Nick Clegg, the UK’s Deputy Prime Minister, is mad. He’s so mad in fact that he’s threatening to get tough and take action, just as soon as the Christmas dinner and New Year celebrations are out of the way. The source of his madness is the ‘unjustified and irresponsible’ pay awards that some bosses in the private sector are getting, especially those whose businesses aren’t doing so well in the global economic downturn.
There’s no doubt that executive pay has got out of hand and has unwelcome impacts for everyone except the recipients. But my issue with Mr Clegg’s protestations is twofold: firstly, it’s a matter between shareholders and the businesses they invest their money in and really none of his; and secondly that it’s a case of the kettle calling the pot black.
What happens in the private sector, provided it breaks no laws and takes place between consenting adults, is a matter between the investor and the business they’re investing in. Investors risk their cash, or the cash that others have given them to look after on their behalf, in businesses they believe will provide an acceptable return relative to risk. In most cases, investors chose sectors they understand or think show promise. Sometimes they invest in a management team that gives them that same warm, fuzzy feeling.
When Northern Rock threatened to turn to sand a few years ago, the then Labour Government wrote a check for £1.4 billion and effectively nationalised the bank. Just last month, the coalition Government sold the ‘good part’ of the bank to Richard Branson’s Virgin Money for £747 million with the hope of a little more over time. The ‘bad part’ of the bank remains, unsurprisingly, with the taxpayer who is nursing a loss so far of over £500 million.
What’s more, it now looks like much of the cash used to fund the deal came from Northern Rock’s own cash reserves. This is the same way the Glazer family purchased Manchester United Football Club a few years ago and saddled it with debt. I trust that Clegg has already ‘got tough’ with whomever was responsible for this stunning piece of business? Who? George Osborne, his cabinet colleague? Really?
Where Clegg should maybe have a stronger say is in the board compensation in those banks where the UK Government remains a major shareholder, like Royal Bank of Scotland and Lloyds Banking Group.
The UK Government currently holds 82% of RBS in a trust fund for UK taxpayers after it injected an emergency £65 billion, or 50p per share, to save the bank from doing a Lehman Brothers in 2009. Each of those shares today is worth 21p, making the capital loss for the taxpayer today about £35 billion. The bank’s CEO’s remuneration in the last financial year, agreed presumably by UK Financial Investments Limited, was £7.7 million.
The UK Government reached a similar bailout agreement with Lloyds Banking Group in 2009, investing £17.43 billion of taxpayers’ funds at an average of 63.1p per share. This investment gave us a 41% shareholding in the bank. Lloyds Bank shares are available to buy on the open market today for 25.4p each. I make that a further capital loss of around £10 billion.
The current CEO of the Lloyds Banking Group is on long-term sick leave, while the previous incumbent continues to get paid an estimated £100,000 every month while he tends his geraniums. Clegg in his current mood must be livid with the UKFI, which was set up by the government to ‘… manage these [public investments in UK bailed out banks] to create and protect value for the taxpayer as shareholder.’
So the Government’s record in managing investments in the private sector comes up a little short. Maybe Mr Clegg should focus his ire here before taking on another crusade?
In truth, Clegg has enough to be getting on with in the public sector without worrying himself about the private world. Unemployment, particularly among the youth, is worryingly high. The future of the Eurozone economy, and any ramifications for the UK could benefit from his attention, as could the dizzying levels of Government debt.
Clegg and Cameron are very quick to point out that the state of the nation was cast by the previous Government and that they’ve simply inherited the mother and father of all messes. This would be ok, except that this argument ignores the fact that they were members of Her Majesty’s Official Opposition, paid by taxpayers to keep an eye on the actions of the previous Government and to hold them to account on our behalf. That’s a payment for failure, something that Clegg rightly doesn’t support, they’re reluctant to discuss.
Of course running the country in the worst recession in several generations is complex, frustrating and difficult. So too is running a business in the same environment. But it’s no easier when people are busying themselves trying to do someone else’s job.
Clegg’s protestations are little more than a naked and cynical attempt to curry favour with voters while appeasing public service workers who are underwhelmed by the revised prospects for their old age. The truth is Government has limited jurisdiction in Britain’s private sector boardrooms and that will be reflected in the impact that Clegg’s actions will have in terms of what executives get paid.
Picture: Cabinet Office