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ISSUES IN ACCOUNTING EDUCATION Vol. 22, No. 4 November 2007 pp. 625–640

Svenska Handelsbanken: Controlling a Radically Decentralized Organization without Budgets R. Murray Lindsay and Theresa Libby ABSTRACT: Svenska Handelsbanken was the large national Swedish bank that provided the exemplar case for the idea that organizations could abandon budgets and operate successfully, or perhaps operate even more successfully, without them. In this case, Nancy Cartwright, a senior executive in a large Canadian financial services corporation, had just been introduced to the Handelsbanken case and the Beyond Budgeting idea. She was intrigued by the idea that companies could abandon budgets while implementing a new more decentralized model of management control. She wondered whether these ideas could work beyond Handelsbanken and, in particular, outside of Scandinavia. Keywords: beyond budgeting; decentralization; management control systems; empowerment.

INTRODUCTION s her plane was about to taxi down the runway at La Guardia Airport in New York en route to Toronto, Nancy Cartwright sat back in her seat and pondered the events of the last three days. Cartwright, director of financial planning at a large Canadian financial institution, had just attended a Beyond Budgeting Roundtable conference in New York. At the conference, Sven Grevelius, the former executive vice president of finance of Svenska Handelsbanken, and others spoke about Handelsbanken’s rather unique management model. Among other things, Handelsbanken did not utilize budgets in controlling its operations. Cartwright couldn’t help but be impressed by the bank’s financial performance and the apparent simplicity of its management model. But could such a model of control work in companies beyond Handelsbanken? Could such a model of control work as well in the North American context?

A

HISTORY OF HANDELSBANKEN Svenska Handelsbanken AB (Handelsbanken) began operations in 1871 with 12 employees working in the Schinkel Palace located in the Old Town of Stockholm. Through R. Murray Lindsay is the Dean and a Professor at University of Lethbridge, and Theresa Libby is an Associate Professor at Wilfrid Laurier University. This case was written with the assistance of Steve Player and the Beyond Budgeting Round Table utilizing their source research documents. In addition, Lennart Francke, the former CFO of Svenska Handelsbanken, contributed to improving the accuracy of this case and we thank him for his contributions. We also thank this journal’s reviewers as well as the reviewers of the 2007 Management Accounting Section Midyear Meeting. Finally, we acknowledge the research assistance of Ken Mark and the Social Sciences and Humanities Research Council of Canada (SSHRC) for their financial support.

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internal growth and acquisitions, Handelsbanken transformed itself from a Stockholm-based bank to a national Swedish bank. In the 1960s the bank’s objective was to be the largest bank in Scandinavia based on the strategy of increasing business volume. It operated within a traditional multi-divisional model. Senior managers created strategy, made the key decisions, and allocated resources. Middle managers communicated senior management’s directives to the front-line staff, who then implemented them. Budgets were used as the primary tool to plan, coordinate, and manage capital. Costs rose significantly during this period due to a growing bureaucracy, the handling of a large number of small accounts, and increasing marketing expenditures. Also, the bank was considered to be unresponsive to its customers. Moreover, the bank experienced a large financial loss in the late 1960s, and Handelsbanken was in trouble with regulatory authorities. Dr. Jan Wallander was hired as the CEO in 1970 to help the bank get through this crisis. He changed the Bank’s management policies radically. These policies have continued to provide the foundation for the modern Svenska Handelsbanken and the four CEOs who have followed Wallander. In the ensuing years Handelsbanken has grown, consistent with its aim to cover the entire spectrum of banking. This growth has been largely achieved organically rather than by takeovers. In 2006, Handelsbanken had 615 branches and 10,200 employees across the four Nordic countries and the United Kingdom, as well as seven representative offices in other major world centers. The bank offered a full range of financial services, supported by six product-based business area units, including mortgage, structured finance, life insurance, mutual funds, and telephone and Internet banking. HANDELSBANKEN’S SUCCESS STORY Ever since Wallander was appointed CEO, Handelsbanken has been a perennial top performer from virtually any perspective (see Exhibit 1 for key financial information). These have been some of the bank’s key accomplishments: ● ● ● ●

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Ranked by Moody’s as among the ten best-rated listed banks in Europe. Recognized as the only major Swedish bank not to ask for government support during the financial banking crisis in the early 1990s. Voted the 2006 Commercial Bank of the Year in Sweden. Achieved world-class performance on the cost / income and cost/total loans ratios— two closely watched measures for banks (see Exhibit 2). In addition, Handelsbanken has had a lower loan loss ratio than its competitors for the last ten years (see Exhibit 3). According to an annual survey conducted by Svenskt Kvalitetsindex, an independent survey institute, Handelsbanken has had the greatest proportion of satisfied customers, both corporate and retail, among large Swedish banks every year since 1991. In 2006, Handelsbanken met its overall goal of providing higher profitability than its competitors for the 35th year running. Share price performance and return on equity (ROE) have been equal to or better than the competition for many years (see Exhibits 4 and 5). Even though share price was running about even or slightly below the competition starting in mid-2006, the dividend growth rate from 2000 through 2005 was 75 percent as compared to an average of 56 percent for other Nordic banks.

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For many years, employee turnover has been very low compared to other companies in the Swedish labor market. University students in Sweden rate Handelsbanken highly as an employer, and the bank is one of their preferred choices in the banking sector.

WALLANDER’S MANAGEMENT PRINCIPLES Based on the lessons of the 1960s, growth was never the primary focus for Handelsbanken.1 Instead, Wallander’s overall goal was for Handelsbanken to be the most profitable of the Nordic banks as measured on the basis of return on equity. This goal was to be achieved through radical decentralization, better customer service, and lower costs than competitors. With respect to costs, Wallander stressed that the quality of the lender should never be neglected in favor of higher volumes. Wallander developed a number of key management principles and policies to support these objectives. These were codified in an internal publication called Our Way, which became compulsory reading for all new employees. This publication has undergone only marginal revision over the years by Wallander’s successors. Customer (not Product) Focus Wallander abandoned the establishment of product sales targets along with the central marketing department. He believed that while the product-led approach and its supporting information system informed managers about product sales, product profitability, and the market share of individual products, it provided them with little information on customers, their changing requirements, and, most importantly, their profitability. Nor did it promote what was truly in the best interests of the customer. Former president Arne Ma˚rtensson stressed the importance of adopting a customer focus in the following way: The selection of the right customers determines the productivity and profitability of the branch. Making a telephone call now and then, or a spontaneous visit, or sending a birthday flower or a personal letter to mark a special occasion are all ways of keeping in contact with the customer. You do not usually lose a customer because of high prices. You lose them because they are not valued. When we study branches with low cost-toincome ratios it becomes apparent that they seek out customers who don’t require lots of time expended on them. This emphasis on selecting each individual customer is also the reason why we do not offer particularly advantageous terms for special groups such as students, retired people, or shareholders. We should offer good customers good terms and conditions, and it is the branch that decides who is a good customer.2

Structure: Radical Decentralization Wallander adopted a radical system of decentralization that was based on two key tenets. First, people at the branch were considered to be best placed to make operating decisions (e.g., granting a loan, setting prices, or offering a discount) because they knew the customer best. On average, half of a branch’s staff had lending authority, permitting customers to receive answers very quickly. The few decisions that could not be made at the front line were pushed up the hierarchy, and an answer was normally available within 24 hours. 1 2

The material in this section was drawn from Wallander (2003). Quotations presented in the case, except where otherwise noted, were drawn from source documents provided to the authors by the Beyond Budgeting Roundtable (BBRT), an independent international research collaborative that collects and disseminates information about managing without budgets. More information about the BBRT can be found at: http: / / www.bbrt.org.

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With respect to marketing, apart from the few occasions where a new product common to all branches was being launched, there was no centralized advertising. Instead, marketing decisions were made at the branch level, and the costs were charged to the branch. Branch managers’ authority on spending became virtually complete in the early 1990s when it was increased to include staffing levels and salary decisions along with decisions on property lease costs. The branch manager was considered to be best placed to determine the optimal level of staff if, for example, customer demand fell, or if new IT systems resulted in fewer staff being required. This change produced a pleasant surprise: far from increasing staff numbers as many people expected, the number of staff decreased as managers took a more realistic view of future performance. Notwithstanding, some activities and decisions were made centrally. In particular, while the branch managers dealt with the bulk of credit risk decisions, financial risk exposure connected with trading, funding, and liquidity was managed centrally, thus covering interest rate risk (if interest rates change), liquidity risk (matching deposit maturity with loan maturity), insurance risk, and foreign exchange risk (unmatched exposures in other currencies). Investment funds were also centrally produced. In addition, the managing level of the bank posted interest rates and charges, although branch offices were entitled to make departures from these published rates for good customers. For reasons of efficiency and standardization, branch managers had low levels of authority on investments such as furniture, office, and computer equipment. The branches were also committed to using the central bank’s computer system and data center in Stockholm, they all utilized the same common accounting system, and they all had to follow the bank’s credit policies and procedures. Finally, each of the six product areas had a manager who was responsible for product development. Wallander’s second tenet was based on the belief that success with decentralization depended upon having capable and committed employees who were required to become ‘‘involved.’’ This involvement included being ‘‘seen,’’ being able to identify with a group, obtaining increased responsibility, having the authority to implement one’s ideas, and seeing how one’s work affected results. The use of decentralized branches that were very small and independent from one another was considered to facilitate such involvement. As a consequence of these two tenets, there were only three management layers in the firm’s structure: branch managers (615), regional managers (11), and the Group Chief Executive. The size of the average branch was eight employees. Regions and branches were established as profit centers with branch managers reporting directly to the regional manager. Branch managers were responsible for financial results and could take whatever actions they deemed appropriate to improve them. They were held accountable for only those items and costs that they influenced, directly or indirectly, including significant parts of overhead costs. In this way, the branch office result was considered to reflect the actual contribution to the bank’s overall result. Philosophy and Culture During Wallander’s tenure a number of principles comprising the management philosophy emerged. First, Wallander believed beating the competition should be an integral part of the performance management process at Handelsbanken. Toward this end, he instituted a relative performance measurement system, whereby branches, regions, and the overall bank’s performance would be compared with relevant others. Second, resisting the temptation to interfere was considered crucial to prevent centralization from returning through the ‘‘back door.’’ For example, issuing memos, instructions, and directives were a symptom of such centralizing forces and had to be resisted. To Issues in Accounting Education, November 2007

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emphasize to employees that management was serious about not interfering, a policy was established to eliminate head office directives or reports. Higher-level managers were expected to set the example and use a coaching style of management in support of the decentralized structure. If senior managers knew that a poor decision was being made, then the expectation was that they would only send an email or make a brief phone call to inquire about the issue. The final decision ultimately remained with local managers. The discipline of not interfering was considered to be one of the toughest parts of operating within a decentralized framework. As Ma˚ rtensson reflected, ‘‘You have to learn to keep your hands down by your side even when you could intervene and help solve a problem.’’ Third, employees were held strictly accountable for their performance. This emphasis on accountability became well entrenched within the organization due to what senior management viewed as their deep-seated corporate culture and an excellent accounting system. Fourth, the branch was considered to be the bank. Responsibility for the individual customers existed with the branch closest to the customer. Everyone else in the organization was considered to be a servant of branch offices. The final value was thrift. Building shareholder value through customer satisfaction delivered by happy, autonomous employees was the essence of Handelsbanken’s management philosophy. Employees were to avoid any expenditure not supported by this philosophy. Budgeting—An Unnecessary Evil? Wallander issued the directive in 1970 that the company would neither engage in any formal strategic-planning process nor prepare and approve annual plans or budgets (shortor long-term).3 With respect to strategy, he believed that strategic planning was only 10 percent, whereas execution was 90 percent, and thus he focused on the latter. His views about budgets were influenced by his previous experience as a professional economist involved in macro-economic forecasting and his employment at a competitor bank called Sundsvallsbanken, which operated without budgets. These views were reinforced by his experience as a non-executive director at L.M. Ericsson, a Swedish electronics company, during his tenure as CEO at Handelsbanken. In Wallander’s view, budgets’ usefulness depended on the validity of the assumptions underlying their construction. These assumptions fell into two basic types: ‘‘the same weather tomorrow as today’’ and ‘‘different weather tomorrow.’’ Under the former, a budget was prepared under the assumption that management’s current knowledge was an appropriate basis on which to prepare the budget. In effect, budget preparers were telling people to work as they were doing, and that perhaps they should attempt to increase sales and be a little more efficient. However, he believed that individuals did not need to have an intricate budgeting system to accomplish this task. On the other hand, if individuals could forecast that a very different situation was going to exist, resulting in very different trends that required major changes to operations, then budgeting would prove to be enormously useful if the forecast turned out to be accurate. However, Wallander’s previous experience suggested that such an outcome was rare. Moreover, Wallander believed that, psychologically, it was difficult for humans to perceive that something new was on its way even when, in hindsight, it would be difficult to comprehend how one could have missed the signs. Wallander therefore gave up trying to predict discontinuous change, as he considered this prediction to be beyond human capability. Instead, the crucial task was to be able to adjust to the situation quickly and manage the business 3

This section and the quotations within it are based on Wallander (1999).

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according to what really happens. The use of a fixed budget was considered to be antithetical to this need for flexibility. These considerations led him to the following dictum: A budget will thus either prove roughly right, and then it will be trite, or it will be disastrously wrong, in which case it will be dangerous. My conclusion is thus: Scrap it!

MANAGING WITHOUT BUDGETS Credit Decisions and Risk Management The overwhelming majority of credit decisions were made at the branch level. In 2006, for example, branch managers had authority to make loans to individual customers that varied between U.S.$100,000 and $4.5 million, depending upon the size of the branch and the branch manager’s seniority. Amounts in excess of these limits had to be approved by higher levels within the bank. Of approximately 400,000 credit decisions in 2001, approximately 385,000 were made at the branches; another 15,000 were recommended by the branches, but had to be approved by the region because the amounts exceeded the branch managers’ limits. Finally, another 800⫹ credit recommendations made by the branch manager and the region had to be approved by the Central Board Credit Committee.4 The Handelsbanken philosophy on managing credit risk was not on a portfolio basis, but rested instead on the quality of the individual customer. This philosophy underscored the importance the bank placed on decentralization, whereby branch managers were expected to have a thorough knowledge and understanding of their customers; these customers were acquired through due diligence and close relationships. In particular, the bank never utilized targets that placed bounds on excessive exposure to a single industry. Instead, it was the quality of the individual loan that was paramount. While this practice was contrary to practice in North America where risk management occurs at the top management level, Handelsbanken felt its philosophy was vindicated by the property crisis in 1990 where it was the only major bank in Sweden not requiring government assistance. In addition, the t...