11 February 2010
Changing the mindset
On 7th February 2010 (on ft.com) the Lex Column of the Financial Times published a note on Executive Pay. This can be seen at:
http://www.ft.com/cms/s/3/28c6e0cc-1414-11df-8847-00144feab49a,s01=1.html
(Subscription may be required.)
I added the below comment:
Lex has precisely identified the problem with the “take one for the team”, “clubby remuneration committee” attitudes. The top people in business are now engaged in a game whereby they compete with each other to extract more and more value from the rest of the community. This is utterly wrong and completely unsustainable. A total change in mind set is needed. We need a global (or G20 wide) cap on pay from employments/directorships. This would promote and enforce the idea that an executive’s job is to work for the benefit of shareholders and wider stakeholders, not for his/her own benefit. This principle of fiduciary duty is fundamental to company organisation. Capitalism is doomed if we can’t get back to this principle.
More on a global pay cap at www.performanceandreward.blogspot.com
See links to "global cap on pay" and "Competition Law" in left hand column.
http://www.ft.com/cms/s/3/28c6e0cc-1414-11df-8847-00144feab49a,s01=1.html
(Subscription may be required.)
I added the below comment:
Lex has precisely identified the problem with the “take one for the team”, “clubby remuneration committee” attitudes. The top people in business are now engaged in a game whereby they compete with each other to extract more and more value from the rest of the community. This is utterly wrong and completely unsustainable. A total change in mind set is needed. We need a global (or G20 wide) cap on pay from employments/directorships. This would promote and enforce the idea that an executive’s job is to work for the benefit of shareholders and wider stakeholders, not for his/her own benefit. This principle of fiduciary duty is fundamental to company organisation. Capitalism is doomed if we can’t get back to this principle.
More on a global pay cap at www.performanceandreward.blogspot.com
See links to "global cap on pay" and "Competition Law" in left hand column.
Labels: club, competition, Fiduciary Duty, global cap
04 January 2010
Q&As on the Global Pay Cap - 1
Click here for the original article about a global cap on pay.
Click here for the global-cap-on-pay letter published by the FT, 12/12/2009.
Agreeing a global cap on pay and making it stick would be really tough - look how difficult international leaders have found it to agree anything on climate change. Is it feasible?
I agree that agreeing a global cap and making it stick is a tough challenge. However I can't help feeling that any less radical reform would not really get to the heart of the problem. Also, compared to climate change, a global pay cap has three big things going for it.
1) It is a simple concept.
2) It would be popular with voters.
3) It offers a cheap way of recapitalising banks
Like climate change there would be powerful vested interests working against it, but it is much easier to see it gaining rapid political momentum.
[Incidentally, if the pay of oil chiefs was capped and not affected by oil profits, then I suspect that oil chiefs would be far more ready to work constructively on the climate change agenda.]
Also we have to recognise that as the world gets more and more interconnected then there will be more and more need for global agreements. Truely international issues such as climate change and financial regulation really require international agreements. World leaders are going to have to get much better at delivering them!
To what parts of banking should the cap apply?
I agree that there are issues about where the cap should apply, but in the first instance it is very simple. Money made from someone investing his/her own money or growing his/her own business is not captured. Money made from other people's money or businesses is. All company directors and employees are working for a company and not for themselves so all wages and salaries, whatever form they are paid in, are all captured. All banking activities are clearly captured.
Where it potentially gets more difficult is with people like lawyers, accountants and consultants who are partners in a firm or have a company limited by guarantee, so they do make money from growing their own businesses. However it seems to me that this money should still be captured under the cap because they do not act as "Principals" but rather as "Agents" of their clients. They are therefore working for their clients and owe their clients a Fiduciary Duty.
The really fundamental issue that the cap is trying to address is making sure that "Agents" really do act as "Agents" and properly respect the interests of their "Principals". If agents are highly paid, or on performance related pay, then it suggests that they are working for their own benefit, not for the benefit of the Principal. This agency problem is a really deep problem. See http://en.wikipedia.org/wiki/Principal-agent_problem . It is also an ancient problem. Note that Jesus discusses the agency problem in his parables (e.g. Luke 16: 1-8). Alan Greenspan's comments on the cause of the credit crunch are very important. He says that in 60 years dealing with American business he had always assumed that companies worked to maximise the company interest, and especially to avoid their own destruction. However the risks taken in the build up to the credit crunch show that this assumption was no longer valid. Managers made the decisions that worked for managers, more than for the companies they managed. Part of the reason for this was the intensity of the competitive pressures than managers were facing.
Could not more be done to boost competition in the banking sector which is riddled with cartels and other practices aimed at artificially pushing up profits, and hence bonuses, at the expense of the customer?
I agree that there is a lack of economically effective competition in many sectors of banking. In the left hand column of this blog there is a link "Competition Law" which documents my efforts to get the Office of Fair Trading excited about the competition problems in the market for executive talent. Having said that, I no longer believe that more effective competition could ever solve the problems. The top people in society need to collaborate before they can compete. If they only compete then they pull society apart. Competition is certainly a big factor in the falling apart of the financial sector.
Are you aware of Stephen Green, Chairman of HSBC, and his work on banking ethics?
I am aware of Stephen Green through a Church Times article, but I don't know much about him really. I am interested in his book "Good Value"(although I am hopeless at reading!) HSBC is a good example of a bank that did not allow competitive pressures to distroy it. In the year before the crisis HSBC was under intense pressure from the activist investor Knight Vinke who thought HSBC should use its balance sheet more agreesively to improve "performance". I think HSBC was able to see through this because of its strong comporate culture and its emphasis on long term returns in the pay of top people.
Click here for the global-cap-on-pay letter published by the FT, 12/12/2009.
Agreeing a global cap on pay and making it stick would be really tough - look how difficult international leaders have found it to agree anything on climate change. Is it feasible?
I agree that agreeing a global cap and making it stick is a tough challenge. However I can't help feeling that any less radical reform would not really get to the heart of the problem. Also, compared to climate change, a global pay cap has three big things going for it.
1) It is a simple concept.
2) It would be popular with voters.
3) It offers a cheap way of recapitalising banks
Like climate change there would be powerful vested interests working against it, but it is much easier to see it gaining rapid political momentum.
[Incidentally, if the pay of oil chiefs was capped and not affected by oil profits, then I suspect that oil chiefs would be far more ready to work constructively on the climate change agenda.]
Also we have to recognise that as the world gets more and more interconnected then there will be more and more need for global agreements. Truely international issues such as climate change and financial regulation really require international agreements. World leaders are going to have to get much better at delivering them!
To what parts of banking should the cap apply?
I agree that there are issues about where the cap should apply, but in the first instance it is very simple. Money made from someone investing his/her own money or growing his/her own business is not captured. Money made from other people's money or businesses is. All company directors and employees are working for a company and not for themselves so all wages and salaries, whatever form they are paid in, are all captured. All banking activities are clearly captured.
Where it potentially gets more difficult is with people like lawyers, accountants and consultants who are partners in a firm or have a company limited by guarantee, so they do make money from growing their own businesses. However it seems to me that this money should still be captured under the cap because they do not act as "Principals" but rather as "Agents" of their clients. They are therefore working for their clients and owe their clients a Fiduciary Duty.
The really fundamental issue that the cap is trying to address is making sure that "Agents" really do act as "Agents" and properly respect the interests of their "Principals". If agents are highly paid, or on performance related pay, then it suggests that they are working for their own benefit, not for the benefit of the Principal. This agency problem is a really deep problem. See http://en.wikipedia.org/wiki/Principal-agent_problem . It is also an ancient problem. Note that Jesus discusses the agency problem in his parables (e.g. Luke 16: 1-8). Alan Greenspan's comments on the cause of the credit crunch are very important. He says that in 60 years dealing with American business he had always assumed that companies worked to maximise the company interest, and especially to avoid their own destruction. However the risks taken in the build up to the credit crunch show that this assumption was no longer valid. Managers made the decisions that worked for managers, more than for the companies they managed. Part of the reason for this was the intensity of the competitive pressures than managers were facing.
Could not more be done to boost competition in the banking sector which is riddled with cartels and other practices aimed at artificially pushing up profits, and hence bonuses, at the expense of the customer?
I agree that there is a lack of economically effective competition in many sectors of banking. In the left hand column of this blog there is a link "Competition Law" which documents my efforts to get the Office of Fair Trading excited about the competition problems in the market for executive talent. Having said that, I no longer believe that more effective competition could ever solve the problems. The top people in society need to collaborate before they can compete. If they only compete then they pull society apart. Competition is certainly a big factor in the falling apart of the financial sector.
Are you aware of Stephen Green, Chairman of HSBC, and his work on banking ethics?
I am aware of Stephen Green through a Church Times article, but I don't know much about him really. I am interested in his book "Good Value"(although I am hopeless at reading!) HSBC is a good example of a bank that did not allow competitive pressures to distroy it. In the year before the crisis HSBC was under intense pressure from the activist investor Knight Vinke who thought HSBC should use its balance sheet more agreesively to improve "performance". I think HSBC was able to see through this because of its strong comporate culture and its emphasis on long term returns in the pay of top people.
Labels: competition, global cap, HSBC, international, Stephen Green
11 December 2009
Global cap on bankers' pay
Following Alister Darling's one-off bonus tax I have today written to the FT. This letter was published by the FT on Saturday 12/12/09.
Dear Sir,
Surely the time is now right for a global cap on bankers pay?
The argument for high pay is that banks have to compete to secure the best talent. This is a real problem but it would simply disappear if all top bankers worldwide were paid no more than say US$500,000.
Economists usually support competitive markets because competition forces out costs and increases efficiency. However competition has manifestly failed in the market for banking talent. Costs have spiralled and, but for government intervention, most banking institutions would be insolvent. Why do we allow such destructive competition to continue?
Yours sincerely,
Revd Patrick Gerard
Dear Sir,
Surely the time is now right for a global cap on bankers pay?
The argument for high pay is that banks have to compete to secure the best talent. This is a real problem but it would simply disappear if all top bankers worldwide were paid no more than say US$500,000.
Economists usually support competitive markets because competition forces out costs and increases efficiency. However competition has manifestly failed in the market for banking talent. Costs have spiralled and, but for government intervention, most banking institutions would be insolvent. Why do we allow such destructive competition to continue?
Yours sincerely,
Revd Patrick Gerard
Labels: Bankers, capital, competition
17 April 2009
Christian contribution to business and economics
Because of the speaking engagement on 18th May (see previous blog entry) I have been asked twice recently about the contribution that Christianity and Christian values can make to business life and to the world of economics. This caused me to write the following brief reflection.
It seems to me that the wealth of the Western world has, in large part, grown out of its religious (primarily Christian) values. The deterioration we have witnessed in those values over recent decades has been a major factor leading to the credit crunch. I don’t believe that we will find any lasting solutions to our economic problems before religious and ethical considerations are once again given far more prominence in our society and public life.
In particular we need a society where co-operation in building up the common good, takes precedent over competitive considerations. This requires a fundamental change in attitude! Competition has a useful function of controlling costs and ensuring efficiency. However this can only contribute positively to society of it takes place in the context of co-operation and a common vision at the top end of our society. Top people, (top business people, politicians, professionals) have a responsibility to work together for the good of all society. Excessive competition between top people has the effect of pulling society apart, just as we have seen our financial services sector pulled apart. Competition between top people also seems to increase pay and other costs, rather than control them.
We need to find ways of encouraging top people to co-operate in building a society that benefits everyone. The way that top people are paid is very relevant here because often it is higher pay that causes top people to compete with each other. The hope of higher pay can encourage top people to develop new agendas (for example setting up new investment funds) which might pay well, but do not actually benefit society. There is therefore a case for a cap on pay, which affects top people only. It should apply only to pay received for working for others as employees or as people who owe a fiduciary duty to others. Entrepreneurs should not be affected. People who want to become seriously rich should be encouraged to set up and grow their own businesses.
The management of risk also needs reform. Risks must be shared in a way that provides proper incentives to mitigate risk; they cannot simply traded away or insured away. Banks must take direct responsibility for the risks associated with the loans that they make. They should be able to evaluate and control these risks better than insurers. Banks should take proper account of the limitations of using of credit rating agencies. There is a serious conflict of interest associated with the issuing of a credit rating. Also, when making a loan, a bank needs to know if others are also making loans on the back of the same credit rating. Banks therefore need a far more traditional relationship with the people they lend money to.
Greed within general management must be constrained so that managers (especially top managers) are working primarily for the benefit of their company members (shareholders) rather than for themselves. Greed especially needs to be constrained in the financial services sector, where the top priority should be maintaining the health of the financial system as a whole. The second priority should be serving the genuine needs of the clients. Both of these activities must take much higher priority than maximising the profit of the financial services firm. A cap on pay could be helpful in constraining greed in these situations and restoring focus on fiduciary duty.
All these changes require far more attention to relationships, working together and values that are held in common at the top of our society. This is where I believe that the religions can contribute something extremely valuable to society and to the economy in particular.
It seems to me that the wealth of the Western world has, in large part, grown out of its religious (primarily Christian) values. The deterioration we have witnessed in those values over recent decades has been a major factor leading to the credit crunch. I don’t believe that we will find any lasting solutions to our economic problems before religious and ethical considerations are once again given far more prominence in our society and public life.
In particular we need a society where co-operation in building up the common good, takes precedent over competitive considerations. This requires a fundamental change in attitude! Competition has a useful function of controlling costs and ensuring efficiency. However this can only contribute positively to society of it takes place in the context of co-operation and a common vision at the top end of our society. Top people, (top business people, politicians, professionals) have a responsibility to work together for the good of all society. Excessive competition between top people has the effect of pulling society apart, just as we have seen our financial services sector pulled apart. Competition between top people also seems to increase pay and other costs, rather than control them.
We need to find ways of encouraging top people to co-operate in building a society that benefits everyone. The way that top people are paid is very relevant here because often it is higher pay that causes top people to compete with each other. The hope of higher pay can encourage top people to develop new agendas (for example setting up new investment funds) which might pay well, but do not actually benefit society. There is therefore a case for a cap on pay, which affects top people only. It should apply only to pay received for working for others as employees or as people who owe a fiduciary duty to others. Entrepreneurs should not be affected. People who want to become seriously rich should be encouraged to set up and grow their own businesses.
The management of risk also needs reform. Risks must be shared in a way that provides proper incentives to mitigate risk; they cannot simply traded away or insured away. Banks must take direct responsibility for the risks associated with the loans that they make. They should be able to evaluate and control these risks better than insurers. Banks should take proper account of the limitations of using of credit rating agencies. There is a serious conflict of interest associated with the issuing of a credit rating. Also, when making a loan, a bank needs to know if others are also making loans on the back of the same credit rating. Banks therefore need a far more traditional relationship with the people they lend money to.
Greed within general management must be constrained so that managers (especially top managers) are working primarily for the benefit of their company members (shareholders) rather than for themselves. Greed especially needs to be constrained in the financial services sector, where the top priority should be maintaining the health of the financial system as a whole. The second priority should be serving the genuine needs of the clients. Both of these activities must take much higher priority than maximising the profit of the financial services firm. A cap on pay could be helpful in constraining greed in these situations and restoring focus on fiduciary duty.
All these changes require far more attention to relationships, working together and values that are held in common at the top of our society. This is where I believe that the religions can contribute something extremely valuable to society and to the economy in particular.
Labels: capital, Christian, competition, cooperation, top people
