In 2009 http://www.economist.com/ asked me to write a piece to explain the crisis of confidence in business leadership. At the heart of the reasons for a public failure of confidence in business leaders, I argued, was the issue of their remuneration.
The reaction was explosive: I had touched a very raw nerve. On a ratio of roughly 2:1, the comments reinforced my view that the leaders of big business had managed to exploit the failure of the market to represent shareholders’ interests to execute a coup. This coup against the owners of the capital employed in their businesses resulted in them extracting something like double the amount of profits to pay themselves than was the case 30 years ago. This payment, I said, was for performance that was no better and, in many cases, worse. This is now a common mantra and the case of Stephen Hester’s bonus has turned it into political theatre.
It might make for good headlines – even Boris Johnson jumped on the bandwagon having fallen behind Ken Livingstone in the London mayoral polls – but it is the posturing that rings hollow. The outrage from the two ‘Eds’ seemed less sincere when we remember that they were in the cabinet that set up UKFI and agreed the employment contract for Hester. The pressure from the prime minister and the chancellor was lifted at a critical moment when, according to the Financial Times, it became clear that the government appointed RBS board and CEO “might walk”. The leaders and finance spokesmen of our two major parties need to play fair with us. As with any failed remuneration system, it’s not the payment that’s the problem: it’s the scheme. By the time we get to payment, it’s far too late. The rules, the multiples, the definitions, the measures in Hester’s case were far too lax, far too open to interpretation, and based on objectives that were just not demanding enough as far as shareholder interests were concerned. It was the lack of understanding of business that led Labour to set up the system it did. It’s the lack of understanding of business that led the prime minister and his chancellor to blink. If I was the major shareholder and they were not meeting my expectations, I would have let them quit: after all, there are plenty of unemployed bankers out there who’d be happy to do the job.
RBS, just like any other business, is not dependent for its success on a single executive, however important. CEOs leave all the time and their businesses seem to carry on regardless. This argument is over an undeserved bonus on top of a salary that is around 50 times the national average. To have fought to win, it seems to me, was exactly the right signal we needed to force a change of culture. The failure to impose shareholder will is an unfortunate precedent that will come back to haunt this and future governments.
So, despite the fact the Conservatives pulled their punches, Hester accepted Nick Clegg’s invitation to play fair and act in the interests of his shareholders by turning the award down. Had he done so before he got it, it would have been an act of leadership. To do so only in the face of public opprobrium is a sign of just how far away from reality he and many other leaders of big business really are.
Chris Bones is professor of creativity and leadership at Manchester Business School. His book The Cult of the Leader explores in detail the reasons behind these issues and lays out a public policy and leadership agenda for change.