Bonus bashing

Looks like some sort of government intervention in respect of bonuses could be in the pipeline. Alistair Darling has given an interview to the Sunday Times with some interesting comments. Given last week's leak then back-peddle, it's hard to know exactly how seriously to take this, but given that these are direct quotes from Darling there must be something in it. The key comments appear to be these - 

“If we need to change the law and toughen things up, we can do that. I’m quite clear that some of the problems we have today were caused by the fact that some traders were incentivised to take risks which neither they nor their bosses fully understood,” he said.

Darling said: “The public is rightly concerned because the taxpayer has had to stand behind a number of these banks, and the whole banking system, in effect. So people want to make sure we don’t get ourselves into this situation again. The FSA code is only part of our approach.”

Darling said: “I am not against bonuses where you are rewarding good behaviour and long-term growth. What you can do is make sure you don’t get yourselves into a situation where firms actively have a pay system that results in them being exposed in a way that led to ruin.”

There's not a lot of meat in there but I think we can draw something from this - something in addition to the FSA code is planned, and any intervention is likely to focus on bonuses and ensuring that they are paid over the long-term and/or encourage long-term performance. There's nothing in here about quantum, which is what the public is really annoyed about. That's not to say the Government isn't thinking about that too, but that isn't what Darling has said. 

And in effect, Darling could be 'tougher' than the FSA by taking its code and making it, or reporting on it, mandatory in some way. A tweak to the Companies Act could be used to make further disclosures on remuneration mandatory for example. I doubt it would have much impact in practice, but it does demonstrate that there are things that could be done which would be direct government intervention, and tougher than the FSA's stance so far. (It's worth noting by the by that for all George Osborne's rhetoric about the FSA's code being insufficient, the apparently Tories didn't bother talking to the regulator about what it was doing.) 

One final thought on this stuff. Let's take another look at my favourite quote:

"I'm clear that executive pay is a matter for boards and shareholders, not for governments and regulators."

Well as things stand the regulator is already involved. According to this latest interview the Government may itself intervene directly (and we can safely assume it has been involved behind the scenes in the meantime). The one group that sticks out for its lack of activity/involvement is... errr... the shareholders. If (and I still think it's a big if) remuneration policy did drive behaviour that contributed to the crisis then it must be in the self-interest of at least long-term shareholders to make sure that the problems are sorted. Yet as I pointed out previously, the ISC said nothing at all about remuneration in its response to the crisis. I haven't seen any statements either from the likes of the ABI and NAPF (though to be fair both did respond to the FSA consultation).  

In practical terms too, let's keep a sense of perspective - only four companies have been defeated on remuneration votes this year and only one of them (RBS) was a bank, where UKFI puled the trigger. So to date the only defeat for a bank has been driven by the Government too. The right to vote on remuneration policy was only enshrined in 2003, yet in 2007 and 2008 not a single company was defeated on its remuneration report. (And there are fund managers out there that even now barely vote against anything. I was looking at the voting record of one manager the other day - in the whole of 2008 it opposed management in less than 1% of cases. Such managers, I humbly submit, are part of the problem.)

Is it any wonder then that there is a sense of exasperation at the failure of institutional shareholders - who are very quick to assert and defend their rights - to shoulder any responsibility as owners of companies. The lack of engagement in the deeper issues in the remuneration debate is just another example of how flawed the current system is.