PARIS (BLOOMBERG) -- On a cold day in January last year, Societe Generale's board met at the headquarters of its Russian unit Rosbank, a modern building in central Moscow angled around a cylindrical glass structure. The annual gathering was being held there to honor the unit's strong performance in 2019, but things quickly turned sour: CEO Frederic Oudea had an off-agenda item to discuss.
Just weeks earlier, Bloomberg reported that the board had hired head-hunting firm Egon Zehnder to search for potential candidates to eventually succeed Mr Oudea. Stepping up in front of the gathering that included chairman Lorenzo Bini Smaghi, Mr Oudea seethed that such leaks were unacceptable and warned that there would be consequences for anyone involved. An uneasy silence fell over the room as Mr Oudea berated the gathering, people with knowledge of the meeting said, signaling the power he held over the board members who are meant to oversee him.
That dominance has helped the 57-year-old executive hang on to his job to become the longest-reigning CEO of a major European bank even as SocGen shares have lost 75 per cent of their value in the worst performance for a French bank. The region's lenders that fared worse over the almost 13 years that Mr Oudea has been at the helm, like Unicredit, Deutsche Bank and Santander, all changed CEOs. At 0.24, SocGen has the lowest price-to-book ratio of any major European bank, suggesting investors believe the firm is destroying value.
In a sector where the churn in executive suites is common, with banks from Credit Suisse to UniCredit just the latest to make changes in top jobs, Mr Oudea's staying power confounds industry observers. While a SocGen director attributes it to the fear of changing the captain of a ship in the middle of a storm, critics say the board's inaction shows a lack of courage to take the tough, radical steps needed to turn the bank around.
"I am surprised that Mr Oudea is still there," said Peter Hahn, emeritus professor at the London Institute of Banking & Finance. "It is long past due that the bank needs to rethink its leadership. It is time for the bank to rethink its strategy."
Mr Oudea declined to comment on his record or his longevity in the role, while SocGen chairman Bini Smaghi dismissed the notion that the board fears the CEO or that investors want him gone.
"The task of the board is not necessarily to change management frequently; we need to change management when it's needed," he said in an interview. "In the middle of a crisis like the one we're experiencing, I don't think it is the right time.... We know very well that the price-to-book is not satisfactory, and we are not happy with that. This is the reason why we have decided to implement important restructuring."
The market's disenchantment with Mr Oudea stems in part from his continued focus on investment banking, which is expected to have plunged the bank last year into its worst loss since he took charge in 2008.
"SocGen is overweight in investment banking, which structurally yields a lower return on equity than asset gathering, in which it is underweight" said Jon Peace, head of European banks research at Credit Suisse. "This situation is difficult to get out of."
While the top US investment banks saw their fixed-income trading revenue and equities business soar in 2020, SocGen took a hit with its soured equity-derivatives bets. Rival BNP Paribas's equity-trading desk suffered too, but its fixed income products helped mitigate losses. UBS, which pivoted from investment banking to wealth management in the wake of the financial crisis, was able to limit the pain.
SocGen has historically focused on investment banking, especially market activities, a path Mr Oudea stayed on even as the one-time powerhouse and the core center of profits peaked as risk-control rules grew more sophisticated.
He also miscalculated the importance of the asset management business, selling SocGen's 20 per cent stake in Amundi in 2015, saying it wasn't core. Amundi is now the top asset manager in Europe. With an almost 48 per cent gain since its trading debut, Amundi has a market value of 13 billion euros (S$20.9 billion), just shy of SocGen's 14.6 billion euros.
"Mr Oudea's biggest strategic regret of his tenure would have to be the protracted exit from Amundi ownership," said Jonathan Tyce, senior analyst for Bloomberg Intelligence.
Fixing SocGen won't be easy, and Mr Oudea has yet to present his ideas to turn the bank around, focusing instead on plans for parts of the group. The trading loss prompted him to review the bank's structured products, cut 640 jobs at the investment bank and pledge 450 million euros of cost cuts in the markets unit. Like other European banks, SocGen is seeking to cap expenses and deal with the impact of negative interest rates.
"SocGen is fighting multiple battles," said Iacopo Dalu, an analyst at Janus Henderson. "Their cost-to-income ratio is still too high. Unlike other French banks, they've also sold several businesses with higher returns. That's a disadvantaged starting point in a lower-for-longer" interest rates world.
In the CEO's defense, Bini Smaghi said, Mr Oudea was dealt a bad hand about 13 years ago, taking over just as SocGen was emerging from the troubles related to Jerome Kerviel, a rogue trader who almost brought the bank down. He then had to contend with a series of legal battles related to the case even as he braved the financial crisis, the chairman said. Over Mr Oudea's reign, the bank hasn't raised capital, unlike many of SocGen's European peers, Bini Smaghi pointed out, adding that the board supports the restructuring plan the CEO is working on.
"Nobody is naive here," he said. "We know that the bank is facing challenges; we think we have adopted clear strategic choices that are important and difficult to implement."
Still, such benevolence from the board may be a French phenomenon, said Jean Dermine, banking and finance professor at Insead, one of the country's top business schools.
"In France, more than in other countries, the board is an elite, private club, and they put less pressure on CEOs in place," he said.