By Ian Fraser
Date: 27 January 2012
The board of Royal Bank of Scotland and its remuneration committee, led by the ex-Coca Cola executive Penny Hughes but also comprising ex-Standard Life boss Sandy Crombie, must have decided let’s just go for it and to hang with the consequences.
The RBS directors had earlier seemingly coerced the UK government, which still owns an 83% stake in the bank, into acquiescing to the payment of a near £1 million award to chief executive Hester by threatening to resign en masse if the government stood in their way.
According to BBC Business editor Robert Peston: “they feared Mr Hester and much of the board would have quit, if the payment had been vetoed by the government as the majority shareholder. In the words of my source, the mass resignation of RBS directors would have created ‘all sorts of bigger problems’.”
This made me cast my mind back to general election campaign of early 2010 — and to some remarks made by business secretary Vince Cable. In a televised debate in April 2010, Cable said: “This country was held to ransom in the 1980s by Arthur Scargill, now we’ve got these pin-striped Scargills threatening to blackmail us in exactly the same way.”
It might be wrong to characterize Hester, who took over as RBS chief executive in October 2008, as just another pinstripe Scargill. But the way in which the bank has handled this bonus affair, and Hester’s acceptance of it, certainly makes one wonder (especially given the recent decision of Hester’s counterpart at Lloyds Banking Group, António Horta-Osório, to forgo his bonus).
The bank, chaired by Sir Philip Hampton, declared on Thursday that Hester, 51, would be getting a £963,000 bonus for 2011, over and above his £1.22m basic salary. The all-stock award of 3.6 million shares, whose value is based on the closing price on January 25, is deferred until 2014. Hester received and accepted a £2m bonus for 2010, his first in three years since he replaced his disastrous predecessor Sir Fred Goodwin.
Hester’s remuneration forms part of a highly opaque, elaborate, but lucrative reward package put in place by the Labour government of Gordon Brown in 2008, to entice him across from British Land where he was chief executive. The quantum of the RBS boss’s long-term incentive plan, and bonuses being paid to other directors and surviving investment banking staff have yet to be decided.
Hester’s bonus is particularly controversial because RBS had to be bailed out by the UK taxpayer in 2008, when it became the most expensive in the world to bail out, and remains 83% taxpayer-owned. In an era of sharply widening inequality, with cuts across the public sector and the average worker in the UK struggling to get by on £26,000 or £34,000 a year (depending whose figures you want to use), and unemployment on the rise, prime minister David Cameron likes to tell us Britons that “we’re all in this together.”
The award could not have come at a worse time for Cameron, who has been urging bankers to show “restraint”, at a time when real wages are falling and public spending is being squeezed. Cameron and his business secretary Vince Cable have been promising a crack down on excessive boardroom pay and “rewards for failure”; in this context, their failure to stop RBS from paying its chief executive what many Brits consider an obscene amount for someone who is widely regarded as a “public servant” given that the bank is essentially state-owned makes a mockery of their efforts.
The award prompted a chorus of condemnation across the UK (though a significant minority including the absurd arch-apologist for City greed David Buik, of BGC Partners, stood up for RBS and Hester). Labour leader Ed Miliband said: “It’s a disgraceful failure of leadership by the prime minister. He’s been promising for months action against excessive bonuses, executive pay, and now he’s nodded through a million-pound bonus. He’s also been lecturing shareholders about how they need to be more active in holding executives to account. He owns, through the British Government, 83% of the Royal Bank of Scotland. He must now explain, not least to the British people, why he has allowed this to happen.”
Mayor of London Boris Johnson, usually an ally of Cameron’s and usually remarkably forgiving of financial excess, admitted even he was “at a loss to justify” the scale of the payment. He told the BBC he had sympathy for Hester and wanted an end to “incessant banker-bashing”. However Johnson added: “I find it absolutely bewildering because RBS occupies the same status in the economy as Gosbank did in the Soviet Union: it’s a state-owned bank. The idea that this is not in the control of the Government seems to me to be far-fetched.”
But what should we make of the claims from the RBS board that Hester has “performed well” and deserves to be given a near £1m bonus?
He was hired as a glorified ‘bomb disposal expert’ — just as he was by Abbey National in the 2000s –with the objective of derisking the folies de grandeurs and the many unexploded time bombs left by the recklessly negligent and possibly criminal regime of his predecessor, Sir Fred Goodwin.
Since 2008 Hester has arguably handled this task, which is critical to the future of the UK economy, reasonably well, reducing the bank’s balance sheet by some £600bn. The bank’s ratio of assets to loss-absorbing equity capital has shrunk to 20 times, down from 50 times when Goodwin was fired in October 2008 at the time of the first bailout of RBS.
Under Hester the nastiest and most toxic legacy assets have been parked in the Government Asset Protection Scheme, some 30,000 jobs have been axed across the RBS and NatWest empires, the bank has exited countries and markets where RBS was sub-scale and/or inadequate, and Hester recently confirmed that the group was either going to shut down or sell large parts of its investment banking arm (including cash equities , corporate broking, equity capital markets, and mergers and acquisitions).
Hester is said to be poised announce a deal to give the brokerage Hoare Govett to the US-based investment bank Jefferies, has sold RBS’s aviation leasing business to Sumitomo Mitsui Banking Corporation for $7.3bn and various parcels of toxic commercial property debt are also being hawked around. The bank wants to carve up its £37bn still toxic commercial property assets into 15 separate joint-venture funds in the hope these might be flogged off to external investors who have the patience to see the portfolios come good (if such investors exist at the moment).
In a statement explaining the bank’s thinking on Hester’s bonus, RBS’s chairman Hampton said: “Stephen Hester’s pay is strongly geared to the recovery of which he was recruited to turn around, having played no part in its collapse. The priority is to re-shape a business that was far too big and far too risky, reducing legacy losses whilst improving performance in the Group’s strong core businesses.”
Commenting on a recent FT piece, a commenter named ‘Goldsack’ praised Hester’s efforts. He wrote: “I am glad that we have someone who seems as experienced, robust, and self-aware as Hester running this critical risk in the British economy. I can understand the condemnation of Goodwin, who enriched himself while getting us into this mess; but to vilify the man who is skilfully unwinding it, simply because he is being paid at the market rate for his services, shows how priggish, diseased, nasty and destructive Britain’s public culture has become.”
However when evaluating whether or not Hester deserves a bonus one must also bear in mind some of the significant failures at RBS over the past 12 months. These include the small matter of a 48% slump in the bank’s share price between January 1 2011 and December 31 2011, which causeed UK taxpayers to lose £17bn on the value their 83% holding (according to The Motley Fool). Hester has also conceded that it’s going to take longer than the promised five years to revive the bank — meaning he has broken one of the key promises that he made on taking control.
Other failures include:-
(1) RBS has missed the SME lending targets it agreed with the UK government under ‘Project Merlin’
(2) RBS’s return on equity fell from 14% to 12% in 2011 and its cost-to-income ratio rose to 59% from 56%. (The 2013 targets for the measures are 15% and less than 50%, respectively; source BBC.co.uk).
(3) RBS is being sued for circa $6bn by the US Federal government for allegedly faking the quality of bundles of securitized mortgage debt in the United States (I know the alleged crime occurred under Goodwin’s stewardship but arguably Hester’s team could have done more to see off the criminal action?).
(4) RBS last year had to make a £850m provision for the mis-selling of payment protection insurance (another legacy issue I know but Lloyds boss Horta-Osório waived his £2.4m bonus earlier this year as a result of a similar provision at Lloyds, and because he was off work for two months owing to stress).
(5) RBS’s insurance division which includes Direct Line and Churchill has been caught forging signatures and faking documents in complaints handling, which led to a £2.17m FSA fine earlier this month.
(6) RBS was fined a record £2.8m by the FSA in January 2011 after treating retail customers in a shabby way.
(7) RBS continues to treat significant numbers of small business borrowers with utter contempt. Behaviour includes arbitrarily changing the terms on lending agreements to shut down businesses and purloin their assets. (For more on this please read here and here.)
I’m struggling to make up my mind whether these failures outweigh Hester’s achievements (though I’m probably erring towards thinking they do, and am beginning to sympathise with the commenter on this predictable Daily Mail article who said, “What I want to know is how p*ss poor, exactly, one has to be in the banking world to ONLY get the salary?”
Ultimately the problem of excessive pay in the financial sector goes way beyond Hester and RBS. It is part of systemic problem in the financial sector that has been stewing for decades and was brilliantly analysed by the Bank of England’s Andy Haldane in a recent speech. A lot of it boils down to what is sometimes summarized as the “principal-agent” problem, in which the capitalist system has become rigged or skewed so that the agents end up with all the yachts.
Dr Ruth Bender of the Cranfield School of Management believes all the sound and fury over Hester’s bonus probably does not signify very much. She says it is a massive diversion from the need for broader reform of the banking and financial services sectors, arguing that excessive banker pay is only a symptom of the disease (lack of competition, flawed incentive structures, flawed performance metrics, semi-comatose fund managers, “crony capitalism” etc), not the disease itself.
The trouble is, as the politicians know only too well, it is much, much easier to pander to the British people’s fury overbankers’ bonuses, than to reinvent finance.
A slightly different version of this article was published in QFINANCE at 3.45pm on January 27th, 2011