David Prosser: Bumper bonuses aren't compatible with better balance sheets

Outlook: The squeeze on balance sheets will make it tougher for the banks to lend to businessesand individuals, undermining their commitment to targets
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The Independent Online

Let us be realistic. While the Treasury Select Committee's members will take the opportunity to stick it to Bob Diamond today, no amount of public shaming is going to prevent the Barclays boss and his opposite numbers at rival banks paying unacceptable bonuses to staff over the next few weeks. Not least because for many people, any bonus at all for the bankers is unacceptable.

If the politicians can't persuade the bankers to show what Nick Clegg, apparently without irony, calls "sensitivity" – and won't force them to do so – who might? Well, what about the Bank of England? It will soon have responsibility for prudential supervision of the banks under the "twin peaks" model of regulation now being implemented by the Government.

Remuneration is not typically part of the remit of the Bank, or its Financial Policy Committee. However, Mervyn King has made his views about bonuses clear: he thinks they remain excessive. The Governor's argument is not based on fairness, but his desire for banks to plough their profits into building up their balance sheets, rather than handing them out in the form of bonuses or dividends.

He is concerned for good reason. By the end of 2012, UK banks must find as much as £800bn to replace borrowings due to mature, mostly from support mechanisms such as the special liquidity scheme that the Bank introduced at the height of the financial crisis. As yet there is no clarity on how that will be achieved, and a number of banks continue to lobby privately for an extension of emergency support beyond the end of 2012.

In that context, the prospect of British banks paying bonuses totalling £5bn or more looks difficult to defend as a sound business practice. Mr Diamond and company may worry about their stars heading elsewhere if they aren't paid top dollar, but they should be more concerned about how they are going to roll over debt arrangements in the next 18 months.

The squeeze on balance sheets is bound, by the way, to make it tougher for the banks to lend to both businesses and individuals, undermining their commitment to new lending targets if this is how the latest bonus round is to be sold.

Lord Turner, chairman of the Financial Services Authority, said last February that the regulator had forced UK banks to pay less to staff than planned, after highlighting balance sheet pressures. If it was able do so for the 2010 bonus round, it should be able to repeat the trick this time around.



When shareholders should be told

Sometimes, the stock market works in mysterious ways. The directors of companies such as healthcare group Smith & Nephew and banknote printer De La Rue have a statutory duty to represent the best interests of shareholders. Yet under the terms of company law and stock market regulation, this duty does not automatically extend to telling shareholders someone might want to buy them out – even if the price on offer might be substantially higher than the current market valuation.

That does not feel right. Requiring the board to spend its every waking minute keeping shareholders informed about the way it is exercising the duties delegated to directors is not practical. Yet a takeover approach valuing the company at a premium to the current price is surely the sort of thing that shareholders would want to be told about as soon as it happens.

Neither Smith & Nephew nor De La Rue saw fit to tell shareholders that, respectively, Johnson & Johnson and Oberthur were interested in acquiring their companies. They simply rejected the offers out of hand. Naturally, both insist they act in shareholders' best interests at all times and there is no suggestion that either company has broken any rules. The only requirement for disclosure of such approaches appears to be The Takeover Panel's expectation that companies make a statement should their share price move unusually. In other words, you only have to tell people about bid interest if news of it is already beginning to dribble out.

Should there be a requirement for mandatory disclosure? Well, there would be difficulties with such a rule. How official would an approach have to be before it was disclosed? Would the rule only apply to offers at a premium to the prevailing price? And would companies be destabilised if they were constantly having to report all contact with potential acquirers?

Still, these difficulties are soluble. And, ultimately, shareholders should have the right to decide whether a takeover offer merits consideration. The boards of all companies have a tendency to believe they will produce morevalue than anyone else ever could. Assuming they have convinced shareholders of this too, there should be no problem leaving it to investors to reject opportunistic bids, rather than taking the decision on their behalf.



BP still has some lessons to learn

The reaction of the market yesterday to BP's operational difficulty in Alaska underlines just how precarious the oil giant still is as it tries to battle back from the Deepwater Horizon disaster of last spring. Its shares fell 2.5 per cent on opening yesterday morning, despite the fact that the leak in Alaska appears to be very minor – and contained within a building.

With investors remaining so nervous, it's a pity BP does not seem to have learned one of the big lessons of last year: that failing to take responsibility for such affairs immediately can result in much greater damage later on. Yesterday, it was referring all requests for information about the leak to Alyeska, the operator of the pipeline affected, rather than dealing with the issue itself. Guess which of the Alaskan oil extractors is Alyeska's biggest shareholder, owning 47 per cent of the company? Step forward BP.

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