Comment: The word Sir Rick never wants to hear again

"The truth is that the committee was intent on playing politics. It seems to have thought the tax idea would both make its report look tough and attract attention away from the weakness of the code itself"
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Life being what it is, we aren't perfect, said Sir Richard Greenbury a week ago, explaining that there were bound to be things missed or even wrong in his pay report. What a prophet he was. Yesterday he was apologising for his committee's failure to think through the tax recommendation, which has now led to a U-turn not only by the CBI and the Institute of Directors but even by Sir Richard himself.

More embarrassing still, Sir Rick and Tim Melville-Ross, the director general of the Institute of Directors, both now admit they argued against the idea in private. Poor Sir Rick seems to have steamrollered himself, by insisting that above all else the committee should be unanimous. He gave way, to be consistent, but now seems to have gone into shock over the reaction, judging by his bizarre promise to wear an apron, saying "If you can't stand the heat get out of the kitchen" at today's Marks & Spencer annual meeting. Sir Rick does not want to hear the word remuneration ever again.

The text of the pay report gives a clue to the thinking that led to this extraordinary muddle. It says "executive share options should in future be taxed as income rather than capital gains." The arrangement the Chancellor banned as a result of this paragraph is normally referred to as an approved executive share option, but in fact 'executive' is a misnomer because such schemes are available to all employees. That was the rub. Sir Rick and Mr Melville-Ross were fully aware of this pedantic but rather important point, because they argued against the tax change on the grounds that it would hit some of the wrong people. Excuses that the committee really meant top earners when it said executive share option really won't wash. The truth is the committee was intent on playing politics. It seems to have thought the tax idea would both make its report look tough and attract attention away from the weakness - in the eyes of the political world and the press - of the code itself. This was certainly what happened, because the rest of the report has been almost forgotten in the last few days.

Sir Rick and Mr Melville-Ross must now be reflecting on the dangers of compromising their principles. Gordon Brown, the shadow Chancellor, who campaigned vigorously for abolition of CGT relief, should also be showing some humility. He said during the spring that Labour would keep relief for Save As You Earn share option schemes - which the Chancellor has also done - but at no time did he acknowledge the wider effects of dropping the separate approved share schemes.

Just over half of companies extend the executive scheme down to middle management, and 14 per cent allow non-management staff in. As we advised Mr Brown more than once in this column, Capital Gains Tax relief was a red herring in the great pay debate because the best paid would hardly notice abolition while employees down the scale would be hit proportionately far harder. That is exactly what has happened. With the Chancellor also at fault for lack of consultation and forethought, neither government nor opposition comes out of this with any credit.

Play that again, Smith

Watching Smith New Court's effort to sell itself is like sitting through the remake of an old film. The characters and the backdrop may be different, but the plot bears unnerving similarities. For Smith New Court read SG Warburg; for Merrill Lynch or Commerzbank put in Morgan Stanley, and for the "villain" of the piece, Evelyn de Rothschild, remember Mercury Asset Management. Like the forced revelation of the Morgan Stanley/Warburg talks in December, Smith was not ready to go public. But once it did, nothing was said to dispel the impression that a deal would be wrapped up fast.

More than a week has gone by, amidst confusion and temper tantrums worthy of the silver screen, but still without a clear proposal, let alone a deal, to show for all the haggling. In his long years of working with Sir Evelyn, Michael Marks, the chairman of Smiths, should have learned that the head of the English Rothschild dynasty would not take kindly to being presented with a fait accompli.

Within Smith New Court , there are big differences among both staff and top management about the best option, be it Merrill, Commerzbank or no sale. Talk that if no satisfactory deal comes off then it is back to business as usual is nonsense. The relationship with its biggest shareholder has been compromised, and Michael Marks would find it hard to keep his job. Smith New Court has gone beyond the point of no return. It may not be a distress sale at the moment, but could soon become one if the uncertainty drags on. It is this realisation that will probably persuade Sir Evelyn to cash in his 26 per cent stake. Failed sale talks, and confusion within Smiths, could see the stake's value fall off the edge.

Footsie can shrug off Wall Street blues

Markets on both sides of the Atlantic were a good deal more comfortable yesterday after the near panic that drove Wall Street 132 points lower for a while on Wednesday. But the correction in New York caused some sweaty palms. With technology stocks representing a tenth of the market by value, any hiccup in the bull run the sector has enjoyed since the start of the year was bound to be a shock.

Downgrades at Microsoft and poor figures from Intel provided the excuse, though the Dow had been living dangerously for a while. The last time the ratio between bond and equity yields reached the current 2.8, at the end of last year, the market also took a tumble. With mutual funds historically low on cash, there was never likely to be much buying support if the market got the jitters on interest rates, which is why Alan Greenspan's comments caused such a clumsy knee-jerk response.

The good news is that worries in New York need not panic London unduly. First, the differential between the two markets, for years a reliable 600 or so points, has widened dramatically over the past six months to about twice that much. That should mean the Footsie can shrug off anything other than a catastrophic fall on Wall Street.

The yield ratio in London is also much less worrying. At just over two, it suggests equities are relatively cheap both historically and compared to other markets. Compared to corporate earnings forecasts they are also not expensive by recent standards.

One of the reasons London has kept its feet on the ground is that it has been largely passed over by this year's biggest investment fad: high growth technology stocks sadly account for just 3 per cent of the All Share. Liquidity is also good, thanks to takeovers funded by overseas cash, and a seasonal influx of dividend payments. There are plenty of reasons to feel relaxed even if analysts' forecasts of 15 per cent earnings growth are reined back. But the market is unlikely to provide too many pleasant suprises either. Stir in political uncertainty and forecasts of a flat market for the foreseeable future look depressingly plausible.

Edited by Peter Rodgers

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