Posts Tagged ‘Robert Peston’

The Failure of British Institutional Investors

February 12, 2009

Robert Peston today gave a pretty scathing assessment of British institutional investors.

And here’s the tragedy. Those owners were us – the millions of British people saving for a pension, who innocently mandated a bunch of numpties at investment institutions to look after our retirement savings.

These investment institutions were supposed to ensure that the big companies in which we’re invested serve our interests – instead of which they encouraged these companies to maximise short-term profits regardless of whether the future was being dangerously mortgaged to the hilt.

To call this a failure of corporate governance is the equivalent of describing the second world war as a breakdown of diplomatic relations between Britain and Germany.

What does Richard think about this?

Many British institutional investors have taken a very short-term view to the world, rather than pressurising the boards of our biggest companies into making decisions for the long term they were happy to sit back and as long as the dividends kept on coming they didn’t care what the company was doing. I don’t know why this is the case but here are some possible reasons:

  • Lack of accountability on institutions to invest their customers’ money wisely. Indeed £7bn of investors’ money is languishing in so called “dog” funds where they have consistently underperformed their index over a three year period.
  • Because institutional investors’ performance is assessed relative to their peers. They don’t want to deviate from the crowd in case they make a mistake. A cause of bubbles, with everyone feeling the need to jump on the bandwagon even if rationally they should not.
  • Believed that they could rely on board members to make the right decisions, not necessarily a failure of the investors but of the implementation of corporate governance guidelines.

I plan to look at corporate governance soon.

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RBS Bonuses…

February 6, 2009

In Robert Peston’s latest blog post he discusses the dilemma facing Gordon Brown and the RBS board in deciding what bonuses should be paid, if any at all.

There is considerable anger from the general public about ‘bankers’ and the idea of any of them getting bonuses is clearly abhorrent to them, as many perceive it as tax payers’ money being used to fund lavish lifestyles for ‘bankers’.

One issue I have with many recent news stories about banks, is this word: ‘bankers’… it seems to imply that everyone working at a bank is directly involved in making the lending and risk-taking decisions which is plainly not true. From my own perspective I prefer the WordNet definition:

a financier who owns or is an executive in a bank


Out of the 100 (at time of writing) comments, there were probably only about 10-15 comments that spoke any sense and from a rational perspective. The rest were, in my opinion, clouded by anger and ill-thought.

Some make the point that as de facto shareholders, tax payers should be desiring RBS to perform well as a commercial entity to enable the government to make a profit when returning RBS to fully-privatised ownership. In this case it is imperative for RBS to retain its best people, the ones who have the knowledge and the wherewithal to return RBS to full health.

Over on his Knowledge and Making blog (seen via his comment on Peston’s blog) Leigh Caldwell argues there is no reason for shareholders to object to bonuses, and proposes a bonus structure which:

gains value only when RBS shares recover to a certain point and the state’s stake is reduced below a certain level (maybe 30%). The number of options awarded to be based on past performance; the future value of each will be derived from RBS’s success in giving the taxpayer a return on our investment. (Leigh Caldwell, Knowledge and Making)

Should anyone at RBS get a bonus?

To answer that question you have to first consider how a bonus is determined. In its simplest form it would probably be

Excess Profits ÷ Number of Employees

But in most large organisations they will not be determined in this manner, they will most probably be based around the annual performance reviews (individual, team, departmental and divisional). So if the individual has had an outstanding year and had a bigger impact on profitability than predicted they should be rewarded, similarly if the team has performed beyond expectations they should be rewarded, and so on.

For people to declare that everyone at RBS should get nothing because of the losses incurred in a small part of the bank’s huge operations is not being realistic. Are they saying that Joe from an operations team who came up with and implemented a more efficient and cheaper method of maintaining/restocking ATMs say should get absolutely nothing, because Geoff the trader has invested too heavily in CDOs losing RBS millions?

In answer to my question… Yes, RBS should be paying a bonus for 2008, but only to those who have exceeded their predicted performance and based on their team and divisional performance too. As owners, tax payers need to understand that it is in their best interest to see RBS return to full health. We can only hope that Gordon Brown does not take the populist path and ban all bonuses, which will only lead to long-term pain.

The ‘Wimbledonisation’ of Britain

February 2, 2009

Robert Peston, the BBC’s Business Editor, has written a thoughtful piece on his blog about Britain’s economy and the wildcat strikes currently taking place.

As [Sir John] Rose [CEO, Rolls-Royce] said, it is human nature for a business with operations all over the world to favour its home country when making decisions about where to expand – or, as in the current horrible economic climate, where to cut.

So it should be no surprise that an Italian company IREM, hired by Total of France on a construction project in Lincolnshire, should itself be employing Italian workers. In a way it would have been more surprising, at a time when money is tight all over the world, if IREM had shunned its own people and had hired new British workers.

In the current economic climate I believe that governments should be extremely careful about their policies, it will be a very sad day when governments from the world’s leading countries start enacting protectionist policies into law. It is a retrograde step, and one which will impact on every economy, especially those in developing countries.

America, despite their constant talk of free trade, has always had protectionist policies (see Protectionism), as do many countries in Europe. One exception seems to be the UK, which is probably the most open to free movement of investment and jobs. Protectionism within a struggling global economy is a sure fire way to speed the process up and end up with a deeper and longer-lasting recession as Peston argues.

History does indeed tell us that protectionism in a worldwide downturn is the shortest route to slump and depression.

So, is the UK’s economy better off for being open and free and allowing foreign companies to buy up its major businesses? I would argue that on the whole it has been better off, in the good times at least, but personally I would prefer the country to have greater control over infrastructure businesses (energy, water, transport etc.) this is because if there is a truly global and major crisis it would be reassuring to know that the businesses running our infrastructure will have the UK’s interests at heart. On the jobs front, should businesses operating in the UK be forced to employ only or mostly British workers? Of course not, if a business believes that it can employ workers from outside the UK to do a better job and cheaper then I see nothing wrong with that, if anything complain about the government’s immigration policies the businesses are only maximising their shareholder value.

But Wimbledonisation – the notion that Britain is the winner even if none of the economic players are actually British – became official dogma.

We can carry on with a Wimbledonised economy, but I would like to see British companies improving their competitiveness on the world stage and expanding into other markets, only then will the free market economy which the UK operates be completely beneficial to the UK populace.