Banking on corporatism

Adam Smith’s ‘agency problem’, the separation of ownership from control, enables big-business executives and directors to pursue their own agenda. All too often this results in an unholy alliance between big business and big government, the former achieving protection from competition via state decrees or regulations, and the latter gaining its prized goal of greater power and intervention, along with a ready-made scapegoat (‘the market’) when things go wrong.

The modern term for this collusion is corporatism and perhaps the most obvious corporatist industry is banking. Banks need government licences; they cannot issue their own bank notes (they must use those of the central bank); they are prisoners of interest rates set by the central bank and central government; they make billions of pounds directly from governments – raising capital for them, trading their ‘securities’ and advising them.

On top of all that, and deposits guaranteed by government, banks need hold no reserves of the money in which they deal; nor need they hold much in the way of capital. And they are guaranteed not to fail – as we have seen with Northern Rock, which is to carry on as usual under government ownership when even its former shareholders are seeking compensation from the taxpayer. Yet with a mere handful of exceptions, journalists berate banking as greedy capitalism, or even market fundamentalism!

Terry Arthur is the author of Crap: A Guide to Politics.

A change in corporate governance that I have advocated for forty years now [see 'The Power To Destroy' (1969), p.116] would allow shareholders to vote to increase the dividends proposed by directors, not merely to reduce them. This could help to rein in over-ambitious expansion by corporate directors, whose pay often seems to be related to size rather than profit. It is true that shareholders can vote to dismiss directors (from time to time), but by then it may be too late. Since the key question in dividend policy is: who can use the money best, the company or its owners?, it doesn’t seem unreasonable to let the shareholders have a direct say in this decision.

Banks could be fixed by debt-for-equity swaps.You mention the Unholy Alliance of Big Business with Big Government. The Unholy Trinity includes trade unions as well. (click link, item 6).

I think another phrase to describe it could be “national champion’itis”. The desire of the government to have world leaders in this or that industry leads to a very cosy coterie of the great and the good at the top of ever larger corporations. It is hard to know how we ended up with such a shockingly low quality bunch of banking executives. The boards of non-execs must take some of the blame. But they are made up of other establishment figures, well-in with the government, and usually knights of the realm if not modern “working” peers: Chairman Sir Tom McKillop to CEO Sir Fred Goodwin at RBS and Chairman Lord Stevenson to CEO Sir James Crosby at HBOS. You also feel sorry for Andy Hornby.

Andy Hornby rocks!

A change in corporate governance that I have advocated for forty years now [see 'The Power To Destroy' (1969), p.116] would allow shareholders to vote to increase the dividends proposed by directors, not merely to reduce them. This could help to rein in over-ambitious expansion by corporate directors, whose pay often seems to be related to size rather than profit. It is true that shareholders can vote to dismiss directors (from time to time), but by then it may be too late. Since the key question in dividend policy is: who can use the money best, the company or its owners?, it doesn’t seem unreasonable to let the shareholders have a direct say in this decision.

Banks could be fixed by debt-for-equity swaps.You mention the Unholy Alliance of Big Business with Big Government. The Unholy Trinity includes trade unions as well. (click link, item 6).

I think another phrase to describe it could be “national champion’itis”. The desire of the government to have world leaders in this or that industry leads to a very cosy coterie of the great and the good at the top of ever larger corporations. It is hard to know how we ended up with such a shockingly low quality bunch of banking executives. The boards of non-execs must take some of the blame. But they are made up of other establishment figures, well-in with the government, and usually knights of the realm if not modern “working” peers: Chairman Sir Tom McKillop to CEO Sir Fred Goodwin at RBS and Chairman Lord Stevenson to CEO Sir James Crosby at HBOS. You also feel sorry for Andy Hornby.

Andy Hornby rocks!

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