Depressed by the bankers’ current bonus round? Outraged by endlessly escalating boardroom pay? Appalled by the prospect of the banks repeating their risk-prone investments? Not only does it not have to be this way but, for capitalism to function effectively, it cannot be this way. The weakest link in today’s capitalism is that the interest of the individual top managers is no longer the same as the company or the shareholder interest. Thus, managements can and do increase their incomes and wealth while their companies’ and shareholders’ income and wealth declines.
From Cadbury in 1992 (post-BCCI and Maxwell) to Smith in 2003, seven eminent reviews have reported on corporate governance. But their number has proved proportional to the rise in top pay, not the intended converse. In practice, remuneration committees are as effective as a damp toilet roll. To suggest that the current model of corporate governance does not work seems almost tautological. Until the individuals’ interests are restored to being those of the shareholder and company (as company law requires), we can anticipate continuing fatal behaviour.
To realign interests, step one is to remove blanket immunity from personal liability in limited liability companies. Entrepreneurial risk is crucial. Reckless risk needs personal consequences, if it is to be stopped. In the partnerships of accounting and legal professionals, although some recent changes in the law have in theory limited the personal risk, the culture remains of the entire assets of the individual being at stake for failures by the partnership. Thus, an audit failure, for example from Enron to Maxwell, could result in the firm paying the claimed damages which would go way beyond any insurance cover and mean seizing the house, possessions and investments of the individual. I can assure you this focuses the mind in every business decision, and quite rightly.
Exactly the same regime should apply to all bankers at any level (and not just to the directors) who are taking risks with the company’s, shareholders’ and investors’ money. Under this regime, we would now see bankers and traders at all levels being rightly sued for their personal assets for the losses. That would concentrate their minds. As in the partnerships, it would not stifle appropriate risk, but it would stem reckless risk.
Step two: shareholders must have much greater control over remuneration. Remuneration committees have to be composed of the truly independent. Some of this is process. The monetary policy committee has shown the way in its process for producing the best available outcomes. Thus, its decisions are all public, its proceedings minuted and the votes of each member recorded and published. Transparency produces learning through media and specialist discussion. The individual cannot hide under a cloud of club behaviour.
In terms of membership, no one who could in anyway benefit from the cross-company ratchet effect on pay should be a member, thus barring all company executives. The information base should be published and come from the Office for National Statistics or a similarly independent organisation. If you think all this is too draconian and will drive away all this global management talent, remember the comment of an American colleague on a board on which I served, which was that the senior management would do it for a third of what they were asking as they all wanted the power so much.
At some point, someone with clout in government and without an interest in the status quo will clock that seven committees followed by the biggest crash in history must add up to doing something very different. The longer these corporate outlaws are allowed to continue (for in any capitalist system that is what they are), the more company failures there will be, the more outrageous pay packets, and the more bills for us to pick up. It’s obvious, isn’t it? Fundamental reform is needed, not an idle debate as to the hemline of the FSA.