerial positions and have the right to command and enforce obedience. Leaders in an organization have the ability to get people at the lower levels of the organization’s hierarchy, to willingly follow. There are no specific styles that leaders have to follow, but few of the most effective ones of the “outstanding leaders” are mission, vision, values and being a role model. One of these “styles” – mission, tells the fundamental purpose of the organization. It is concentrated on the present and gives information about the desired level of current performance. Another one is vision – that is, leaders create a general overview of what the organization should look like, concentrating on future plans and decisions, aimed to be a source of inspiration to the employees. Leaders also serve as role models, since followers identify with the values of role models, whom they perceive in positive terms (House and Podsakoff, 1994).
illustration not visible in this excerpt
In all of the observed organizations, the leadership is a key concept to the successful existence of the companies. The leaders of the organizations set the mission and vision and take care of their implementation and try to improve the weaknesses. Take Barclays for example – their mission is “to be an innovative, customer-focused Group that delivers superb products and services, to ensure excellent careers for their people and to contribute positively to the communities in which they live and work” (Barclays, 2008), whereas their vision includes being the best bank in UK, building new international retail and commercial banking markets and develop global operational excellence (Barclays Careers, 2008). The leaders of the organization are trying to achieve expanding and strengthening their main UK banking business by overhauling what they do for their customers and having strategic alliances with companies such as Legal & General. The Barclays leaders focus on encouraging the staff at all levels to take decisions, founded on clear value-based guidelines, using the power of new technology, developing deeper relationships with customers.
In comparison to that, Sumitomo Corporation leaders pay much more attention on recruiting and the growth of the staff itself in order to get as close as possible to achievement of their mission and vision. The leaders of the organization have established a performance review system, through which they feed back information to the employees of the personal annual targets based on the company’s goals.
As of 2006, the Corporation has provided a total of 38 human resources develop-ment training sessions in three categories for personnel in important positions (Figure 1) (Sumitomo Personnel Management, 2007). The mission and vision statements also include the growth of the staff, in addition to providing top quality services and products for their clients, as well as contribution to the society by assisting their clients to enrich their assets (Sumitomo, 2007).
The leaders of the BNP Paribas bank have included in their mission statement support of the trade transactions of their clients by “providing traditional services or tailored solutions” (BNP Paribas, 2008b). The vision of the bank is summed up by the phrase “Give France a European-scale banking group with a strong domestic foundation” (FTSE Global Markets, 2005). Similarly to the leaders of the Sumitomo organization, those of BNP Paribas take really good care of management monitoring by conducting systems of employee surveys, carrying out information on satisfaction upon changes in the working environment in accordance with the company’s image, management practices and attitudes, and workplace experience (BNP Paribas, 2006). Another survey measures staff commitment through a variance of indicators. The responsible managers take care of undertaking changes in accordance to the results of the surveys, so that the mission and vision implementation is going as planned.