Make money -- make toilet cleaner

Richard Lambert, the editor of the Financial Times, spoke to business 'leaders' recently and told them that excessive pay levels posed a risk to the rest of the planet taking them seriously. They would be regarded as creatures from another planet themselves unless pay levels were reined in. This might be bad for their businesses, thought Mr Lambert.

What no-one has yet seemed to comment on though, in all the debate about excessive levels of executive pay, is the dangerous consequences such greed will have for the next generation of businesses. In short why should anyone take all the risks, all the heartache, all the punishment , year after year to grow a business from scratch -- if the rewards they gain at the end are less than the head of a company which makes toilet cleaner can take home in one year?

It's the shareholders, stupid

£90m in pay for a man who sits at the top of a company which makes toilet cleaner. £28m for a man who presides over a business that has as the chair of its remuneration committee the wife of the MP who claimed for moat cleaning. 'Sir' Stuart Rose demands £800000 for being an executive non-executive and the DG of the CBI (ex-editor of the bankers' house paper, the FT no less) warns executives that they risk they being regarded as aliens unless they get their snouts out of the trough. The average remuneration of the boardroom fat cat has moved up to about 80 times that of the average employee (from about 40 times ten years ago)

Yes -- something is wrong somewhere. And mostly it's with the shareholders. The reason things have got to this pass is because the shareholders -- the institutional ones where the clout is -- didn't bother to stand up for good governance. That's where reform should take place.

Mr Pensions Regulator -- if we can't see why you doing it, you aren't doing it properly

Lack of transparency at the Pensions regulator serves no purpose whatsoever.....

The UK arm of Readers Digest has been forced into administration after a deal struck with the American parent company, (in voluntary bankruptcy procedures) trustees of the pension fund and the Pension Protection Fund -- the "Pensions Lifeboat" -- was refused clearance by the Pension Regulator. The deal involved a £10.9m payment to the fund and the transfer of assets to the Readers Digest UK pension fund.
There are about 1600 members of the Readers Digest UK pension fund who will be affected by this move and who could now see their pensions reduced since the Lifeboat will only cover 70% of proposed benefits. The details on which the refusal to clear the proposal were made have not ben made public. They may be very sound. Equally they should be made public so that pensioners, trustees, fund managers and companies all know the rules under which they are supposed to be playing.

Its remuneration Jim ... but not as we know it

Bonus+bankers = bonkers

Information researched by some of my masters degree students has revealed an even more astonishing picture of rapacity among senior staff working for large banks than I had previously recognised.

Three Masters students -- Emma Rickards, David Whincup and Yvonne Frimpong -- trawled through recent newspaper reports to gather evidence about the bonus culture for an assignment I had set.

What they found was that bonuses paid to staff greatly out-weighed the pre-tax profits declared by some companies In three of the companies the bonus payments that managers awarded themselves were over three times the amounts that were declared as pre-tax profits.

In other words the amount paid to shareholders through dividends and to the state through taxes were one quarter collectively of what they managers appropriated for their cut. So much for the principal and agent theory. So much for the primacy of shareholders. So much shareholder value-added. So much for shareholders being the owners of a business.

The pernicious effects of the bonus culture are beginning to pervade the wider economy –- and often in the places where they are least appropriate.

The same students who unearthed information about the magnitude of bonus payments to managers in contract to payments to the state and to shareholders (see ‘Bonus+bankers=bonkers’) pointed out how wide the practice has become. The Olympic Delivery Authority, Railtrack, the NHS, the BBC and Ofcom are all organisations which are fully embracing the bonus as means of ‘rewarding’ staff – yet curiously none of these organisations makes a profit. None of them have the rational economic yardstick of profit – or even independent cashflow – on which to base a bonus calculation. Yet each is giving its senior staff the chance to add around a third of basic salary to take home pay just for doing their jobs adequately.

The reasons for this are manifold. They include at least: a spurious comparison between the values and purpose of the public and private sector; an invidious tendency to avoid collective responsibility by using ‘remuneration consultants’ to fix salaries; the fatuous use of the phrase ‘world-class’ in describing both jobs and organisations; and the wholly illogical use of ‘benchmarking’ to align organisations no matter what they are or what they do or how they do it. Add to this the inordinate greed of many senior managers and you have a recipe for escalating ‘packages’ which have no foundation in reality or ethics of commonsense.

And just what can anyone do when even the Financial Services Authority adds £33m to its pay bill by paying bonuses to senior staff (in 2008/9 among 2800 of them) ?

Quis custodes custodiet?

Sir David Walker’s report may have been a damp squib as far as BOFIs are concerned (Banks and Other Financial Institutions) but at least most of the banks know what corporate governance is. There appear to be some in the City who need an even more basic education in the duties and obligations of directors and the rights of shareholders.

The board of Mitchell & Butlers – which owns the All Bar One, Harvester and Browns brands; with 200 outlets making it the UK’s largest pub operator – has been bullied apparently into accepting nominations of supposedly independent non-executive directors from large shareholders who may – or may not, depending upon which reports you read – have ulterior motives. The law quite plainly states that directors should have no partial interest while considering the affairs of a company. It would appear therefore that the M&B board were wrong in accepting nominated appointments of directors who carried other baggage and are now, most of them, in breach of their legal and fiduciary obligations.

All sorts of shenanigans have been taking place with threats to the board – including “heated debates’; apparent threats of physical violence and threats of egms to oust non-compliant directors. The ‘tainted ‘ non-execs have now been sacked by the independent non-execs but there is also serious concern about stock being loaned out – presumably to short sellers – which may affect any voting for future shareholder-based decisions.

All this after M&Bs balance sheet was weakened last year by £400m of losses on daft property speculations.

The cut and thrust of corporate politics is great fun to watch – unless you are a shareholder. The obvious thing to do given the damage being wreaked on the company by this unseemly brawling of the directors is for the shares to be suspended by the Stock Exchange until the directors sort out their own mess and report properly to the shareholders.

Just why the Stock Exchange is so supine in this case is anyone’s guess.

The Financial Times reports today (04/01/10) that the FSA is using outside experts to help it conduct evaluations -- supervisory reviews by 'external skilled persons' under s166 of the FS&M Act -- of some of the banks brought into the nation's custody. PwC is apparently looking at RBS; Ernst & Young are reviewing HBOS; and BDO Stoy Hayward are looking at Bradford and Bingley.
According to the FT "people with knowledge of the probes" said it was unlikely that the reports would be made public.

Could that be because the reports are actually being used to determine how the auditors of all these businesses -- KPMG audited both HBOS and Bradford and Bingley; RBS were audited by Deloitte --could have been so blind as to miss all the signs of imminent collapse when signing off the accounts? Neither KPMG nor Deloitte are cited as being involved in the reviews.