Bankers’ pay and their bonuses are causing heated debate on both sides of the Atlantic. The President of the United States and the British Prime Minister have both spoken on the subject. In the U.S. a cap on both for senior executives of up to $500,000 is proposed. In the U.K. the Chancellor has set up a review to “examine how banks are managed. Bank boards have a duty to ask more searching questions of their executives – when times are good as well as when they turn bad”. This appeared in a column written by the Chancellor in the Sunday Telegraph of 8 February, under the head “Era of risk is over; what we now demand of banks is responsibility”.
I know that sub-editors take liberties with copy in order to make headlines but this is utterly misleading.
First, risk, as the Chancellor himself acknowledges is inherent to the business of banking. It is only by the judicious taking of risk that business grows. So, the era of risk is not over.
Second, what are we to make of the demand that banks should be responsible? Of course they should. Whoever thought otherwise? It is in defining what it responsible business and how that is policed where the problem lies. If the review announced by the Chancellor helps to answer those questions, so much the better.
Third, what of the boards? For the most part, and current inquiries and investigations will confirm this or not, most directors were and are conscientious people doing their best, according to the context in which they were asked to perform their duties.
Fourth what was that context? In the first place, the banks were seen as hugely successful enterprises oiling the growth of world trade and investment. Senior bankers were courted and feted by politicians and the media. The siren voices prophesying doom were there, but they were few and far between. In second place, directors, including those of banks, under modern theories in the U.S., U.K. and E.U. are supposed to be independent of management. They are expected to exercise their judgement and experience to know what information to call for so as to challenge management and assess the adequacy of internal control and risk management. How can they do that without a much more profound knowledge of the business of banking which risks making them less independent? May be that is a compromise which will have to be made.
Fifth, where were the regulators in all of this, and the governments behind them? The regulators were passive and the governments quite happy to see the money lubricated by the banks flowing into their pet projects and into their tax coffers.
Sixth, what do we as a society want of banks and businesses – constantly improving returns, reported on a quarterly basis. Isn’t that perhaps just a tad short term? As the saying goes, you get what you measure.
So, where does this leave us on the question of pay and bonuses. Hindsight is a wonderful thing we all know, but let us not demonise millions of people for the sins of a few. Most bankers worked hard and conscientiously. When they did so they just be justly rewarded. If that includes bonuses, so be it. All they should be is fairly structured to promote the long term success of the enterprise and aligned to meet the interests of the employee and employer in long term sustainability. It may not be so exciting, but it will be more enduring.
Alan Jenkins, chairman & head of international development, at the London-based law firm Eversheds LLP.