Dioscuri Research Project Eastern Enlargement – Western Enlargement Cultural Encounters in the European Economy and Society after the Accession
DIOSCURI Final Conference
Institute for Human Sciences, Vienna
April 20-22, 2007
Viola Zentai THE RISE OF A BANKING EMPIRE IN CENTRAL AND EASTERN EUROPE
THE RAIFFEISEN INTERNATIONAL Work in Progress
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Only for conference discussion
Banking has become a salient component of the transforming economies in Central and Eastern Europe as only few of them had started to establish commercial banks during the old socialist system. Due to their actual economic and symbolic power, banks tell about successful and less successful privatization stories, mobilize imagination on wealth and monetary power, and set norms of actions in management, organizational and human resource practices. This comparative study will investigate encounters between actors and organizations in a genuinely transnational space that the emergence of a successful banking group enacts in the countries of concerned in the DIOSCURI project. The comparative inquiry has a unique chance for relying on case studies prepared on five local (national) subsidiaries of Raiffeisen International as well as three other banks, as test cases1.
Raiffeisen International demonstrates two distinctive phases of the history of a regional multinational company in the making: the period of massive expansionof an Austria-based mother firm in a territory where is assumes cultural familiarity, and the period of consolidation of acquired assets and markets through an international shareholding company with relatively decentralized organizational structure. Some older subsidiaries of the banking group experience these two phases in a regular sequence in their lives, for the newer ones expansion phase is already intertwined with a consolidation story.
1. Post-socialist circumstances shaping cultural encounters Foreign investments and multinationals
It would be tempting to give an overview of the main paradigms of the literature on economic transformations in CEE discussing the conditions and results of the appearance of multinational companies in the region. The literature seems to offer diverging views and lessons depending on the very subject of the inquiry, whether it is the transfer of social model, management technique, institutional design, or some more complex topics. One can find in the literature some key non-surprising observations. Accordingly, the degree to which an organization tends to model itself on Western institutions depends on the stage of transformation in the country, the importance of field/sector, and the ownership structure. Further, organizations remodel themselves on Western organization in a specific field or sector in order to ensure survival, to gain legitimacy and efficiency. The modes of adaptation differ according to the main characteristics of the organization, in particular the ownership structure and size. In foreign-owned larger enterprises imposition and imprinting is common, in large domestic firms acquisition, inducement, and incorporation prevail, whereas small enterprises follow imprinting, incorporations, bypassing, and acquisition of knowledge and patterns of economic behavior. It is becoming more interesting to the DIOSCURI agenda how transfer and adoption of Western management concepts, structures and instruments often face cultural barriers. It is observed that organizations in CEE countries tend to solve inconsistency problems by de-coupling different parts of their economic practices and developing a facade of legitimacy.2
It is also relevant to our inquiry how typical patterns in the arrival of foreign direct investment (FDI) are discussed in the literature. Many scholars see polarization between the expanding service sector motivated by market access and the manufacturing sector motivated by efficiency in terms of their impacts on management culture and in particular labor relations. The efficiency seeking investment was dominant in the early 1990s in the pioneer countries of transformation in Central Europe. In the second half of the 1990s, the higher-added value investments in consideration of labor quality and productivity, not only labor cost, became more dominant. This latter process is more frequently associated with the transfer of modern managerial technique. More refined pictures are drawn by incorporating FDI motivations, structure of sectors, country origin of the expanding multinational companies, and local labor relations. In this context, the multinationals are becoming contested fields to inquiries that investigate local reactions to global economic effects3. Within his field, it is debated how market-seeking investments into retail, tourism, food, beverages and business services are changing local realities. It is not debated that multinationals in these sectors are becoming the most visible symbols of westernization in the public eye by introducing new forms of services associated with Western capitalism. It is highly debated, however, how these visible entities play into the negotiations, competitions, contests, and fabrication of management models, organizational design, corporate governance, and labor relations in this part of the world—or economic culture, as we call it in the DIOSCURI project.
Without immersing ourselves in the details of the literature, case studies in our inquiry revealed that institutional stories depend to a large extent on the very sector of economy the firm belongs to. Transnational impacts differently reach enterprises in banking, manufacturing, or agriculture. The market competition in specific sectors (e.g. the availability of regional markets), the typical purpose of the privatization of multinationals, global trends in consuming practices and fashions (e.g. food industry) generate different encounters due to particular sets of local and foreign actors, institutional design, and communication needs in different sectors. The specificities of banking in transforming economies engaged in global exchanges will be examined.
Case studies also highlighted that different types of enterprise may also limit and enhance cultural encounters between local and foreign actors. Global and well-established multinationals trend to bring more ready made patterns for institutional design and business policy and thus tailor the perceptions and inclinations of both locals and foreigners within the firm in contrast to regional multinationals, which are often in the making and by default have less norms and rules of conduct available in standardized and tested format. In the comparative study, the availability and incentives of transplanting ready-made tools and business practices by Raiffeisen International and local reactions to it will be investigated.
Although business success is mostly an outcome or intervening factor in our inquiry, it is impossible not to notice that greater success and convincing market results legitimate different autonomy of action for managers and thus different space for negotiating cultural compromise. Some case studies are complex enough to highlight the differences of the cultural encounters in subsequent stages of decline and growth in the life of an enterprise. The connection between market performance and freedom of local actions will be scrutinized within the Raiffeisen context.
Transnational march of banking
Considering the broader European context, the literature explains how the changing competitive environment in banking contributed to the adjustment of national regulations and EU directives on banking in the spirit of the single market in financial services. The Second Baking Coordination Directive (89/646/EEC) has reinforced the principle of universal banking allowing a range of activities for financial institutions. As a result, one can witness rapid merges and acquisitions, greater diversification of the products and services due to competition of new players (leasing companies, mortgage firms, etc.) Banks reacted to the increasing competitiveness of the environment by specific strategies for internationalization, such as building own network at high costs, negotiate merger and acquisitions by handling cultural and organizational complexity, and seek cross-share holdings. Internationalization, however, has not proved to be an easy target for all actors in banking. Whereas investment and corporate banking has become internationalized, retail banking until recently has remained national business. Moreover, extended transnational network presents advantages as well as risks for business results.4
According to mainstream accounts in the Hungarian economics literature, the high profitability of bank sector and particular banks in CEE by international standards stems from the fact that banks could easily transfer their relatively high costs to their clients.5 There is evidence to prove that competition is growing in banking in due to post-socialist economic restructuring but this is true more for the corporate banking, which is deemed to face international competition. This is much less so in retail banking in which penetration is still modest in many CEE countries. Thus, the loan-deposit interest difference is much higher than the EU average. Pricing services both in deposits and loans opens possibilities for rent seeking.
Leadership and management selection at the privatized banks is constrained by basic domestic laws on banking. Yet, responsibility and competence in decision making could be largely defined by the owner. There are two major paths in selecting key senior managers: either to rely heavily on local professionals or import senior managers from the mother bank. The two strategies often connected to particular transnational relations. Austrian, German and Italian banks, believing in their local knowledge are more likely to trust local managers, whereas American, Asian, and other owners are more likely to trust their own professionals. Among the entrusted local professionals in CEE, one often finds former employees of the national banks, and some other financial institutions operating in the late years of state socialism.
The typical avenue for foreign banks’ market expansion was first to enter in corporate banking and later embark on retail banking. Again, according to the Hungarian experience, the best performances are shown by those, who came by green-field investment and thus avoided to take over in-built weaknesses and problems. This does not mean that all green-field operations have proved to be success, well performing mother banks sponsored unsuccessful local branches due to bad business strategy or management problems. Success is also explained by the relatively early entry to the market: among the four best green-field banks in Hungary, three started to operate in the 1980s. They could select among the best clients against poorly managed state banks, ensure lower costs, and recruit the best local experts of the time, who quickly managed to catch up with their Western partners by capitalizing on their local knowledge better than their Western counterparts.6 The move of Raiffeisen Bank on the map of CEE and its countries nicely comply with the conditions of successful investing strategies. To be among the early birds, and if possible to be the very first, to combine green-field investment and acquisition, and to cautiously expand from corporate sector to retail and other fields, all belong to the essence of the Raiffeisen strategy.
2. The Raiffeisen corporate world From savings to transnational banking
An Austrian savings bank started to buy shares and then establish whole new entities in the emerging banking sector in Central Europe at the end of the 1980s. It opened its first subsidiary in Hungary in 1986 and by this it started a seemingly irresistible march eastward on the map of Europe and later the CIS as well. By the new millennium, the Raiffeisen Bank (RZB) has spread all over the former socialist countries and established a multinational shareholding company called Raiffeisen International. At the beginning of the story, the bank ranked only 8-9 in its home market. Since then, the mother company has moved to the third position at home. By the mid-2000s, the Raiffeisen Group has become one of the biggest banks in CEE and the leading Western-owned banking group in the entire CIS. The main market focus of the company is in retail and corporate bankingth.
It is not only the geographical expansion of the company embracing now 17 countries that appears to be noteworthy but its business results as well. In 2006, Raiffeisen International achieved a record profit: the consolidated profit (after tax) adjusted for one-off effects rose by 55% and the earning per share increased from 2.79 euros in 2005 to 4.17 euros. Even more telling is that the profit grew six-fold in the previous four years. The corporate customers segment remained the largest in terms of assets and profit. The retail customer segment contributed almost one third to the profit. The banking group has more than 12 million customers served by 2,800 business outlets in 16 markets. “No other international bank in the region offers such a far-reaching and closely-knot sales network” claims the 2006 Annual Report of the bank.7 It is interesting to have a look at the results of the regional segments: excluding the one-off effects, the profit contributions of the three regions (CE, SEE, and CIS) would be almost equal8. The largest part of the profit before tax would still arise from the units in CE with a share of 35%. The largest increase in the next two years is expected from CIS.
The organizational and internal structures of the bank underwent far-reaching changes during 2004. The erstwhile holding company became an operational management company whose orientation is reflected in its newly created organizational structure. All management functions were consolidated under the umbrella of Raiffeisen International. The international arm acts autonomously but in close collaboration with its majority shareholder, RZB(the Austrian mother firm). RZB owns 70% of the common stock, the rest is free float. The shares are traded on the Vienna Stock Exchange. New structures were created, new staff was hired, and managing board remits were defined and assigned. Raiffeisen International’s transformation from a pure holding company to a management holding company increased the workforce in Vienna from 12 to 83 during 2004.9 In the ambitious plans for building a large, if not the largest, banking group in CEE, and the steady and successful march of the bank in setting-up a powerful regional network, the current CEO has taken a decisive role. Herbert Stepic joined RZBin 1973, became member of the Managing Board in 1987 and was the Deputy to the CEO since 1995. He has been Chairman of the Managing Board and CEO of Raiffeisen International since June 2001. He is responsible for a number of tasks at the Bank but what is the utmost tangible in the lives all subsidiaries in CEE is his lead in Strategy & Acquisitions. Three out of the five members of the Managing Board of Raiffeisein International moved to the supervisory board of the group in the middle of 2006. Only Stepic remained and five new members arrived out of which three have international banking experience other than Raiffeisen.
The bank received numerous decorations in the last couple years. For example, in 2006 the Best Bank award was given in 5 countries by Global Finance, the title Best Bank in CEE by Euromoney, and Bank of the Year 2006 from The Banker.
According to the self-image of the management, “the secrets of Raiffeisen International’s success in Central and Eastern Europe undoubtedly also include two characteristic features of Raiffeisen tradition: the strong local roots of the banking subsidiaries and their high degree of autonomy within the Group. Management is central wherever a centralized approach is appropriate and necessary, for instance in the case of IT services and risk policy.” It is a key part of the self-image that the local managements of subsidiaries are given a large degree of autonomy in their operational decisions, and only strategic orientation and performance monitoring are kept for the central management. The local subsidiaries’ strong local anchors are also reflected by the make-up of their senior management personnel, which consist mainly of local experts. Just 22 of the local 75 managing board members are foreigners. Local roots are also seen to be proved by business orientation: local constituency is seen as important as international corporate customers.