Shredding Sir Fred – and friends

Rewarding senior executives for failure has become all too  common in recent years.  The £16 million pension awarded to Sir Fred Goodwin, former boss of RBS, may make him ‘media hate person of the day’ but his is only the latest in a long line of payments for destroying perfectly good companies.

Gordon Brown may view it as ”unacceptable” and be taking legal advice about how to claw it back but surely we need to draw the general lesson here and not just beat up on one case – however offensive that case might be. 

And that general lesson should surely encompass the thought that all rewards – including salaries, bonuses and pensions – should be commensurate with results.   In other words the perfectly justified public anger over this case (and banking bonuses generally) could and should be harnessed to put through some long-overdue changes to corporate governance.  

In too many large firms the rights of shareholders (and that means most of us through pension funds etc.) have been expropriated by a breed of self-serving managers who serve no higher goal than short term greed.  It is too easy for a dominant Chairman to pack his board with yes-men who can be relied on to lock arms and push back against even the most determined efforts to question pay awards or strategy.  No wonder we are in a mess.

Corporate governance needs to move on from being the domain of buccaneers and kleptocrats to one of managers who actually serve the longer term interests of shareholders (and in practice therefore also of employees and the wider society). 

So what can be done?

I suggest that legislation to restore shareholder control is the democratic and effective way to go.  Legislate that directors of public companies may only draw a salary package up to a maximum of a specified multiple of average wages in their firm – say a generous 20x.  That should be more than enough for anyone to live on!   Any remuneration above this level (whether as bonus or pension etc.) would be subject to two votes by shareholders -   the first to agree and set up a bonus scheme and a second vote five years later to confirm (or deny) any sums awarded under such a scheme.

In practice the shareholders would be pension funds etc so they would use such powers responsibly and sparingly but the threat of being able to do so would be a powerful deterrant to bad behaviour in the first place.

If it turned out that the Directors had been utterly foolish and/or negligent then the shareholders would have the right to decline to pay the accrued bonuses.   However ,shareholders would be constrained to behave fairly and not unreasonably or they would find it impossible to attract and retain quality management.

Funds accrued could earn interest while in trust so there is no ultimate loss to the directors involved – only a delay so that any short-termism is exposed.

And just imagine; if such legislation were introduced in the next few months and backdated to late last year,  it might even catch Sir Fred.

That would seem perfectly fair.

Trouble with sheep

In difficult times it is good to know that all levels of government  are working tirelessly to help businesses both large and small.

I wish!

In reality it is all too often the exact opposite as the latest EU nonsense demonstrates.

The bEUrocrats have got it into their heads that all sheep should be electronically tagged so that they can more easily be traced when moved so helping prevent the spread of disease.

This may sound like a perfectly sensible plan – but it’s not.  There’s a perfectly adequate scheme already in place and the new EU regulations will add considerably to farmers’ costs for a system they say will not work on the ground.   EU officials have just been on a week long trip to Britain to consider the problems.   Yet, as the National Sheep Association (NSA), explains:

It is so frustrating that the EU officials when pushed are still not able to identify a single animal disease situation where individual recording of sheep identities would reduce disease spread. All we have shoved down our throats as a sheep industry is that this is all about coping better with disease outbreaks yet no one can tell the sheep farmers who will have to live with it how it will make a difference.

So there’s the plan:  impose a scheme that will cost a ruinous amount of money, will not work in practice and has no useful purpose. 

Great!

The NSA concede that Defra and the government are  not keen to see these regulations introduced but they are clearly not in the driving seat.  Other EU member states recognise that the regulations would harm some of their rural areas but do not have such an important sheep industry so this is not high on their agenda.

Now I have no connections to farming whatsoever so I have no personal axe to grind, but it stikes me that these sheep are like the proverbial canary in the coal mine – so to speak!   They are flashing us a warning.

Firstly, government has no business to be taking away someone’s livelihood (even if only by carelessness or negligence) without a strong overriding reason – usually that what they are doing is criminal, dangerous or similar.   In this instance it’s the EU in the frame but just as often it’s Whitehall or a local authority – for instance by imposing parking charges on the high street without at the same time imposing them on supermarkets and out of town shopping centres. 

Secondly, this is yet another example of the ‘big is beautiful/might is right’ philosophy that has taken over New Labour.  As we have seen, they can be very fast to act when it’s Big Banks, Big Oil, Big Auto etc. but who is to speak for the rest of us?  It may be ‘only’ sheep farming today, but tomorrow it will be some other sector, and another the day after, and …

Thirdly, it gives the lie to the promised principle of subsidiarity that is supposed to guide the EU (the idea that things should be done by the lowest practical tier of government).  If subsidiarity were indeed a principle then please someone explain why it is absolutely necessary for policy with respect to sheep to be made in Brussels.   Air pollution I could understand, but sheep!

Each of these points in its own way conflicts with every Liberal principle I know so that leaves a strong message for Lib Dems MPs and MEPs.

1. Wake up and smell the coffee. 
2. Stop this bad scheme.
3. If you can’t stop it then campaign vigorously against it and explain to the rest of us what you propose to do about the democratic deficit this would reveal.
4. If you can’t do (2) or (3) then expect to loose votes to UKIP.

For the avoidance of doubt I should perhaps explain that I strongly support the ideal of a European Union – but one that is devolved and democratic and actually puts people first which is very far from what we have now.

So, rather than cheer-leading for the existing nonsense, can we please have some constructive thinking on what sort of Liberal EU constitution we would like to see.  I don’t for a minute suppose that anything we might come up with would appeal to the conservative and socialist groups but you never know – if we have a plan and they don’t we are in a very strong position to push for it.

Interesting Times

Shanghai in 2009 is New York in 1929 – in a manner of speaking.

Shanghai owes the shiny new tower blocks on its waterfront to China’s booming economy of recent years just as New York owes its Manhattan skyline mainly to the booming 20s. 

And, by curious coincidence, Herbert Hoover, the US President in 1929 was a  geologist as is Chinese Premier Wen Jiabao.   A fluent Mandarin speaker, Hoover was instrumental in founding one of the companies that later merged to form Rio Tinto – in which a state-owned Chinese company Chinalco has just bought a large stake.

Fascinating but irrelevant trivia. 

Of more immediate concern, however, is what might happen in the near future: China in 2010 certainly does not want to be where the USA was in 1932.   But, as Patrick Chovanec, of Tsinghua University points out  the slowdown in the West started at the top as the result of extreme foolishness (and, I would add, not a little corruption). 

In the West it is essentially a financial panic and the first layoffs have been bankers.   However, in China it started at the bottom and is a collapse of demand that is chopping the economy off at the knees with migrant workers the early casualties.   The political and business elites are still partying – for now at least.

The implicit contract between rulers and ruled (we give you jobs/you leave politics to us) is being stress tested.   These are indeed interesting times.

We shall see.  My guess is that the parallels between 1930s USA and modern China have a way to run yet.

Clever stuff on PFI

The current edition of Private Eye (No 1229) makes a couple of  good points about the Private Finance Initiative.

Firstly, the labyrinthine processes necessary to tee up any project will inevitably slow down any economy-boosting investments to the point where they are too late to be fully effective.

Secondly, even the pretense that the private sector was shouldering some of the risk is unsustainable; with the government now explicitly underwriting the banks that provide the finance.

So what we are left with is a plan worthy of Baldrick at his cunning best whereby middlemen take a fat cut of public funds in return for making slowing developments down and making them more expensive.  Clever stuff!

The real driver behind PFI is, of course, New Labour’s desire to fiddle the books.  In the short term it can look like a winner if no-one notices (and by and large they don’t!) but in the longer term it comes back to bite you on the bum.   It is straight from the same stable of delusional finance that the banks have been living in for the last few years.

I have always been viscerely opposed to PFI, not because of any ideological opposition to public-private partnerships per se, but simply because it is a crazy idea – guaranteed to increase costs and complexity (the two usually go together).  Has no-one in government heard of the KISS principle (Keep It Simple, Stupid)?

Whatever savings may be found will almost certainly be more than offset by the high cost of financing (a big cost for capital projects even in ‘normal’ times) and the inflexible lawyer-defined relationships that result. 

If there is a case for improveing project management when building schools and hospitals etc. (and I am inclined to think there is), then address this issue directly and don’t imagine that involving private sector players with very different motives will somehow – magically – solve the problem.  The really serious problems more usually arise from the government’s habit of being a bad client – for instance by chopping and changing specifications in mid project.  PFI does not help with this – indeed it can only make it worse.

 But the biggest problem of all with PFI may be that in embracing it the state sets itself up as a honeypot.  Many of the most successful and fastest growing UK companies of the last decade have been those that set themselves up to exploit this growing market which depends on old-school-tie networks, on revolving doors and secret deals. 

As George Monbiot argues in Captive State: The Corporate Takeover of Britain, what PFI actually means is virtually no democratic control or accountability (under the convenient guise of  ”commercial confidence”).   Moreover, cost savings are illusory – financing costs are through the roof and FPI hospitals typically have substantially few beds than the ones they replace.  His account of the Skye Bridge PFI debacle is one of the scariest things I have ever read.

It was always a bit of a mystery to me why, judging by the Party’s relatively low profile on PFI, other Lib Dems did not apparently feel as I did about  it.  Could I be so far from the mainstream?   Then I stumbled across Vince Cable’s call for views on PFI dating from July 2007.   Some trolls of course, some not sure, but plenty of contributors who see PFI very much as I do.

Lets kill PFI off now before it does even more damage.