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15 August 2009

Glass Houses

Tag(s): Boards, Business, Politics & Economics

I recently met Peter Bottomley MP at a House of Commons reception for the Intelligent Transport Systems industry. He was one of very few parliamentarians who came out that night as it was right in the middle of the expenses crises and interestingly none from the Governing Party attended. Soon after I saw his wife, Baroness Bottomley, at a Marketing Society function. I said, “Hello, Virginia! I saw your husband the other day.” She replied “Oh! He’s not in my good books. He hasn’t been making any of these expense claims!”

Now these blogs are not intended to be about politics although God knows I could rant and rave about the benefit cheats with the best of them.  Rather these are intended as a commentary on the world of business from the perspective of someone with a wide range of experience around that world. The point is that while it may be easy to criticise the MP’s I suspect that the public doesn’t see a great deal of difference between them and business leaders. Certainly the bankers haven’t covered themselves with glory and the man on the Clapham omnibus is likely to think we all come from the same cloth.
This is a time to radically examine our own practices. Its time to make sure that none of our own expense claims would fail the Daily Telegraph headline test. And it is not just about expenses. The whole question of remuneration is likely to come under more and more examination. None of us want to see this subject to greater regulation but the following chain of logic is entirely valid:
• The credit crunch is the result of poor business decisions with inadequate consideration of risk.
• These in turn were driven by greed as it was possible to earn stupendous bonuses based on value of business booked rather than long term profitability.
• Only vast expenditure by the tax payer has avoided further structural damage to the banking sector.
• Such bonuses should be restricted to avoid repetition of this behaviour.

Remuneration has become one of the hottest topics in the world of business and as in many such matters the debate is distorted by a lack of understanding on the one side but no doubt greed and indefensible practices on the other. It is irritating to read in the popular press of well paid executives “trousering” or “taking home” sums which are always quoted as gross as if these individuals were not subject to the deductions of c.50% by the Treasury, next year planned to rise to nearly 60%. Nevertheless, the multiple of the wages of the lowest paid workers now earned by the highest paid has grown enormously and is now arguably too high to sustain social cohesion. British public companies now have to put their remuneration practices to the vote but since that was enacted very few have not been supported by shareholders. This may be because major shareholders have already been consulted on the more radical proposals. Certainly the Non Executive Director who draws the short straw of chairing the Remuneration Committee will be spending a considerable part of his time in explaining the company’s policy to shareholders. A huge part of the Annual Report is now given over to the subject of remuneration. The cost involved of the total remuneration of the directors will probably be less than 1% of the total cost of the enterprise but the issue is so politically emotive that it comes under the greatest scrutiny.

And this is right and understandable if badly designed remuneration policies have contributed to a major halt in economic growth as in the case of banks and other financial services. There is an enormous responsibility with the Boards of such businesses to get their policies in balance.

Copyright David C Pearson 2009 All rights reserved




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