Shareholders are gearing up for another rebellion on pay, but it’s non-executives who bear the lion’s share of responsibility
Take a deep breath. Could we be seeing an outbreak of morality among the corporate elite? Next’s chief executive, Lord Wolfson, announced last week that he is sharing out his £2.4m bonus among his retailer’s 19,400 staff; the head of one of Austria’s biggest banks – Herbert Stepic of Raiffeisen – has handed back £1.2m of his pay on the grounds that he is overpaid; and the incoming head of miner BHP Billiton, Andrew Mackenzie has taken a 25% cut to his salary.
In these austere times – GDP data next week will show whether the UK has sunk into an unprecedented triple-dip recession – an acknowledgement by top bosses that they are overpaid should be embraced. Or should it?
Take Mackenzie of Billiton. Even with the 25% cut in his pay, his salary is still £1.1m before any bonuses. Wolfson, a Tory peer and Conservative party donor, still enjoyed a 13% rise in basic pay to £4.6m at Next (the store’s staff got 2%). The Austrian bank boss still walked away with more than £2m.
And, as is usual with executive pay, there are many more bosses grasping for more. The attempts at restraint demonstrated by BHP’s boss contrast sharply with the behaviour of Xstrata’s departing Mick Davis. He is walking away with £75m as a result of the takeover by Glencore – a staggering £9.6m of which is to be handed to him in cash rather than shares. Similarly, compare Stepic’s gesture of goodwill with Barclays, where the much-welcomed retirement of Rich Ricci seems unlikely to stop millions of pounds of previously awarded bonus deals continuing to flow to him as he enjoys his retirement – which is beginning at the age of 49.
Ricci is a symbol of anything but restraint. This is the man who was handed £17m under the cover of this year’s budget – when Barclays seemed to hope attention would be focused on the chancellor’s speech – taking his earnings since 2010 to over £70m.
The announcement of Ricci’s retirement came just a few days before the bank’s annual meeting with investors this Thursday. The hope is that it will take the heat out of an uncomfortable few hours for new chief executive Antony Jenkins. Remember the fuss last year– even before the Libor crisis had struck – when Bob Diamond was at the helm? Diamond also had unimaginable wealth but was determined to take a bonus for 2011. Almost a third of Barclays investors failed to support the remuneration report.
That rebellion heralded last year’s “shareholder spring”, during which an unprecedented number of remuneration reports were voted down and a number of bosses ousted after years of being overpaid for underperformance.
There are signs that this year could see a replay. Standard Life has angrily criticised the pay policies at BP, and fund manager Jupiter – which itself polices pay policies – suffered a serious humiliation on Thursday, when 42% of investors failed to back its own remuneration report. Corporate governance expert Manifest reckons that any dissent of more than 10% is something for a management team to worry about.
Governments keen to pass the buck on the pay controversy point at shareholders to keep a lid on pay excess, but non-executive directors have at least an equal responsibility. Bonus schemes that pay out so much that their bosses are embarrassed to take the proceeds should never have been approved. Directors on remuneration committees need to think much longer and harder about how bonuses are handed out.
And then there are the executives themselves. Wolfson, Stepic and Mackenzie are to be applauded. But the loudest cheer should be reserved for those executives ready to acknowledge that they do the job to their best ability regardless of the bonus attached. Shell’s former chief, Jeroen van der Veer, once admitted his work would have been the same regardless of his bonus arrangements. Surely he cannot be the only one.
Npower’s tax bill may be justified, but its record isn’t glowing
Almost 90,000 people have put their names to an online petition for RWE npower to pay more corporation tax more in line with the rest of the business community. Revelations last week that npower – one of the Big Six energy providers – had paid “almost nothing” (just £5m) over three years understandably infuriated many.
Comparisons have been made with Starbucks, which faced similar protests and eventually decided to make a £20m ex gratia payment to the taxman.
Will npower have to do the same? Maybe, but the energy company is in a rather different position from the US-based coffee chain, not least because it has invested much more heavily in Britain. The German-owned company has spent almost £5bn over recent years putting in place new gas-fired power stations and wind farms.
Npower is legitimately able to write off some of the cost of those investments against its profits in Britain, where it has more than 6.5 million gas and electricity customers. Certainly, Britain needs new lower-carbon power stations rather more urgently than it needs caramel macchiatos.
It is more vulnerable to criticism over an estimated £350m of “interest payments” from the British company to the German parent. Npower argues that this is just good business: the British arm can borrow money for infrastructure building more cheaply from its colleagues in Essen.
But critics, including crusading tax experts such as Richard Murphy, say there is no difference between such “interest” and the “royalties” paid by Starbucks for use of the brand name, which triggered the coffee crisis.
And there is still no need for any of the Big Six to give regulator Ofgem anything other than retail and generation profits. Yet sitting in between these two are big trading divisions.
The real problem is that npower and the rest have been tarnished by a string of Ofgem fines, criticism over tariffs that seem designed to baffle, and some executive pay excess. Few feel inclined to give them the benefit of the doubt when a tax row breaks.
Departing lingerie boss leaves Bolland looking exposed
The sudden departure of Marks & Spencer’s lingerie boss 12 weeks after her much-heralded arrival means at least six senior bosses at the ailing retailer have recently quit.
When Janie Schaffer was recruited, her appointment was described as “inspirational” . Dubbed “the knicker queen”, she had learned her trade in the M&S undies department, founded the Knickerbox chain in 1986 and for the past five years had been creative director at Victoria’s Secret in the US, injecting new glamour that has helped to haul the brand out of the doldrums.
M&S sources say that Schaffer had come to the end of a three-month probation period – with the clear suggestion that she wasn’t up to the job. Schaffer’s supporters say she didn’t have a probation period and quit because she wasn’t allowed to make even basic decisions, such as new packaging for women’s tights.
Who to believe? Who knows. But a little of the Victoria’s Secret sparkle would have been welcome at M&S, where sales of clothing and homewares have been falling for the past seven quarters. Chief executive Marc Bolland should be worried: the executive exit door is revolving fast, and he might soon find himself spinning through it.
Labour says bank levy has raised £2bn less than planned and should be supplemented with tax on fat cat bankers
The Labour party has branded the government’s bank levy a failure after releasing figures showing that over the past two years it has raised almost £2bn less than planned.
Chris Leslie, Labour Treasury spokesman, said this amounted to a “tax cut of nearly £2bn for the banks” and reinforced the case for the tax on bank bonuses that Labour proposes.
The Treasury did not contest the figures, but stressed that the rate at which the levy was charged was reviewed regularly.
Alastair Darling, the Labour chancellor, introduced a one-off tax on bank bonuses when he was in power that raised £3.5bn in 2010-11. The coalition government chose not to repeat it, but instead said it would raise about £2.5bn every year by introducing a permanent bank levy, a tax based on the annual value of debts held by the banks.
But, according to figures published by the Office for Budget Responsibility and HM Revenue and Customs, the levy has failed to raise this amount in both years it has been in force.
In 2011-12 the Treasury raised £1.8bn from the levy. But the banks also gained £100m from the cut in corporation tax that was implemented that year, leaving a net gain of £1.7bn.
And, according to the Labour analysis, the levy raised just £1.6bn in 2012-13. This was offset by a £200m gain to the banking sector from another cut in the rate of corporation tax, leaving the exchequer with a net gain of £1.4bn. Labour says this means the levy has raised £3.1bn over two years, instead of £5bn as promised.
Leslie, who is going to raise the figures when the Commons resume the debate on the finance bill this week, said: “On top of last week’s tax cut for millionaires, this is effectively a tax cut of nearly £2bn for the banks at a time when millions of working people are being forced to pay the price for this government’s economic failure.
“Whether it’s on tax or watering down reforms to separate retail and investment banks, David Cameron and George Osborne have repeatedly failed to stand up to the vested interests of the banks.”
Labour wants the bank levy to be supplemented with a tax on bank bonuses, which it believes could raise £2.5bn. It would use the money to fund its youth jobs guarantee.
The Treasury said it had raised the bank levy to compensate for the fact that banks would gain from the chancellor’s decision to cut corporation tax. A spokesperson said: “It is inevitable that the fragility of global financial markets will have had an effect on banks’ balance sheets. This is why the government increased the bank levy both in December last year and at budget this year.
“These increases offset the benefit to banks of the government’s latest corporation tax cuts. We have said that we will review the bank levy this year to ensure it is operating efficiently.”
• Euroland nightmare weighs on UK
• BP and ‘on target’ results
• HBOS hubris
• Lord Green visits Latin America
→It is tempting from a UK perspective to regard events in Cyprus as a case of domestic violence within the eurozone that doesn’t much affect us.
That would be mistake. The serving of “poison” to Cyprus, as the country’s parliamentary president put it this week, amounts to another statement by Germany that the hard way is the right way. There will be no slackening in the austerity message ahead of September’s election, and thus no meaningful debate on how creditors and debtors are going to live in harmony. Minor accidents like Cyprus, it seems, will simply be allowed to happen and eurozone lenders will try to minimise the bill for themselves.
Progress on banking union, supposedly last year’s big step forward, has been negligible and there’s an unfilled hole at the centre. The European stability mechanism (ESM) was intended to deal with insolvent banks, but then it turned out the fund would not deal in “legacy” issues. That’s not an advance.
Thus every bailout remains an ugly scrap in which, as in Cyprus, heroic assumptions are made about recovery and business confidence across the continent is jolted. Is the next crisis Portugal mark 2, or Slovenia? Only then will companies and large depositors discover whether a Cypriot-style savings-grab is the new template.
Add up the austerity, the mixed messages and the backtracking and it’s no surprise that the IMF expects the euro area GDP to contract 0.2% this year, after contraction of 0.4% last year. For the UK economy euro recession is impossible to ignore. “Engineering a recovery while our main trading partner is in a downturn is a difficult undertaking,” said the Bank of England governor, Sir Mervyn King, in January.
You bet. The economy is not rebalancing in favour of manufacturing. Britain’s trade deficit in goods widened to £9.4bn in February, we learned this week, and factory production is back at levels seen last September. A government desperate for growth – any growth – is reduced to trying to pump up the housing market by underwriting sub-prime mortgages. Stagnation and indecision in euroland are infecting not just the economy but economic policy.
Hope springs eternal that Germany, after the election, will finally decide how far it is prepared to go to save the single currency. Well, maybe. But it’s a reasonable guess that markets, currently understanding of Angela Merkel’s political bind, will demand a quick answer. And a post-election mini-revolt in the eurozone debt markets would be no bad thing: the current muddle-through approach is leading nowhere.
→BP’s pay structure, according to remuneration chief Antony Burgmans, employs a “relatively simple” system. Relative to what, he doesn’t say, but it’s a challenge for ordinary mortals to keep track of the moving parts. The annual cash bonus scheme alone has 13 “measures and targets”. Then there’s the deferred bonus, and the performance share scheme, not forgetting basic salary and pension.
Thankfully, somebody is paying attention. He is Guy Jubb of Standard Life Investments, who told the board at this week’s shareholder meeting to “raise its game”. He’s right about the complexity, and he’s also right when he says the executives have the potential to receive “significant rewards for achieving unchallenging performance targets”.
The giveaway is the table that illustrates what chief executive Bob Dudley should receive in a year in which he achieves merely an “on target” performance – a cool $10m (£6.5m), even if the share price went sideways.
How is that possible for a middling performance? It’s because long-term incentive plans (LTIPs) have become vastly inflated over the years. Once upon a time, 100% of salary for an LTIP was seen as the largest carrot that could be offered to an executive. These days Dudley can earn 550% of salary under his LTIP. In cash terms, today’s “on target” performance equates to yesterday’s hit-the-ball-out-of-the-park performance.
Jubb calculates that by merely coming third out of five in a league table of oil companies ranked by total shareholder return (TSR), BP’s chief executive can receive shares equivalent to nearly two-thirds of his $1.7m salary. Third out of five? If BP really believes that’s worthy of a £1m bonus it should drop the pretence that Dudley’s package is driven by tough performance targets.
The company was very pleased that 94% of voting shareholders backed the pay report. The reason for that, one suspects, is that executive payouts from incentive schemes have been depressed by the Deepwater Horizon disaster in 2010. Now that the effect of the disaster on the share price will drop out of the three-yearly TSR calculations, Dudley’s generous rewards for “on target” results are much more likely to materialise.
Complexity and the redefinition of success are how boardroom pay outstripped shareholders’ gains in the past. It’s happening again. BP is probably not unique.
→HBOS famously ignored a cardinal rule of banking: never take an equity stake in a company to which you are a lender. If you do, you are no longer a bank but a private equity house and there’s trouble in store in the event of a restructuring.
Some of HBOS’s early loan-plus-equity adventures turned out spectacularly well, such as Sir Philip Green’s takeover of Arcadia, the Top Shop group, in 2002. But that doesn’t deflect from the wisdom of the basic risk-management principle that lenders should not dabble in the shares of a customer.
Less remembered is how far HBOS was prepared to go. Ray Perman’s lively book – Hubris: how HBOS wrecked the best bank in Britain – recalls the detail of Green’s attempt (eventually abandoned) to buy Marks & Spencer in 2004. In that case, HBOS would have been a major lender in the £9.5bn offer. But the bank’s chairman, Lord Stevenson, was also lined up to be a non-executive director of Green’s bid vehicle. It is hard to think of a more glaring example of a conflict of interest.
Perman reports that arrangement caused one of the few rows within the HBOS board. It also caused a fuss in the outside world at the time, but should have caused more. It was an early clue that HBOS directors had deluded themselves that traditional rules of banking didn’t apply to them.
One of the City’s biggest institutional investors calls on BP to ‘raise its game’ as it votes against remuneration report
Standard Life, one of the City’s biggest institutional investors, put executive pay back on the public agenda on Thursday when it voted against BP’s remuneration report at the season’s first major annual meeting.
The investment house called on BP to “raise its game” and said it should do more to promote the interests of women and other minority groups.
Standard Life used the oil company’s meeting at the ExCeL centre in London to argue that the targets set by the remuneration committee made it too easy for executives to obtain generous bonuses or other payouts. The investor also voted against reelection of Antony Burgmans, the chairman of the BP remuneration committee.
At the stormy meeting the BP board was criticised by various investors over share buybacks, the Gulf of Mexico spill and even the company logo.
“I should like the [BP] board to note that we have voted against or abstained on remuneration related resolutions at seven out of the last eight AGMs,” said Guy Jubb, global head of governance and stewardship at Standard Life Investments. “We want to see the remuneration committee raise its game and make significant improvements to address our concerns.”
Standard Life holds only 1.3% of the BP share capital but is one of the major investors. Its appearance in front of hundreds of small shareholders was an embarrassment for a company whose reputation is still suffering badly from the Deepwater Horizon spill.
Institutional investors normally take their concerns to a company board in private and rarely turn up to AGMs unless the issue is considered very serious.
Burgmans, who saw 4% vote against his re-election, said high bonuses were on offer at BP but mostly had not been paid because targets had not been met. This showed the system worked, he said.
Executive pay issues have focused on the chief executive, Bob Dudley, who saw a drop in overall remuneration during 2012 but still secured £1.8m in total pay and bonuses plus a £5m injection into his pension pot. That was despite an 18% slump in underlying BP profits to less than £12bn, while his bonus target was in theory 923% of his base salary.
Referring to the bonus for Dudley, Burgmans said: “I admit it is a very high figure but the company would have to fire on all cylinders [for him to get it].”
The attack by Standard Life suggests there could be a repeat of last year’s AGM season, when there were was a series of revolts against excessive executive payouts at Britain’s leading companies during a period of high unemployment and government austerity became known as the “shareholder spring”.
The pensions advisory organisation, Pirc, had already raised the alarm about the BP remuneration report and has also urged shareholders to vote against AGM resolutions at other companies such as temporary power generator Aggreko.
In the end nearly 6% of shareholders voted against the BP remuneration report while a similar level of dissent was recorded against the re-election of the BP chairman, Carl-Henric Svanberg. He has been a lightning rod for wider criticism of BP executives since the Macondo blowout three years ago.
BP said the 94% of shareholders voting in favour was the highest number for seven years and compared well with many other companies in previous years.Svanberg and Dudley gave an upbeat assessment of BP prospects despite continuing civil action in the US courts over the Deepwater Horizon and a $38bn (£24bn) sell-off of assets to raise cash to pay off liabilities emanating from the spill of April 2010.
Svanberg said BP had ended the 2012/13 financial year in good shape. “We have reorganized and restructured. We are resolving the uncertainties facing the company.We have a clear strategy. And more than everything we have great people. We go into a new year with momentum and with confidence.”
Dudley said the settling of many legal actions against in the US and the new deal with Rosneft in Russia were two of many pointers to a strong future. “I hope that you will leave here confident that your company is on the right course – in good shape to safely deliver energy for customers and sustainable growth for our shareholders.
But shareholders at the AGM raised all kinds of concerns, not least the decision to move ahead with $8bn worth of sharebuybacks. One investor, John Farmer, said the repurchasing of a company’s own shares was merely an “act of faith” that it would help boost the share price but often turned out to be pouring “money down the drain”.
Svanberg begged to disagree while Dudley was forced to deny allegations from shareholders based in the US Gulf who accused BP of playing down the health risks of the dispersants it had used to clear up the Gulf spill.
Environmentalists attacked the board over its commitments to high-carbon activities such as the Canadian tar sands but company executives insisted their took climate change sertiously and would only engage in “responsible” activities.
After last year’s shareholder spring, the mood of rebellion against directors’ rewards may bubble up again this month – and is likely to be at its strongest at these annual meetings
Pay campaigners have in the past confined their criticism to companies gifting bonuses to executives who have manifestly failed. Latterly, however, many have grown increasingly uneasy at the size of potential payouts on offer, which have ballooned at many large companies. Tougher laws requiring shareholder approval for large individual bonus payouts have been passed in Switzerland, adding to calls in the UK and elsewhere for payouts to be kept in check. Campaigners calculate BP chief executive Bob Dudley could receive performance-related payouts of up to 923% of his $1.75m (£1.15m) salary. Last year, 13.5% of votes cast at the oil group’s annual meeting were in protest – that is, “no” votes or abstentions – over pay deals for Dudley and his fellow directors.
The insurance group is expected to see investors register a protest at its decision to replace long-standing auditor Deloitte with rival KPMG.
This is not because they are keen for Deloitte to stay on – quite the contrary, after the firm received £10m for additional services sold to RSA on top of £6m for audit work. The proposed move from Deloitte has prompted concern because RSA’s audit committee chairman, Alastair Barbour, only stepped down as a senior KPMG partner in March 2011. Too close a relationship for some. Meanwhile, big bonuses for chief executive Simon Lee after a 20% fall in pre-tax profits and a dividend cut also sticks in the craw for many. Last year 9% of votes at the AGM were cast in protest over RSA boardroom pay deals.
Most chief executives facing a pay controversy try to absent themselves from the debate, or defer irate questions to the chairman or head of the remuneration committee. Not so Sir Martin Sorrell. In the runup to what he knew would be certain defeat at WPP’s meeting last year, he railed against those who suggested he was excessively remunerated. “WPP is not a public utility,” he said. His role, he argued, was “to behave like an owner and entrepreneur and not a bureaucrat”, and that meant paying him accordingly. Last year some 60% of votes were cast in protest at pay deals for Sorrell and his fellow directors.
Chief executive Sam Laidlaw and four boardroom colleagues shared payouts totalling £16.4m last year. Such rewards have already sparked outrage from unions and fuel poverty campaigners who insist they are unmerited after Centrica subsidiary British Gas raised consumer gas prices by 6%. Coincidentally, the rise in payouts for executive directors was also 6% – gains the company insisted were based “squarely on performance”. That was not an argument that convinced all shareholders last year. Some 16.2% of votes cast at the 2012 annual shareholder meeting were in protest at the pay arrangements for Laidlaw and his fellow directors.
A delegation of American trade unionists is expected to return to National Express’s shareholder meeting this year, determined to highlight what they see as the company’s moves to block Teamster union recruitment efforts at school bus depots in America.
US union leaders said they had held talks with institutional investors and members of parliament about their concerns. The group is unlikely to face pressure this year from activist investor Elliott Advisors, which has in the past agitated for strategic changes. Elliott sold half of its near-20% holding last month and described itself as a “strong believer in National Express’s management team and its strategy”.
Chief executive Tidjane Thiam surprised some by retaining the support of shareholders following the group’s ill-fated takeover bid for Asian competitor AIA three years ago. Last month, however, that sorry episode came back to haunt the FTSE 100 boss when he became the highest-profile figure to be personally censured by the Financial Services Authority. The regulator suggested he had not behaved “openly and cooperatively” towards it over the proposed deal, and went on to fine the group £30m.
Despite the huge fine and the censure, Thiam has received a £2m bonus. Last year the group faced a protest vote of 33.6% over its boardroom pay arrangements. Thiam, however, enjoyed near-unanimous support, with 99.1% of votes in favour of his re-election to the board.
The Tory position on social equity, personified by the words of George Osborne, only adds to division
Britain needs an urgent debate about fairness – the responsibilities we all have to the wider society we live in, and to the taxpayer. Last week saw examples of extraordinary duplicity and criminal irresponsibility from both the upper and lower echelons of society.
Britain’s most infamous benefits claimant, Mick Philpott, was jailed for life for the death of six of his 17 children in a fire he started. The case prompted a sometimes unedifying debate about the part played by our welfare system in the appalling events, amid claims that taxpayers had funded the chaotic lifestyles that nurtured tragedy. Meanwhile, a parliamentary inquiry into HBOS and a special report into Barclays commissioned by the bank itself exposed cavalier irresponsibility with others’ savings in the quest for personal gain, with the taxpayer directly or indirectly picking up the pieces once disaster struck.
But instead of national conversations about encouraging fairness and responsibility at both the top and bottom of society, there has been a single-minded focus on the failings of those on the lower rungs of the ladder, often reinforced by an unwillingness to correct widespread misconceptions about the true levels of welfare payments. Philpott has become part of an unpleasant syllogism, shamelessly created by the beleaguered chancellor, George Osborne, in his efforts to portray the coalition’s welfare “reforms” as grounded in morality and fairness.
Philpott, runs the argument, was party to the manslaughter of his children. He was also a benefit claimant who bred children as sources of income provided by an unreformed welfare state. Therefore, both the benefit system and its claimants are as morally corrupt as Philpott and the coalition’s decision to reshape welfare, notably capping claimants’ income at £26,000, is wise and in tune with the people’s instincts.
The best that can be said about Mr Osborne’s position, supported by the prime minister, is that he expresses a very partial truth supported by a moral position on fairness that is selective and discriminatory in its application. The worst is that it is a mendacious stigmatisation of a system that is all that stands between the majority of claimants and destitution. Yet to win this argument, defenders of the very principle of welfare, social security and the social contract that stands behind them have to ensure that what they are defending corresponds to fairness, thus revealing the mendacity and cruelty of Osborne’s position. This they have failed to do, not least because the system has been allowed to drift too far away from fairness principles.
For the Tories strike a popular chord when they say they want an end to the something-for-nothing society and that welfare as it is currently organised rewards Philpott-style irresponsibility. One of the principles of fairness is that there should be a proportional relationship between what one contributes and what one gets back. This is an elemental human instinct, which Osborne invokes, and which the current welfare system insufficiently respects. William Beveridge, the architect of the welfare state, wanted to defend it from Osborne-type attacks by insisting it be based on the contribution principle. It would genuinely be a collective insurance system, with insurance premiums leading to proportional benefits – one’s pension, unemployment and sickness benefits.
But successive governments have failed to earmark national insurance contributions for a dedicated fund that will pay out to beneficiaries on the basis of how much they have paid in. Instead, contributions have been treated as if they are income tax payments. This means that all benefits are funded out of general revenues at the discretion of the government of the day. How welfare is paid for has become a technical matter.
Indeed, Mr Osborne has investigated whether there is a case for merging tax and national insurance. But benefits that are part of a social insurance system that represents a social contract are not the same as benefits paid for from general taxation. The charge against the Conservatives is that they have no interest in expressing fairness as part of a social contract. Rather, they want a minimal system that addresses only acute need that they judge to be deserving, funded by taxation and at the discretion of politicians and officials.
This lack of concern with fairness extends to how we address the role of luck in our lives. If someone has an accident, people understand that it is fair to lend a helping hand. Philpott’s children did nothing to deserve the fate of having him as their father. Indeed, no child has done anything to deserve living in a disadvantaged family. This is why society tries to relieve their circumstances by giving their parents the cash to feed, clothe and house them and why it tries to ensure they are properly parented and educated.
This is a cardinal fairness principle. The policy of capping total payments to families, and reducing their housing benefit if they are alleged to have too much space in their homes, in effect penalises children for the bad luck of being born to the wrong parents. Yes, Philpott abused the system, but we should not distort the life chances of hundreds of thousands of other disadvantaged children for one case.
Fairness principles are indivisible: the same must apply at the top of our society as it does at the bottom. HBOS was an insolvent bank and, as the parliamentary report makes clear, was managed disgracefully in the run-up to its collapse and takeover by Lloyds Bank, which in turn only survived because of a huge capital injection by the taxpayer. It is crystal clear that in the years before 2008, banks in general, and HBOS and RBS in particular, ran themselves with too little capital in order to maximise profits and bonuses. They were bailed out by the state providing both capital and more than £1tn of extra liquidity. How bankers are paid and how they run their banks have as profound an impact on society – and taxpayers – as the welfare system.
Yet Mr Osborne, the self-appointed champion of fairness, has fought tooth and nail against the European parliament’s proposal to limit bankers’ bonuses to twice their salaries. The proposal to ringfence commercial and investment banking, and raise banks’ capital, will only be implemented in 2019, while public services are taking significant cuts now. The executives at the helm of HBOS whose actions cost billions of pounds directly – and indirectly contributed to our five-year recession – have suffered little more than reproach and personal embarrassment. More widely, 300,000 individuals with incomes over £150,000 are to enjoy a reduction in income tax from this weekend.
This is not a moment for a witch-hunt over welfare abusers. Rather, we need a proper argument about whether British society as a whole is fair. It is not one that Mr Osborne, or his policies, would win.
Anthony Salz’s 244-page report – commissioned after Libor scandal – finds pay ‘contributed significantly to a sense among a few that they were somehow unaffected by the rules’
Barclays bankers were engulfed in a culture of “edginess” and had a “winning at all costs” attitude which raised tensions with regulators and damaged its reputation, according to a review into the ethics of the embattled bank.
In a 244-page report (pdf), which cost £17m and was compiled after interviews with 600 individuals in the wake of the Libor-rigging scandal, City lawyer-turned-banker Anthony Salz calls on Barclays to strengthen its board, co-operate more closely with City watchdogs and link its pay to the bank’s “long-term success”.
Salz, who makes 34 recommendations, provides an insight into the pay of a cabal of the top 70 Barclays executives who received up to 35% more than peers at rivals, while 60 investment bankers benefited from a lucrative long-term bonus scheme that paid out £170m a year between 2002 and 2009.
“Based on our interviews, we could not avoid concluding that pay contributed significantly to a sense among a few that they were somehow unaffected by the rules,” the report says. “A few investment bankers seemed to lose a sense of proportion and humility.”
The review says the bank underestimated the reputational hit it took from its tax schemes. Data shows its controversial structured capital markets (SCM) arm made £1bn of revenue a year between 2007 and 2010. The division, which is being shut down with its 100 staff being redeployed around the bank, generated revenues of £9.5m in the 11 years to 2011.
The review also reveals that Barclays paid just £82m in corporation tax to the exchequer in 2012 after top-line profits of £7bn shrank to £246m.
Salz found the most deep-rooted culture was inside the investment bank, which was focused on success. “Winning at all costs comes at a price: collateral issues of rivalry, arrogance, selfishness and a lack of humility and generosity,” he writes.
The report – which puts a focus on the management of former chief executive John Varley – reveals that 728 Barclays bankers received more than £1m in 2010. That number fell to 428 in 2012.
The review, which does not attempt to blame any individuals for the damaging collapse in the bank’s reputation, highlights the 10 years of rapid growth that took place as Barclays rose to become a top-five global bank under Varley.
Varley, who handed the top job to Bob Diamond in January 2011, had an executive committee of six colleagues which did “not develop a cohesive team at the top”, putting Diamond in charge of the investment bank and Frits Seegers – who left in 2009 – in charge of the retail bank where he instilled a “culture of fear”.
Diamond, who quit in July 2012 just days after the bank was fined £290m for rigging Libor, had taken steps to develop one culture across the bank, says Salz, who is a director of the Scott Trust, owner of the Guardian. Rothschild, where Salz is also a director, received £1.5m in fees for his time.
Salz says: “Significant failings developed in the organisation as it grew. The absence of a common purpose or common set of values has led to conduct problems, reputational damage and a loss of public trust.”
He admitted that some Barclays staff had refused to be interviewed for the review and one City analyst described the report as an “inappropriate use of trees”, alluding to its focus on the bank’s past instead of its future challenges.
Divisions previously run by Diamond’s successor and current chief executive, Antony Jenkins, are also mentioned. Barclaycard had a culture of making money ahead of customer satisfaction. The retail bank focused on sales where loans sold with payment protection insurance generated two-and-a-half times more commission for staff than loans sold without the discredited insurance, which generated £400m in revenue a year for the bank.
Jenkins has announced a new set of values and a programme of reform, although a survey of 9,000 staff by Salz found that 70% had a high degrees of scepticism about the changes.
The review says the bank came across as “too clever by half” and that its battle to avoid a taxpayer bailout damaged its reputation. “Barclays was sometimes perceived as being within the letter of the law but not within its spirit,” the review says, describing “an institutional cleverness”.
The complicated Protium transaction it used to move loans off its balance sheet in 2009 had concerned regulators while Barclays could have communicated its 2008 fundraisings from Middle Eastern investors – now under investigation by the Serious Fraud Office – more clearly, according to the report. During crucial stress tests to assess its financial health, the bank was “insufficiently sensitive” about the way it presented the results.
Sir David Walker, appointed chairman of Barclays in the wake of the Libor fine, said: “The report makes for uncomfortable reading in parts”.
The 16% dip in pay came in a year the company reported a 12% drop in pre-tax profits to £360m
Michael Dobson, the chief executive of fund management group Schroders, took a £1m cut to his pay last year after receiving a £5.37m package, down from £6.37m in 2011.
In total Dobson received a salary of £400,000 plus a cash bonus of £2.3m, rewards which were supplemented by two separate grants of shares worth £2.14m and £500,000.
This is the second time in two years that Dobson has taken a £1m pay cut, after receiving £7.37m in 2010.
The 16% dip in pay came in a year the company reported a 12% drop in pre-tax profits to £360m.
In the group’s annual report, Lord Howard, the chairman of Schroders remuneration committee, wrote: “Variable compensation awards for the current executive directors were between 13% and 39% lower than 2011. This reflects the strong results achieved in terms of investment performance and net new business, but also the reduction in profit before tax.”
Executive vice-chairman Massimo Tosato received £3.34m in 2012, while departing chief financial officer Kevin Parry made £2.11m.
Deputy PM says he wants to encourage more owners to sell business on to employees
Nick Clegg will propose tax breaks on bonuses handed out to staff in employee-owned firms as part of an attempt to boost what he calls the “John Lewis economy”.
In a speech to the Employee Ownership Association, the deputy prime minister will outline plans to consult in the summer on “a relief on tax on bonuses paid through benefit trusts, where a significant chunk of the business is owned by employees”.
To qualify it would be necessary for the rewards to go to the whole company and not just those at the top.
It is the first time that Clegg has gone so far as to promise a specific consultation on the issue. He will say: “Employee ownership works because it so neatly aligns incentives and puts the workers at the heart of the business.”
The ideas go beyond the budget commitment to provide £50m capital gains tax relief from next year for a majority shareholder to sell his company to his employees.
Justifying that plan, Clegg will say: “Many owners end up selling to the investor who has the largest chequebook but little regard for the traditions, employees and customers of the firm.
“Others hand the business down to their children even if that isn’t what they or their children really want. What we want to encourage is for more owners to sell the business on to those people who know the business inside out, who will go the extra mile, the wider family who have worked to build it up and contribute to its success – in other words, the employees.”
In the past year there has been a 10% growth in the number of employee-owned firms.
In common with the Tories Francis Maude and Oliver Letwin, Clegg is pushing for a diverse model of companies in the UK, including mutuals in the public sector. He will say: “A diversity of business models in an economy is important because it ensures that not all firms are structured to take short-sighted, gung-ho risks on behalf of others.
“Crucially, employee ownership can drive employee engagement by aligning the incentives of ordinary workers and the business. In practical terms, it means lower absenteeism and lower levels of staff turnover. Across public service mutuals we have seen organisations who have decreased their absenteeism by an average 20% since spin-out. Many companies spend thousands of pounds to come up with quirky ideas to motivate their staff, yet fundamentally it is the structure of their company which fails to align incentives.
“The Cass Business School concluded in 2010 that employee-owned businesses are between nine and 19% more productive than traditionally structured companies. So not only does employee ownership help build a more motivated, more committed workforce, but it improves the bottom line too.”
Trade Union Share Owners group aims to use its share ownership to ‘inject a dose of reality’ into British boardrooms
Overpaid chief executives and all-male boardrooms will be challenged by a new grouping of influential shareholders controlled by the TUC, Unison and Unite unions.
The Trade Union Share Owners group, which controls £1bn worth of staff pension funds, will join forces to take action at the annual meetings of FTSE-listed companies, a year after the so-called shareholder spring saw a wave of meetings where investors voiced their anger at excessive pay.
The group will take common voting positions on directors’ pay and bonuses, the membership of boards and the advertising of new director posts.
TUC general secretary Frances O’Grady said: “The UK’s families might be struggling to cope with the biggest squeeze on their incomes in living memory, but that hasn’t discouraged top directors from awarding themselves austerity-busting pay and bonus packages worth millions.
“It’s time to inject a long-overdue dose of reality into British boardrooms and we are going to use the power of our pension funds to make a difference and to encourage a new and more responsible corporate Britain.”
A report last year by corporate governance expert Manifest and pay consultants MM&K revealed that FTSE 100 chief executives saw their take-home pay increase by 12%, while employees’ pay rose by just 1%.
Angry shareholders voted down various pay packets for some of the most highly paid executives in the country and triggered the resignation of Andrew Moss, chief executive of Aviva, Sly Bailey at Trinity Mirror and Astrazeneca boss David Brennan.
However, yesterday, the pharmaceutical giant revealed that it paid Brennan £120,000 in relocation costs after he stepped down and moved back to the US. Aviva said it will pay new chief executive Mark Wilson up to £200,000 in relocation costs to move from his previous base in Hong Kong to the UK.
All-male boardrooms have also caused politicians and campaigners to call for all FTSE companies to have at least 30% women on their boards.
The business secretary, Vince Cable, recently wrote to the seven FTSE 100 companies that still have all-male boards and the business select committee has been hearing evidence on how more women can enter the boardroom.
The general secretary of Unite, Len McCluskey, said: “Trade union values of decency and fairness ought to be present in the boardroom, but if we cannot trust that they will be, then we need to use our share ownership to influence corporations.”