Morning:
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It was only this week that I realised how fraught is the world of corporate governance following the debacle of the banks and the subsequent suggestions that shareholders should in future do more to rein back management whose strategies seemed to embody excessive risk.
Before the end of this month, Sir David Walker is expected to present his suggestions for changes to corporate governance rules as they apply to banks. This has been a catalyst for a review of the corporate governance code itself, and it will no doubt be strengthened in due course.
However, the key issue seems to be something rather harder to achieve. It is the need on the shareholder side to convince Government that it has the will in future to call boards to account.
This will be hard to do. It is insufficiently appreciated that institutional shareholders have a diminishing amount of clout in the London market. Not so long ago, the insurance companies, the pension funds and a handful of large investors spoke for 80% of the shares on the London Stock Exchange. Today, following the mass switch from equities to bonds, pension funds and insurance companies today account only for about 30% of share registers.
When they do engage, it has become much easier for boards to dismiss them and their views as not being representative. This applies, of course, only when several shareholders act together. It is even harder when funds act alone, and even the biggest will rarely have above 5% of a large company.
But at the same time, institutional shareholders do not seem ready to outsource their activism to a body they would pay to do the job — such as, for example, Governance for Owners.
A lot of the problem is that so many of the shares are now held overseas by organisations who bought to make a profit, not to devote time, energy and hard work to governance issues. Short term, the solution has to be to engage with the sovereign wealth funds and the hedge funds who are the new big buyers of shares and get them to become part of the system.
We are a long way off that at the moment, however, and it could be that Government will think it no longer worth waiting, and opt for some sort of regulation instead — a statutory duty to interfere if you like. It is this threat which has prompted some at the heart of the debate to say that what is at stake here is the whole principle of comply or explain, and others to say that what is at stake is capitalism itself — for a system not accountable to its shareholders is not capitalist.
That may sound a bit overwrought but institutional investors have come under a lot of fire, not all of it fair. Self-regulation could emerge stronger from this, but no one should make the mistake of thinking it is a foregone conclusion. Such a result is going to have to be fought for.
Bankers' excess must be curbed
Standing in for the Lord Mayor at a British Bankers' Association dinner earlier this week, Lloyd's of London chairman Lord Levene quoted with approval the words of a leading New York banker who said that when he started working life as a business school graduate, the boss in his bank received $300,000, which was 10 times as much as he did as a new entrant.
That he thought was about right. Lord Levene passed this on to his audience for them to think about in the context of current salaries and bonuses.
Also this week, Lord Turner told a BBA conference that while he and others would try to put in place a regulatory system which would guard against a re-run of the current crisis, “it is up to the banking industry itself to restore an appreciation of the positive role which banking can and must play and to create a culture focused on delivering necessary services to customers”.
Finally, Robert Jenkins, writing in his capacity as a fellow at London Business School rather than chairman of the Investment Management Association or past chairman of Foreign & Colonial, wrote: “Bankers of the world: listen up. You are not God's gift to the financial universe. You have an important role to play and a duty of trust to discharge. As an industry, you have recently failed in that role and betrayed that trust...you can best make a contribution to society by being boring.”
So how does the banking industry choose to respond to this good advice from three of London's most senior figures? This week, various analysts forecast how much those banks not constrained by Government shareholders were likely to pay out in bonuses as a result of their trading in the first half of this year.
The figures for the bonus pots are once again running into the billions. The investment banks appear to have learned absolutely nothing and to have moderated their behaviour scarcely an iota.
The bonuses are fully expected to be record numbers, even as half their industry survives on life support provided out of the taxes millions of people who earn less than one thousandth of what they do.
Clearly, they no longer see themselves as part of society, nor with any obligations to it. Perhaps it is time society felt the same way about them, and governments stopped running scared and either hit than with a windfall turnover tax or made them accountable to the competition authorities.
Reader views (1)
We urgently need lawsuits against board directors of failed banks as a starter.
The fact that a CEO, Andy Hornby, can destroy a bank which helped bring our economy to our knees and then walk to another similar role having not had to face any form of censure is an absolute disgrace - it truly is.
If leaders like Hornby know they will not have their reputations ruined and receive fines commensurate with their gross negligence not only they but all their successors will act with a comparabale degree of arrogance and destroy more companies and probably the rest of us to boot. Assuming we do recover this time - next time we probably won't.
The corporate arrogance virus has just spread to the rail sector where National Express have thrown in the keys on the East Coast Franchise knowing they were never liable in the first place if things went wrong. Where will it stop that taxpayers are taking all the risk whilst we permit private companies take all the reward?
Governments and regulators have to censure bank exec and non exec directors appropriately - any other talk of reforms of governance and regulation are risable until this happens.
- Jim, London
