Theresa May is right: something must be done about executive pay

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Many people were surprised earlier this year when Theresa May launched her bid to be Conservative leader not with a speech on national security or borders, her specialisms as a formidable Home Secretary, but on corporate governance. The term itself drew plenty of blank looks, but the now-Prime Minister had identified, correctly in my view, that there are few things as central to our economic system as how companies are organised and overseen. At the Institute of Directors, we have been campaigning for over 100 years for good corporate governance. We think that large companies can only be both commercial and ethical with the right checks and balances in place.

If you would like an example of how important governance is, just consider what happens when standards slip. The collapse of BHS and the ongoing Sports Direct saga are both directly linked to poor functioning of their boards. In the next few days, the Government will release its long-awaited review into corporate governance. I applaud the genuinely consultative approach ministers are taking with business because the issue in question is a thorny one: do we continue with the organisation of capitalism in its current form, or make a break? Advocates of the status quo should not be surprised that they find themselves increasingly isolated. Writing in The Telegraph in early June, I warned that “there are many politicians, from across the spectrum, who would be very happy to place more burdens on business. To combat excessive or counterproductive new red tape, businesses in the public eye must be seen to be giving a good deal” back to society. An awful lot has happened since then. In a speech this week, Mrs May drew a direct link between public distrust of business and the Brexit vote.

Much the same could be said of Donald Trump’s success in the US presidential election. Bearing this in mind, combined with anger at sky-high pay at some listed companies, and it was only a matter of time before the Government made its move. Some in business will view this new found political interest in the technical procedures of boardrooms as unfair, given that the UK has long been a leader in pushing for more transparent governance. The 1992 Cadbury Report led to the establishment of a model of regulation which makes public companies comply with a wide-ranging code of practice, or explain why they haven’t. The Financial Reporting Council says that compliance with the code is over 90 per cent. It’s a model that’s been copied internationally. Nor has regulation stood still. The Coalition government recognised that decisions on directors’ pay seemed to be being made with little reference to shareholders, the people who actually owned the company. As Business Secretary, Vince Cable may have had an occasionally bumpy relationship with business, but he understood the importance of governance, substantially strengthening investor power with a vote on pay policy. Companies also now have to provide shareholders with a single figure for remuneration, which gives a breakdown of base pay, pension, bonus and so-called “long term incentive plans”. Unfortunately, although the data may be more available, it is often opaque and shrouded in financial and accounting jargon. But there is a more fundamental problem with executive pay at some listed companies. Executives at big firms, talented and hard-working as they certainly are, are not the same as entrepreneurs.

They have not taken the whole risk of the venture on themselves; they are instead extremely well-paid managers, at the company normally for a few years. Bob Dudley is one of the most experienced CEOs around, but when he was paid £14 million in a year his company, BP, made record losses, the public shook their heads in amazement. There is simply a disbelief among the public, and among many IoD members who run smaller businesses, that he would have done any better or worse a job if he’d been paid half as much. In their heart of hearts, many executives know this to be true. Suggestions to change how pay is set and published, alongside moves to give employees a bigger voice in the boardroom, will be met with resistance from the City old guard. They will be right to point out concerns about crude, kneejerk measures. Trying to force German-style co-determination on companies, for example, by creating extra tiers of governance for workers, would likely be disastrous. But resisting all reform would be sending a very strong signal to the public that corporate boards have either not noticed public antipathy to big business, or worse, don’t care. So when FTSE boards feel tempted to grumble at the appearance of the Government’s Green Paper, they should remember the words of  the ageing Don Fabrizio  in Giuseppe di Lampedusa’s novel, The Leopard: “If we want things to stay as they are, things will have to change”.

Simon Walker


RBS in fresh fight to offload W&G branches

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The likelihood of Royal Bank of Scotland offloading all of Williams & Glyn is diminishing as suitors attempt to carve out the best pieces of the bank and leave behind the more risky or less attractive bits.

Senior bankers said Clydesdale, which emerged as a suitor last month, is trying to use RBS’s increasingly weak bargaining position to leave behind the parts of the bank it doesn’t want. It is understood that Clydesdale and Yorkshire bank has proposed leaving some of W&G’s corporate bank, which includes its SME customers as well as some of its branches. The tough negotiating stance puts RBS in an awkward position as it comes under mounting pressure from the European Commission to offload W&G, a network of 300 branches with about 1.8m customers, including 200,000 small businesses. It is more than seven years since the state-backed lender was ordered to dispose of the business as one of the conditions of its £45bn government bailout in 2008.

RBS, which is 73pc owned by the taxpayer, warned last month that it would miss a deadline set by Brussels to divest the branches by the end of next year. The Treasury is in talks with Brussels about how to ensure a successful deal for W&G. A source said the discussions included potential sanctions against RBS for missing the deadline. RBS has said previously that it was in talks about selling “substantially all” of the business. Santander has also renewed its interest alongside challenger bank Clydesdale.

W&G has proved a long-running and costly saga for RBS, with the bank’s outdated computer systems posing a major obstacle to a sale. A deal to sell the branches to Santander collapsed in 2012, while this summer RBS scrapped a plan to spin off and float W&G to once again pursue a trade sale,  even though it had already spent £1.5bn attempting to create a new computer network for the division. Dealmakers have suggested that if offloading W&G proves too problematic, RBS could offer alternative remedies to the Commission, including disposals of other businesses.

 


Brexit vote and Trump’s election have created risks for banks, says S&P

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Leading ratings agency warns that US president-elect’s policies represent a ‘wildcard’ that could affect financial sector The UK’s vote for Brexit, Donald Trump’s US election win and a slowdown in Chinese economic growth are combining to create significant risks for the global banking sector, a leading ratings agency warned on Wednesday. Standard & Poor’s also included the low interest rate environment as posing potential hurdles for the banking industry’s creditworthiness in its global credit outlook for the sector in 2017.

More than half of the largest global banking systems face negative pressure, S&P said, with more banks in Latin America and Asia Pacific appearing on the watch list. The UK is among 11 of the 20 largest global banking markets facing negative pressure. Brexit vote wiped $1.5tn off UK household wealth in 2016, says report S&P said: “Weaker prospects for earnings growth globally, potential risks related to the UK’s referendum vote to leave the EU, and more generally increased political risks are constraining factors for bank ratings in 2017.” It added: “A key constraint in our global credit outlook for banks relates to the path of the global economy, which is marked by a sluggish global growth underpinned by China’s rebalancing, the adjustment of commodity exporters to new commodity prices, demographic factors inducing lower productivity growth and geopolitical and political uncertainty.”

Of the 85 banking systems assessed, 42% faced negative trends. The ratings agency said there were signs of “renewed tremors” from the result of the UK’s EU referendum on 23 June while the election of Trump as US president largest wildcard with the potential, at least over time, to meaningfully affect regulation, economic growth, interest rates, and ultimately bank performance,” S&P said. There could be knock-on effects in other parts of the world as a result, particularly in France and Germany, which are holding elections in 2017.

“Brexit may have energised broader, populist trends already pulsating through Europe. Citizens of other EU member states have expressed interest in holding referendums of their own to exit the union. Increasing populist sentiment, especially after the results of the US elections, also points to a shifting political landscape in the world’s largest economies,” S&P said. This week Angela Merkel said she would run for a fourth term as German chancellor in next September’s elections. In France polls show that the Front National leader, Marine Le Pen, will make it to the French presidential final round runoff next May, while the former French president Nicolas Sarkozy has failed to be chosen as the right-wing Les Républicains party’s candidate for the presidency. The former PMs François Fillon and Alain Juppé now face a second vote on 27 November to decide who will go up against Le Pen as the party’s candidate.

Anti-globalisation movements could affect growth prospects and S&P is operating on the assumption that 2017 will be a year of sluggish growth across most developed and emerging markets. The European Central Bank could adopt a more relaxed approach to monetary policy while the US Federal Reserve could start to increase rates by a quarter percentage point in December and a half point in 2017.

Jill Treanor

 


British taxpayers face 27 billion pound loss from bank bailout

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People walk past a Royal Bank of Scotland office in London

The British government said on Wednesday it faces an almost 27 billion pound loss from rescuing failed banks during the 2007-2009 financial crisis after a slump in the lenders’ value since Britain’s vote to leave European Union. The Office for Budget Responsibility, Britain’s independent budget watchdog, said it has increased its forecast for potential taxpayer losses by more than 9 billion pounds since March. Britain’s government spent more than 136.6 billion pounds rescuing some of Britain’s biggest high street lenders, including Royal Bank of Scotland, Lloyds Banking Group and Northern Rock, at the height of the financial crisis. But the government has so far only managed to recoup just over half of that money and the additional interest on the debt used to buy the holdings keeps increasing, threatening a bigger overall loss.

The bleak analysis calls into question statements made by former finance minister George Osborne last year that the British government would make a profit of more than 14 billion pounds from its bailout of banks during the crisis.This is the second time this year the budget watchdog has recalculated the value of the remaining stakes as turmoil in financial markets has hammered bank shares.

Shares in RBS and Lloyds have fallen by about a fifth since the June 23 vote to leave the EU. The increase in the forecast overall loss from the stake sales will not affect the budget deficit and only counts towards reducing the burden of public debt once the shares are sold. Taxpayers face a 32.4 billion pound loss on the value of the government’s shares in Royal Bank of Scotland. That compares with a previous forecast of a loss of more than 17 billion pounds in the budget in March.The loss on bailing out Lloyds is expected to be 400 million pounds, driven by a new government push to return the bank to the private sector despite depressed share valuations and the cost of funding the bailout.

Meanwhile, the chief executive of the bad bank charged with winding down the assets of two failed British lenders, Northern Rock and Bradford & Bingley, told Reuters this month it may take about another decade before they return to private hands.

(Reporting by Andrew MacAskill and Lawrence White; Editing by Rachel Armstrong and Adrian Croft)

 


UK consumer credit grows at fastest pace in nearly 10 years – BBA

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A woman shelters under an umbrella as she uses a cash machine in Port Sunlight, northern England

British consumer credit expanded last month at the fastest pace in nearly 10 years and mortgage approvals hit a five-month high, according to industry data on Thursday. The British Bankers’ Association figures underlined the strength of consumer demand since Britain voted to leave the European Union in June, although rising inflation and a slowing economy are expected to weigh on households next year. Consumer credit increased at an annual rate of more than 7 percent in October, marking the strongest growth since November 2006, the BBA said. British banks approved 40,851 mortgages for house purchases last month, up from 38,690 in September and the biggest number since May. “Consumer confidence remains robust as borrowers take advantage of record low interest rates,” said Rebecca Harding, BBA chief economist.

“Mortgage approvals ticked up a little October. There has only been a relatively modest increase in activity since the Bank of England cut rates in August.” The figures chimed with strong retail sales data earlier this month that underlined how little impact the vote to leave the EU has had on consumer spending so far. Net credit card lending rose in October by 220 million pounds after a 179 million pound increase in September.

The BBA figures do not include lending by mutually owned building societies, which accounts for around third of mortgages. The next release of the more comprehensive Bank of England lending data is next Tuesday.

((Reporting by Andy Bruce, editing by William Schomberg))

 


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