• 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.
US retailer Target apologises after its labelling of a plus-sized dress after a rotund marine mammal triggered online uproar.
Go here to see the original: US retailer’s plus-sized dress gaffe
HM Revenue & Customs cost callers £136m on phone calls and left 20m calls unanswered
HM Revenue & Customs has been criticised by MPs for costing callers £136m a year by not answering telephone inquiries, despite spending £900m on customer service. The Commons public accounts committee said HMRC had “an abysmal record”, but welcomed moves to introduce a call-back system and dispense with costly 0845 numbers.
According to the committee’s report, HMRC left 20m telephone calls unanswered last year and managed to reply to 66% of letters despite a target of responding to 80% of letters within 15 days.
Labour MP Margaret Hodge, who chairs the committee, said: “HMRC’s ‘customers’ have no choice over whether or not they deal with the department. It is therefore disgraceful to subject them to unacceptable levels of service when they try to contact the department by phone or letter.”
She said a new target of answering 80% of calls within five minutes was “woefully inadequate and unambitious” and warned that proposals to cut customer-facing staff by 8,500 posed a real risk to the department being able to improve standards.
“HMRC plans to cut the number of customer-facing staff by a third by 2015. At the same time, the stresses associated with introducing the real-time information system, universal credit and changes to child benefit are likely to drive up the number of phone calls to the department.”
Since the committee’s hearing on the HMRC, the department has announced the closure of its 281 inquiry centres, which is likely to put more pressure on phone lines. Hodge said: “It may need to put in additional resources … to avoid the kind of plummeting performance we have seen in the past.”
An HMRC spokesman said: “This report criticises a previous poor standard of service from which HMRC has already recovered. We are investing an extra £34m in our contact centres to maintain this industry-standard level of performance.”
The UK tax authority’s new target for answering calls from taxpayers is “unambitious and woefully inadequate”, according to a committee of MPs.
See the article here: HMRC call handling ‘must sharpen up’
Bank of England governor gives rare TV interview, saying Treasury must not water down its commitment to low inflation
Bank of England governor Sir Mervyn King has warned the Treasury against watering down the commitment to low inflation in the budget next week, describing a return to high inflation as “scary”.
King, who leaves office in June, rejected calls for the central bank to put forward more aggressive policies to boost growth at the expense of its current focus on inflation. “I’m not sure there is any call for major change in the remit,” he told ITV News. “Most important is the commitment to the target of 2% [inflation].”
The inflation target, which was set by the Treasury in the 1990s, is under threat following months of criticism directed at Threadneedle Street for the weak pace of economic recovery.
King’s rare television interview came amid speculation that the chancellor will tell parliament next week in his budget that a review of the Bank of England’s mandate is needed to include a requirement to focus on economic growth.
The governor is thought to have lobbied against the move and told ITV: “What was scary when we had high inflation was businesses faced high interest rates … mortgage repayments doubled, there was pressure on household finances … people stopped looking at the long term and focused entirely on the short term.”
Earlier, chief economist Spencer Dale had given a speech where he too endorsed the Bank’s mandate and said the inflation target still allowed it to take an active approach to boosting growth.
In what appeared to be a co-ordinated attack on the chancellor’s plans, Dale described calls for policies to promote growth as “dangerous talk”.
“The target is not a sham, but a vital anchor,” he said. “We will hit the inflation target. And if we don’t hit the inflation target over time, the cost to our economy will be very severe.”
The Bank has pumped £375bn into the economy by quantitative easing, mainly through banks and building societies, in an effort to boost lending. A separate £80bn scheme subsidises loans to banks. Figures for last year show that much of the money was used by banks to bolster reserves rather than lent to households and small businesses. But King reiterated his view that there is a case for more electronic printing of money.
The Bank has failed to meet the 2% target for more than three years but blamed items such as the rise in university tuition fees.
Dale also argued against boosting the economy with more central bank loans, arguing that it would trigger inflation.
Markets responded by reversing a three-month decline in the value of the pound, which bounced back to $1.51.
Sterling has declined by more than 7% since the beginning of the year in response to speculation that the central bank will inject further funds into the economy to boost growth.
Constrained by his focus on debt repayments, Osborne has come to rely on King expanding the funds he puts into the economy to support bank lending to households and small businesses.
The governor will be replaced by Mark Carney in the summer and it is understood the Canadian central bank chief is keen to adopt a broader range of measures to kickstart the ailing economy.