Whose money is it anyway?

Another Mark Kleinman story caught my eye last night. This time it's about anonymous (as always) investors encouraging RBS to a) make a big share award to Stephen Hester and b) defend its head of investment banking. The language used is interesting:

"If Hourican goes, there is little chance of getting a capable replacement. RBS’s investment bank is still very substantial, and he has done an excellent job. We would be furious if the RBS board doesn't stand up to pressure from the FSA and the Government," one shareholder said. "This is nothing more than a random witch-hunt."

Before I set out what bothers me about this let's consider the context. First, the state's stake in RBS is so large that this intervention doesn't matter that much. No doubt non-UKFI investor intervention can be used by the RBS board as a bargaining chip, but ultimately UKFI rules the roost. In addition this intervention takes place in the wider environment that I've described before where shareholders in the banking sector have, in my opinion, dropped down the pecking order, with regulators a more important force now.

So what do I want to moan about (this time)? Firstly, I just don't share the sentiment expressed. RBS is largely state-owned because its board failed to do its job properly, and therefore the taxpayer had to rescue it. No doubt in part the regulatory environment played a part too. As such most punters - people who have a financial interest in RBS remember - would consider it entirely right that the Government and the FSA take a very close interest in what the bank does before we even consider the Libor scandal.

But the fact the Libor issue deomstrated that the banking sector really had lost it way in terms of standards of behaviour surely requires that a clean break with the past is demonstrated. Our anonymous shareholders say "random witch hunt". I say make an example. Trust in the sector is very low in part because of the sense that very rich people in the City have been unaccountable. This may be rough justice (if it happens) but thems the breaks when we've been through a financial crash and the exposure of illegal activity at institutions we trust with our capital.

What really bothers me is who do these shareholders speak for? In the quote above, remember, they are sending a bank a message that they must "stand up to" the Government and the regulator. That's fine if you have the economic interest in the investment in RBS, but what if these are asset managers? They don't manage their own money, they manage our money. So it's not impossible that someone who manages your pension is telling RBS to give its chief executive a big share award and to stick two fingers up to the Government and the FSA.

What's more, I bet you they haven't told you that they are doing this, and they won't report back to you that they have done it. In the world of shareholder engagement it is taken as a good thing that this stuff is kept confidential, so chances are no-one outside the closed circle will ever know who has given RBS this message - even though it's other people's money that gives them the power to say it.

These issues are in particularly sharp relief in the banking sector because a) the state's role is much more direct and b) it's pretty clear what the public think of the sector. The potential disconnect between the views of those with the economic interest and those of the intermediary exercising delegated power are particularly large. But the point applies more generally. If shareholder engagement is going to be portrayed as having kind of 'progressive' element to it then there must be accountability in the system, back to the beneficial owner. Otherwise we can end up faciltating assset managers telling bankers they must have more money and defy the state.