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.
Saturday, 23 January 2010
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 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.
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.
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