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.

The Dogs that didn’t Bark (1)

 

Throughout all the financial crisis, attention has been centred on one aspect -- the culpability of the bankers and the problem posed by the bonus culture in banking.

 

But there are at least three other areas that need attention if the same mistakes are not to be made again: the role of the non-executive directors and, particularly, the chairmen of banks; the role of ratings agencies; and the role of the auditors. None of the dogs barked. Guard dogs that don't bark are completely worthless. 

The Walker Report, issued yesterday (16/07/09) may go some way to shifting attention to the first of these three groups. Initial “reaction” from the banks – in fact more accurately, off-the-cuff responses from high-bonus earners  stirred up by the diligent reporters of the FT --  suggest that Walker’s review little possibility of being implemented, while Gordon Brown remains in thrall to the City.

But action has got to be taken in this country -- as it apparently is in the USA -- to make sure that the credit ratings agencies held to account.

At the beginning of the noughties they altered the way that they charged for their services shifting the burden to the businesses being rated and giving the ratings information away to their previous customers. This put them in a clear conflict of interest  since they were now taking fees from people who would wish to receive th best possible rating rather than impartial assessment.  They  either failed to recognise this conflict or else recognised it and failed to do anything about it. Consequently everything got rated highly regardless of the true  underlying risk.

The FSA should review the activities of Moody's; D&B; S&P and the other ratings agencies to make sure that they behave properly and observe their duties to the end customer who relies on the integrity of their information

The other issues of the auditors -- the other dogs who didn't bark -- is less easily addressed. All the big four are guilty of giving clean bills of health to banks who within months were found to be riddled from top to bottom with toxic assets There are some senior people in the accounting profession who need to be held to account. To be continued……

An object lesson in AGM management

 

 

The Marks and Spencer AGM on Wednesday 8^th July was an object lesson in how to run  a shareholders meeting. The arrangements weren’t entirely perfect – so many shareholders turned out that not everyone could be issued with a voting gizmo – but in terms of stage management, it could not have been bettered. It could have been called  the Stuart Rose (Finest) Hour – except that someone else has already appropriated the soubriquet “Finest’ of course.

 

Middle England turned out in droves to pack the Festival Hall – descending on the free lunch like a plague of locusts, stuffing themselves silly with egg and cress or BLT sandwiches, gathered up in clumps lest someone lese get them first; laughing uproariously  -- with not at --  the half-wit shareholders who think that any AGM is a chance to display their comic talents in asking questions; and swooning at the debonair charmer who, as he frequently reminds them, is their chairman of their company. (Although a moment’s reflection on that would have revealed the fatuity of the claim).

 

Sir Stuart Rose found common cause at every opportunity to side with the private shareholder – part huckster; part noble leader; part ‘simple man merely trying to do an honest job’, he evoked the same sort of admiration that the geriatric Middle Englanders used to  reserve for Mrs Thatcher.  He recited like a mantra the core values of M&S – quality; value; honesty – all things that the shareholders remember dimly from an earlier time. The enemy – by common consent of the majority of the private shareholders -- was to be found in the City, where whiz-kids who had never run anything were intent on snapping at the ankles of this retailing giant. The chairman of the LAPFF who requisitioned (something sinister in that term, underlined by the curl in Sir Stuart’s lip as he said it) the doomed resolution 16 asking for some greater observance of corporate governance principles, ran a close second.

 

The warm-up act for Sir Stuart was his finance director, Ian Dyson – for many in his geriatric audience an improbably youthful bean-counter to be holding such an elevated position. His thin-lipped dissertation on the year’s financial results  shot over the heads of the vast majority of shareholders like a flock of migratory ducks. Dyson’s ten-minute interlude spoilt the Stuart Rose Hour for the majority of the shareholders and his lapse into management speak – Like-for-like sales; ‘a truly multi-channel retail offering’ (in other words stores and mail order)  -- caused a restive murmur. Time for Sir Stuart to come on again, bring on his clothes rail and make some decorously risqué jokes.

 

Few questions challenged the board – or rather were allowed to challenge the board; Rose fielded whatever was asked  and defended his fellow-directors by not allowing anything to get past his straight bat to discomfort them. Shareholders’ questions were deflected – “I hope you agree I have answered that”; any hint of criticism was smothered or batted down through avoidance, obfuscation – or humour. Rose played the meeting like a violin. No one pushed home a secondary question; those who did have any sensible points did his work for him by asking multiple-clause questions, bundling four trivial points around a single  significant one or fluffing their lines.

 

The meeting’s temper was short with anyone who appeared to have some brains; a decent point or a foreign accent. The more facile and stupid the question the more cosy and familiar the terms in which it was couched and the warmer the reception it received from fellow-shareholders. The nasty side of the English lower middle classes -- superior and smug, without having anything to be superior and smug about except their smugness – was only fractionally below the surface. They would resent the term Poujadist if they knew what it meant – but it describes them exactly.

 

For a student of governance the meeting provided conclusive proof that the small shareholders deserve everything that they don’t get. Instead of demanding  a chance to exercise some real power they merely want a day out. They are content to stuff their faces with a crinkly sandwich, drink a glass of warm white wine, sip at cup of stewed tea and then go home thinking that  they have performed their duty as shareholders, clutching the party-bag they have been given as they leave; they go home thinking that corporate democracy is alive and well.

 

Shareholders like that  are not decent moderate people; they are bovine. They are not temperate, tolerant and thinking which is what shareholders should be: they are simply lazy and smug. They deserve chairmen like Stuart  Rose, who only play by the rules when it suits them. Stuart Rose’s recitation of M&S’s mantra -- quality; value and honesty -- may apply to the business but not to fair dealing with the shareholding principles of the Combined Code. Come on -- the man’s a grocer for goodness sake.

Start Worrying -- It's Business As Usual for the Banks

On Wednesday evening (1st july 2009) Jeremy Paxman devoted most of his BBC2 Newsnight programme to new reports of bonus payments in the financial sector. He had heavyweight guests: Nobel prize winner Joseph Stiglitz; Liberal Treasury spokesman Vince Cable; Sir Brian Pitman, ex-chairman of LLoyds TSB; and Paul Myners (Lord Myners), Financial Services Secretary to the Treasury. Gillian Tett of the FT, this year's Financial Journalist of the Year and award-winning author also played a walk-on part

Paxman's story led with the news that for the City the recession is over; "Bonuses are Back" and the good times are rolling again. Goldman Sachs has reportedly set aside £600m in bonuses for its staff and 430-plus Barclays managers will share over £732m in bonuses.

Now, neither of these two financial institutions talk government rescue money, so they are free agents as to how they remunerate their staff. But these bonuses are being paid within a few months of the near-collapse of the financial foundations of the Western world when the change in the culture was supposed to be shifting to long-term horizons matching bonuses with certain returns and was supposed (if it was going to work at all) to apply to all banks -- either by diktat or by osmosis.

Presumably neither Sir Brian nor Lord Myners are fools -- their positions in life would suggest that they can assess evidence; make rational and reasoned judgments and add up to twenty without taking their shoes and socks off. So why did they persist in insisting -- in the face of a billion pounds worth of bonus evidence -- that the bonus culture of the City had changed? Why aren't they devoting their energies to changing that culture with concrete actions rather than singing lullabies to send us to sleep -- again? and if they aren't fools or knaves or liars -- what do they presume we are?

The Sorcerer's Apprentice

Think of the chiefs of the large banks like a character from Mickey Mouse. Yes, i know it's hard -- but try.

Think particularly of Fantasia -- and the Sorcerer's Apprentice sequence, where Mickey dresses up in the magician's cloak (much too big for him), consults the book of spells and proceeds to get the brooms to carry water backwards and forwards to clean the floor of the magicians house. Hold that image in your mind while you read the rest of this note.

As the immediacy of the crisis recedes, so more time for reflection brings increasingly complex solutions to the financial mess we find ourselves in.

Originally the proposed distinction seemed to be between 'good banks' and -- somewhat unoriginal, this -- 'bad banks'. Good banks would be what was left after all the financial pus was cleaned out of the wound and bad banks was where all the icky stuff would go. The Swedes more or less invented the structure years ago during their last banking crisis, (in comparison to the Japanese who kept everything bundled together and ended up with 'zombie' banks). Ordinarily banks want to retain and attract customers; that sort of bank would be the good banks. By contrast the purpose of the bad banks would be to get rid of their customers by gradually working out the loans, with minimal losses of value; running the two different sorts of bank requires different sets of managerial skills.

A development of the good bank/bad bank idea was to revive the structure brought about by the American Glass-Steagall Act of 1933 (repealed by one W Clinton in 1999) which prohibited American banks from undertaking both commercial and investment banking. The thinking behind this was that it was the investment banks which got us into this mess so if we can them separate from the High Street retail banks, then we shan't have any more runs on banks, which so frightened the horses, and the financial regulators can contain the effects of whatever self-harm the bankers do to the bankers themselves, rather than precipitating the whole world to the brink of financial catastrophe.

Recently, however, the debate has got more complex. Some commentators have pointed out that it wasn't just the investment banks (the complex ones) that got us into trouble. it was in fact the High Street (simple) arms of the banks playing around with things that they didn't know the power of -- a bit like the Sorcerer's Apprentice.

So the argument from these supposedly more sophisticated commentators is that we shouldn't try to separate the banks into simple and complex or good and bad , because that wasn't the root of the problem.

Regardless of whether it was or was not, what the recommendations of the simple bank proponents ignores is this. The money that the investment banks play around with is mostly based on pension funds, insurance funds, corporate treasury money and municipal treasury. In other words all the really big money that matters for the long run. So regulating the paltry High Street funds tightly and letting the Sorcerer's Apprentices continue to play with the long-term wealth of the economy doesn't really seem like too sophisticated a solution, does it?.

Rather than give Mickey Mouse the book of spells to play with in any part of the banking structure and try to proof the rest of the structure against him, we ought to make sure that all the structure is as Mickey Mouse-proof as we can get it in the first place.