January 16, 2020 / 11:16 AM / 6 months ago

Breakingviews - Santander CEO fiasco exposes banking’s fault line

By Christopher Thompson and Peter Thal Larsen

Ana Patricia Botin, chairman of Spanish bank Santander, the euro zone's largest lender by market value, speaks during the annual results presentation at company's headquarters in Boadilla del Monte, outside Madrid, Spain, January 27, 2016.

LONDON (Reuters Breakingviews) - The battle over Santander’s CEO has given human shape to banking’s fault line. It’s a year since Ana Botin, the Spanish lender’s chairman, reversed her decision to make UBS executive Andrea Orcel the group’s next boss. In the coming months his 112 million euro lawsuit threatens to highlight the clash of cultures between retail and wholesale lending.

The division is one of the most enduring splits in finance. A vast gulf still separates financial institutions which deal with consumers and small businesses, and those that make their living from corporate and institutional clients.

The leading characters in the Santander drama personify the contrast. The silver-haired Orcel is a charming yet intensely competitive Italian who made his name advising on giant takeover battles. Botin is a patrician but steely executive who took charge of the 60 billion euro bank after her father Emilio died suddenly in 2014.

Until July 2018 their relationship was that of a trusted adviser and his best client. But over dinner at the Loews Regency Hotel on New York’s Park Avenue, Botin proposed a different association. She was under pressure to revive the bank’s share price, which had declined by around a third during her tenure.

Orcel outlined a bold plan to treble Santander’s value by selling businesses and purging underperforming regional managers. The same evening Botin informally gave him the opportunity to put his advice into practice as chief executive. For the hands-on chairman, it meant upgrading a position which had historically been occupied by low-key managers. Orcel accepted. His boss-to-be lauded his “energy and enthusiasm” in a jubilant text message. “I know that both for you personally and for your family this will be a good thing!” she wrote, according to a translation of Spanish court documents seen by Breakingviews.

For Orcel, the job presented a step up. Since joining UBS in 2012, he had overseen a far-reaching restructuring of the Swiss group’s investment banking division. But his prospects of succeeding Sergio Ermotti as chief executive were hampered by his lack of experience in its flagship wealth management arm.

Taking charge of Santander, which has some 200,000 employees spread across retail and commercial banking operations in Europe and North and South America, was an even larger leap. Orcel had spent his career with competitive investment bankers and demanding corporate executives, rather than the humdrum business of handling payments and mortgage applications. Yet any misgivings were swept aside. Announcing his appointment in September 2018, Botin lauded Orcel’s “collaborative” approach and “deep understanding of retail and commercial banking”.

That declaration followed a less harmonious negotiation over compensation. To lure Orcel, Botin agreed to make him one of Europe’s best-paid bank CEOs, with annual pay of up to 10 million euros a year. The package rivalled Botin’s own total remuneration of 10.5 million euros in 2018. The CEO would also receive a signing-on bonus of 17 million euros.

However, by changing jobs the Italian was potentially giving up about 55 million euros of deferred compensation from the Swiss bank, a legacy of post-crisis rules whereby senior executives are paid in stock that they cannot cash in for several years. Bankers who join a rival typically forfeit those payments, and demand compensation from their new employers.

Santander’s board agreed to reimburse Orcel for up to 35 million euros of his deferred compensation, according to a copy of the offer letter seen by Breakingviews. But the bank hoped to avoid the bill. Encouraged by Orcel, Botin believed UBS would let the executive keep some of his deferred pay. After all, Santander was not a direct rival, and UBS Chairman Axel Weber would surely want to keep a valued client happy.

“There is a line I had reserved for Axel,” Botin wrote to Orcel on Sept. 10, 2018, according to a Spanish court filing. “If they decide not to pay you anything because we are their competitors, then it is good to know this, that they will not act as our strategic advisors.”

If such a threat was ever delivered it didn’t work: UBS refused to budge. The Swiss bank also insisted on Orcel serving his full gardening leave - the period before which he could take up his new job – which pushed back his start date to April 2019. Because he would still officially be a UBS employee, Orcel was therefore due to receive a chunk of deferred compensation worth 13.7 million euros in February.

Santander’s board wanted to deduct this from the 35 million euros stipulated in its offer letter, reducing the cost of hiring Orcel. But the Italian resisted, arguing that this would involve him giving up more of his UBS pay than he had originally agreed to. This spat was followed by a disagreement over dividends on Orcel’s deferred shares.

For investment bankers who tend to view their compensation as an absolute measure of their value relative to peers, sparring over pay is common. Santander’s board seemed less prepared for such disputes. At some point during this period, Botin also changed her mind about bringing in a high-profile second in command. In December 2018, while Orcel was in Brazil with his family, she wrote to him curtly, court documents show: “Andrea. We need to stop and see where we are at. To do this, we need to meet up and have a quiet and down-to-earth conversation, in person.”

By the time the two met at Santander’s headquarters outside Madrid on Jan. 7 last year, Botin had privately admitted to other directors that the take-no-prisoner qualities which made Orcel an excellent adviser might be less suitable for a Santander executive. As potential buyers toured his London property, she bluntly told Orcel the appointment would not go ahead. A week later Santander announced the U-turn, claiming - somewhat disingenuously given the precise figure laid out in its letter - that the costs of compensating Orcel for leaving UBS had been greater than expected.

Even so, Botin thought she could resolve the dispute amicably. “I promise you that there are many ways of doing this…I have companies in Spain where I could appoint you CEO or president tomorrow. I have many options to compensate you, in areas that you are also qualified for,” she wrote on Jan. 15, 2019. In February she travelled to London to meet Orcel and his wife in a cafe. The couple left saying the matter should be resolved in court. In June, the Italian filed a claim for 112 million euros, covering his UBS pay as well as compensation he would have earned at Santander, plus legal fees and damage to his reputation. Preliminary proceedings are scheduled for April.

The battle is risky for Orcel. Suing your longest-standing client and prospective employer is hardly a great advertisement for a 56-year-old who still aspires to a top banking job. In the meantime, the lifelong workaholic is stuck on the sidelines.

The risk to Botin is arguably greater, though. Santander could end up having to pay Orcel for the job he never got to start. Revelations over vast pay packages hurt the bank’s image with its retail clients, and call Botin’s leadership into question. Whatever the outcome, the fault line between retail and investment banking has rarely been more vivid.


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