For the last few days, the subject of boardroom excess has been brought firmly to the forefront of the news. That news has been firmly fixed on what should have been a government owned bank – the Royal Bank of Scotland, whose disastrous purchase of failing Dutch bank ABN AMRO was in no small part responsible for the near-collapse of the British banking system. The targets of media – and thus public – ire have been its former chairman, ‘Sir’ Fred Goodwin, and its current CEO, Stephen Hester. Politicians and their supporting press have had their knickers all in a twist over, firstly, Hester’s surprisingly large £963000 ‘bonus’, then Goodwin’s apparently undeserved knighthood.
Both narratives have reached a convenient resolution, so convenient it actually looks a bit contrived. And, as far as I’m concerned, so it is – contrived to distract people from a much larger systemic problem of which these two rapacious capitalists are merely the tip of the iceberg.
I can’t help wondering what backroom deals and political pressure caused first RBS’ chairman, Philip Hampton, to decline his own £1.4m share gift ‘bonus’, then Hester to finally relent and decide he wasn’t going to take his. Both made their decisions amid a mounting storm of public anger; but as usual where a press narrative is concerned, the shades of grey were barely touched upon.
The assumption that RBS is ‘publicly owned’ is close to, but not the actual, truth – the bailout of £45 billion of OUR money to rescue the bank from its own unthinking greed actually left 17% of the bank outside government hands. This was in the dying days of the New Labour government, when the party was somehow still desperate to avoid associations with its own socialist past; so buying the whole thing and effectively nationalising it was right out. Nobody, they thought, wanted to be reminded of British Steel, British Leyland and British Rail – ignoring the fact that privatisation has in many cases rendered formerly nationalised industries worse than they previously were.
So RBS, remained, effectively, a private organisation – albeit one in which the public had a vast majority share of 83%. David Cameron had a point when he said that it wasn’t the government’s place to interfere with remuneration arrangements in a private company; but as shareholder rather than legislator, it certainly could have had a say. It now seems that they did, and Hester’s £963000 bonus had actually been halved at the hamfisted insistence of our beloved Prime Minister. How he thought that kind of sum would be in any way more acceptable than twice the amount shows his trademark lack of empathy with those who aren’t hyper-wealthy millionaires, but hey, at least he made the gesture.
Trouble is, the gesture WE all saw was a middle finger to those who thought senior bankers were already being paid an insane amount, and the PR pressure didn’t let up. And the discussion of the issue was starting to lead onto a wider discussion of, well, if we can’t control the rampant excess of a company that’s 83% publicly owned, maybe, just maybe, something’s wrong with the entire system that allows this to happen.
I’m only theorising, but I wonder if, at this point, a quiet word was had from ‘someone’ in the Treasury (perhaps with the initials G.O.) with the board of RBS, to the effect that, unless they sacrificed their goodies this time, the whole comfy system might come crumbling down for the entire sector. And again, just theorising, but maybe Mr Hester was prepared to call the bluff, but Mr Hampton wasn’t. So, when Hampton gave up his bonus, it really did become politically untenable for Hester to cling on to his.
At this point, another banker was thrown to the wolves – step up, Sir Fred Goodwin, the ‘mastermind’ behind the ABN AMRO takeover and chief architect of RBS’ near-collapse. There’d been quiet rumbling for a while about the prospect of ‘punishing’ Goodwin by stripping him of his knighthood. Lest we forget, this knighthood was given out – in happier financial times – by New Labour in yet another attempt to prove that they weren’t so different from the Tories when it came to looking after The City. There’s a revealing clip of Harriet Harman defending this at the time by saying she “believed” the honour wasn’t for services to the banking sector, but more because Goodwin was such an all round nice bloke.
Buckingham Palace would beg to differ. It was indeed for ‘services to the banking industry’ that Goodwin was knighted, although with hindsight it’s easy to wish the Queen hadn’t just used that big sword to cut his head off and save her country a lot of money. Now though, with the public mood towards bankers something akin to their feelings for Nazi war criminals, it’s been arranged that Goodwin will no longer be “Sir Fred” and revert to plain old “Mr Goodwin”.
This was arranged by a little seen body called the Forfeiture Committee, staffed by civil servants and entirely apolitical – you know, just like the whole Honours system isn’t. There is, undoubtedly, a certain amount of satisfaction to be gained from Goodwin’s stripping of his title. Mind you, I at least might have preferred it if he’d instead been stripped of his pension – a pension that leaves him struggling on a mere £350000 a YEAR from the funds of a bank that WE paid to rescue from his calamitous mismanagement. Still, could have been worse – the original pension was nearly twice that amount, but Goodwin grudgingly ‘agreed’ to sacrifice half of it at the urging of then Chancellor Alastair Darling, himself being leaned on by his Opposition equivalent – one Mr George Osborne. How times change!
So yes, I’d have been happy for him to keep his meaningless knighthood if he’d given back the pension that we’ve paid for. After all, the knighthood’s costing us nothing. And I suspect “Mr Goodwin” has enough of a personal fortune from his obscene pay while still working for RBS that he could probably manage without a pension at all.
Richly deserved fates for both Hester and Goodwin, many are saying, and I find it hard to disagree. Many others, however, are saying that these men have been sacrificial lambs on the altar of public opinion, and I find that hard to disagree with too – but not for the reasons most are saying it. Stripping Hester of what was actually a share gift rather than a cash settlement doesn’t actually achieve very much; he couldn’t have sold the shares until they vested after four years, in which case it would surely have been in his interest to make RBS do well, which presumably is what we want. And removing an archaic medieval title from Goodwin, while it’s nice to see him humiliated, is little more than a meaningless gesture.
No, the reason these two men come across as scapegoats is that, presumably, we’re meant to be satisfied with these two highly-publicised bits of ‘justice’ and stop talking about the problem they actually represent – the increasingly insane levels of remuneration at the top of not just banks but every substantial private organisation.
Yes, Hester has given up his bonus – but he still draws a ‘basic’ salary of £1.2m. This, it is argued, is because it’s the going rate for a talented CEO, and such a person is necessary to restore ‘confidence’ (a word that so easily precedes ‘trick’) in the RBS. The tradition of ‘bonuses’ is justified in the same way – they must be doled out, regardless of merit, because everyone else does it (although this seems to be a tradition largely confined to the UK and the US). Indeed, so great is the expectation of this kind of entitlement among bankers now that the former employees of failed bank Dredsner are actually suing their now-defunct employer for the $66m in bonuses they didn’t get this year – because the bank went bust. That’s some brass neck.
Meanwhile, CEOs and board members routinely award themselves annual pay rises of around 40%, at a point when the lowest ranking members of staff are seeing regular pay freezes. Just ask the employees of HMV, whose Christmas bonus has now been abolished, and have been told that Bank Holidays no longer count as public holidays, so must be worked by all without overtime pay. So they’re working slightly harder than most board members, whose jobs are so undemanding that many sit on multiple boards drawing huge salaries from each.
As with so many political issues, there are two aspects to this – the moral and the pragmatic. A moral argument on the topic is almost impossible to win, because everyone’s morals are subjective. Anyone criticising the state of affairs regarding income inequality is immediately branded as using “the politics of envy” by supporters of the status quo. Bloody right we’re envious – when Tesco CEO Philip Clarke gets paid £6.9m a year while his lowly employees have to use tax credit just to survive, I’d say there was a right to envy. But envy doesn’t mean critics of the system want to be in the same position as Clarke; it’s not a binary argument. They just want some form of fairness restored to a system in which the tax rate tops out when you’re earning £150000 a year, and men like Clarke earn many multiples this amount.
Still, some argue that this IS a fair system – I can see the point about rewarding hard work and keeping the state out of it. That’s plainly not the case – but it’s their moral stance, and unlike religion, it’s virtually impossible to proselytise your own moral code. But there’s the pragmatic argument too, which is harder to shoot down. There’s a finite amount of money in the system. If CEOs and board members continue to get annual raises of 40% or more, they’re increasingly going to be hoarding the vast majority of that finite amount at everyone else’s expense.
I say “hoarding”, because that’s what they do. They’re not actually spending these vast sums of money, which might help stabilise the economy. No, it sits, often untaxed, in foreign banks and tax havens. It’s been estimated that, currently, there is $18 TRILLION worth of untaxed assets sitting in offshore havens. That is, I believe, more than a third of the GDP of the entire planet. And if the rich keep getting 40% pay rises, that figure is only going to get larger.
Unfortunately for such vested interests, the issue has become a hot political topic, even with the apparent dismantlement of the Occupy movement. It was unsurprising to see Barack Obama address income inequality in his State of the Union address this month; but more surprising to see Republican hopeful Mitt Romney vilified by his own party for paying a meagre 15% tax on his gigantic income. Ordinary Republican voters, it seems, are no longer being conned into voting against their own interests by the vague promise that they too can be hyper rich and benefit from the system.
Over here, motivated by political necessity, there have been things afoot too. Many are somewhat ineffectual, if well-meaning. Vince Cable’s much-publicised proposals on curbing boardroom excess strike me as weak at best. Full disclosure of executive pay may well lead to execs saying, “why aren’t I getting as much as he/she does?” Shareholder voting on pay rises is largely irrelevant when most shareholders are vast, impersonal pension funds. Having employee representation on pay committees is a nice idea, but hinges on the concept that execs wouldn’t have the cheek to vote themselves massive increases when faced by their lowest ranks across a table. As we’ve seen time and again, execs have this much cheek and much more besides.
Other ideas, though, seem rather better – and sadly less likely to happen. The Lib Dems’ proposed ‘mansion tax’ on properties above £2m in value is quite a good one – after all, you can’t shift your house to an offshore haven. Trouble is, it’s likely to be shot down by their Tory partners in the interests of fairness –after all, Mr Cameron and his Chipping Norton friends do have VERY big houses.
Then there’s Land Value Tax – again, you can’t move land out of a taxation regime. To some extent, countries like Australia do this already. Perhaps by coincidence, Australia’s economy is doing rather well. However, despite some Lib Dem fondness for the idea, nobody else seems to want this one either.
Then there’s the rather more bonkers idea espoused by a few left wing commentators recently of a one off 20% ‘wealth raid’ on the assets of the tiny proportion of the hyper-rich. This, the commentators argue, could raise £800bn at a stroke – more than enough to pay off the £149bn deficit, and start making a dent in the national debt itself. Trouble is, I can’t see how this would work realistically, when so much of that wealth is based in property or moored anonymously offshore.
As with so much of economics, there are plenty of proposed remedies floating around at the moment, and it’s hard to see which are workable, realistic or fair (there’s that moral judgement again). But the only thing that is clear is that the current system is unsustainable. CEOs aren’t going to sod off overseas if you deny them the contents of Scrooge McDuck’s Money Barns – somehow Mervyn King manages to run the Bank of England on a mere £300000 a year, and he’s not clamouring for a giant increase. No, this whole thing needs more comprehensive debate than this long ramble can cram in, but it’s a debate that shouldn’t be shut off because we’re sated with the sacrifice of two of the small fry villains of the tale.