Royal Bank of Scotland bonuses and why the Treasury has to examine itself

How bizarre are reports that the board of Royal Bank of Scotland has told the government that members might resign en masse if the main owner - the taxpayer - insists it controls the level of its bonuses. They have stirred up once again the still fierce public anger against the banks, showing that they really just don't 'get it'. But should the Treasury examine itself over this matter?

When RBS got into trouble a year ago and the taxpayer stepped in and bought a majority stake (around 70%), the board members were changed. In those days of stress and panic, the Treasury took the view that it really didn't like holding stakes in banks: it would act as if it was just another institutional shareholder. This was formalised with the establishment of the UK Financial Investments to manage the peoples bank shareholdings. For some reason, the Treasury believed it should keep UKFI at arms length.

While some institutional shareholders regularly oppose excessive executive pay for example, most do not do so often enough. But when you own 70% of a company, you really cannot be an arms length shareholder. You have to be involved.

The problem with behaving in the way you think an institutional shareholder would behave is that you will end up acting in a pre-crisis manner. The news is the world has changed.

The RBS board apparently believes that it is not in the interest of shareholders (mostly the taxpayer) for the government to interfere in bonus arrangements. Yet such bonuses can only happen because the government supports the bank and because the taxpayer has injected billions of pounds into RBS. Indeed, the board risks its objectives (its interpretation of fiduciary duty) by its state of denial, since that may encourage calls for harsh regulation or nationalisation.

Both sides seem to be backing down to some extent. But this incident does illustrate that the banks need institutional reform because they are incapable of reforming themselves. Their worldview was destroyed by the financial crisis, yet they carry on with 'business as usual'. RBS today should not be like the RBS of two years ago. That is why government action is so important.

Stephen Beer, 03/12/2009

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