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bankers’ remuneration May 15, 2009

Posted by Bradley in : financial regulation , trackback

In a week when UK press attention has been focused on MPs’ expense claims (it’s a bit like reading about corporate scandals, but on a smaller, rather more ridiculous, scale) the House of Commons Treasury Committee published its report on corporate governance and pay in the City (note that none of the members of the committee appears on the lists of MPs the Telegraph has identified as makers of dubious claims). Here’s a taste:

On remuneration we conclude that the banking crisis has exposed serious flaws and shortcomings in remuneration practices in the banking sector and, in particular, within investment banking. We found that bonus-driven remuneration structures encouraged reckless and excessive risk-taking and that the design of bonus schemes was not aligned with the interests of shareholders and the long-term sustainability of the banks. We express concern that the Turner Review downplays the role that remuneration played in causing the banking crisis and question whether the Financial Services Authority has attached sufficient priority to tackling remuneration in the City.

There are some questions in the report about whether it is wise to rely on people very connected to the financial markets to develop solutions to the current problems, for example:

We suspect that Lord Myners’ City background, and naiveté as to the public perception of these matters, may have led him to place too much trust in an RBS Board that he himself described to us as “distinguished”.

And:

we are not convinced that Sir David’s background and close links with the City of London make him the ideal person to take on the task of reviewing corporate governance arrangements in the banking sector.

But there’s some other, rather odd, stuff too. I suppose that because this report is part of a series (after reports on Icelandic banks and dealing with bank failures) there’s a temptation to shove stuff in even if it doesn’t fit very well, but why does a discussion of the role of the media (in particular of whether the media encouraged the run on Northern Rock, rather than of media coverage of remuneration issues) appear in a report on corporate governance and pay? On the other hand, perhaps this is a good thing, as the committee does not endorse silencing of the media in financial crises:

The press has generally acted responsibly when asked to show restraint in particular areas. Too often, indeed, those responsible for creating the current crisis have sought refuge in blaming the media for their own conduct….it is crucial that the public are kept informed about institutions holding their money. If the public is to trust the banks in the future it needs to be confident it has sufficient information on how they are operating, and that such information is not restricted to those on the inside. Indeed, the Government may wish to look carefully about the disclosure obligations applying to banks and other financial institutions to see if further transparency would be beneficial.

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