Today, the British body politic is outraged at the discovery that Sir Fred Goodwin, the former chief executive of the Royal Bank of Scotland, is – at the age of 50 – drawing a pension of £650,ooo per annum. Heck, most of us would be more than happy with a twenty-fifth of that from age 70; but then we haven’t by our actions brought the economy to its knees and forced the government to take over the bank we were charged with running.
As the details emerge, it seems that there was no obligation to pay this pension now; he would, it is true, have been entitled to it from retirement age, but because he was asked to resign, he was, at the discretion of the Board, allowed to draw it immediately.
The Board could and should have sacked him. The failure of his fiduciary obligations to shareholders alone would surely have been sufficient; and even Sir Fred could surely not have had the chutzpah to sue for unfair dismissal. But the chairman, Sir Tom McKillop, chose to do a mate a favour. After all, corporate thieves must stick together; and Sir Tom, by not just firing Sir Fred, has compounded the insult to shareholders and taxpayers.
But the failure of corporate governance goes much wider than just the overpayment to a fat cat. In the wider scheme of things, the £16m of Sir Fred’s pension pot is but a drop in the ocean; even if it were all recouped it would amount to barely 0.2% of the trading losses made last year, under Sir Fred’s stewardship. It is undoubtedly wrong that he should get that money, but it is a symptom, not the cause of the problem.
The Government, non-execs, auditors, fund managers and other institutional shareholders all believed the story that Sir Fred’s wondrous salary was worthwhile, because he was so good at his job. But the Emperor has no clothes; many of us have been saying so for years, and the only reason the vain courtiers did not is that they were all complicit in the fraud.
Enough of the vitriol. I hope Sir Fred will prove me wrong, do the decent thing, donate his pension to the starving, and get a job stacking shelves in Morrisons until he is really too old to work. I sha’n’t hold my breath.
But I shall continue to argue for much deeper reforms to corporate governance in all sectors. Boards need to be properly accountable to their shareholders. It is a convenient legal fiction that says that the shareholders are the company; the truth is that the company is, first and foremost, its managers and senior executives. Shareholders are merely a source of capital; the objective of the management is to pay them as little as possible, whilst paying themselves as much as they can legally get away with. The law does its best to make sure that other stakeholders – shareholders, employees, bondholders, customers – aren’t ripped off too badly, and auditors in particular are supposed to make sure that the accounts are kept properly, but everyone who was supposed to be keeping things in balance was – to a greater or lesser extent – in on the scam.
Now here’s a suggestion: company directors should get paid only the minimum wage, per hour, for their work, with the balance, up to the market rate for the job, paid in equities which vest (and can thus be cashed in) at a rate of 10% of the outstanding balance per annum. You see what I’m trying to do? I’m trying to align the interests of directors with those of shareholders. Naturally, they’re in opposition, which is why you need corporate law, and the principle of fiduciary duty, to force them together. But that hasn’t been working very well recently, so we need to look at it differently.