Nick Clegg today said that he understood bonus anger. I think that any sane person also understands bonus anger. It is therefore incumbent upon politicians to explain patiently, and with sensitivity, the realities of this situation rather than, as Cameron, Osborne and Cable have done, suggest that the anger is well founded.
Bankers' bonuses involve the representatives of shareholders (directors) deciding to give shareholders' money to the managers of the company. It is only rational to do this, of course, if the bonuses give an incentive for management to add value to the company. Interference in this mechanism to reduce bonuses arbitrarily would make both bankers and banks' shareholders (pensioners, savers and so on) worse off. One might not feel very sorry for bankers as a class of people but I do feel sorry for pension scheme members in the current financial climate. Companies should not be dissuaded by the climate of opinion, or manipulated by politicians, from doing what is in their best interests.
There are some qualifications to this argument. It might be the case that corporate governance is some kind of insiders' racket. Bloggs appoints Smith to one board and Smith appoints Bloggs and so on. Instead of the directors acting in the interests of the company, they might be acting in their own interests and the interests of senior management. If the government believes this it should provide the evidence. However, this really is a problem for companies to solve themselves – perhaps by delisting and going private – and not for government.
Secondly, it may be that the bonus packages are optimal for the company but not for society as a whole because of the implicit bailout promise that exists. There is something in this. However, the problem with the bank bailouts was not the treatment of shareholders (in some cases, they got treated quite badly) but the favourable treatment of creditors (especially the holders of bonds issued by banks). In any case, it is government policy that, as a result of the Independent Commission on Banking enquiry, orderly failure will, in future, be possible. We have, on the one hand, George Osborne conveying this message and, on the other hand, Mark Hoban arguing that banks should be better regulated to prevent failure. So much for joined-up government.
David Cameron also argued that the RBS should be laggards in the bonus season. Maybe so. However, the government has appointed UKFI to look after the taxpayers' interests in the banks. Maybe the Prime Minister should fire the directors of UKFI and do their job himself – or perhaps it is better to let them get on with their job while he gets on with his. It is indeed possible that they are well-briefed specialists who know more about the situation that pertains to RBS than the Prime Minister with his wide-ranging role and that they are taking decisions that are in the best interests of RBS shareholders. Indeed, I believe that the Chief Executive of RBS was told when he joined that there would be no rewards for failure – in other words, his pay package would broadly be a bonus package.
Nick Clegg is right – people might be angry. But, when it comes down to it, the government has got to decide who runs Britain's companies. It is an unnecessary distraction for David Cameron to get involved in the bonus structure of Britain's banks. He should explain this patiently and sympathetically and get on with the business of ensuring that the legal framework exists for the next bank that goes bust to be wound up. The implications of a country whereby pay is determined not by free agreement between contracting parties but by the "wise judgement" of the man in number 10 Downing Street using principles of "justice" are enormous. We do not want to go down that route.