Margareta Pagano: Arrogance got Sir Fred into this mess. The herd instinct could get him out

The RBS boss's decision to raise the final dividend to shareholders beggars belief. But he still might be able to salvage his reputation
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The Independent Online

A stockbroker friend says he would have laughed at Sir Fred Goodwin if he had been at the board meeting when the Royal Bank of Scotland chief executive and his directors agreed to increase the final dividend to shareholders back in February. But for whatever reason, Sir Fred and his chairman, Sir Tom McKillop, decided to go ahead.

What you have to ask is why RBS's non-executive directors didn't question Sir Fred's judgement. The UK's second biggest bank has some real heavyweights on board: Sir Tom is a top industrialist, a former chief executive of the drugs company AstraZeneca and a non-executive director of BP, while the other nine non-executive directors include Sir Steve Robson, former Treasury second permanent secretary, Sir Peter Sutherland, chairman of BP, and Bob Scott, chairman of Yell and a non-executive of Swiss Re. Did they deliberate over the dividend? Maybe they did. We don't know.

You do wonder, though, how such a supposedly talented group of businessmen allowed RBS to get into the position where investors are now demanding Sir Fred's head. Some may say that, as industrialists, they didn't have a sophisticated understanding of what was really happening in the credit markets. But they had the numbers in front of them – holding, or even cutting, the dividend would have been prudent accounting in anybody's business.

The decision to increase the dividend looks even more extraordinary now than it did then, as it was widely known that RBS's financial position was wobbly and that it would need to improve its capital base. Sir Fred has persistently denied the need to boost capital, arguing that the bank was doing fine. But at this week's annual meeting he may have to eat a lot more than humble pie if he does go ahead and ask shareholders to approve a rights issue that may be up to £15bn. They will also be asked to approve the final dividend payment, of 23p a share, which will cost RBS a cool £2.3bn. Last October it paid out £953m in interim dividends. Investors are unlikely to be amused if asked to cough up money with one hand, only to receive it in the other. As my stockbroker says, this is robbing Peter to pay Paul.

You can understand why Sir Fred and his board have resisted a rights issue; it is diluting and represents a loss of face, unless of course it is to fund growth. That's where Sir Fred went wrong. The perfect time to have bolstered capital would have been ahead of the takeover of ABN Amro, when the market was booming and RBS's share price still riding high.

So what changed his mind? The Governor of the Bank of England, Mervyn King, has said on many occasions that he would like to see the banks bolster their capital. But my sources say it would be wrong to assume that it is Mr King's stick that has beaten Sir Fred into submission. A more likely scenario is that he came under pressure from the Prime Minister, Gordon Brown, who met Sir Fred and the big banking chiefs last week and urged them to 'fess up to the extent of writedowns and losses.

Should Sir Fred pay the price with his head, as some investors are already demanding? There's no doubt that RBS has acted with arrogance, vanity even. While buying ABN Amro was a smart move, Sir Fred paid too much for his ambition and it is this that has pushed the bank over the edge. If he goes, he should be accompanied by several of his non-executives, who have clearly not done their job properly

But if Sir Fred plays it right, and even apologises for his stubbornness, then he might survive and could turn out to be the hero of the hour as the first of the bankers to come clean. Banks are notorious for acting like a pack of dogs, whether following the market up – buying overpriced assets – or down, they work like a herd. And the next to go? Barclays and HBOS are the favourites.

DOWNTURN, WHAT DOWNTURN? BENTLEY'S SALES CRUISE ON

The rich really are different and they show it by buying £220,000 Bentley Continentals even in the downturn. Over lunch at the Bentley Room at Mosimann's in London last week, Bentley's chairman and chief executive, Dr Franz-Josef Paefgen, told me even he is surprised at how many cars are cruising out of the showrooms in the current financial climate. Sales are still strong in the US, which is Bentley's biggest market; the cars are particularly popular with real estate tycoons and Wall Street financiers.

Last year Bentley sold 10,014 cars worldwide, and Dr Paefgen hopes to sell as many again this year. Any decline in the US, which imports 40 per cent of the beasts, is made up for by demand from Asia, Russia and the Middle East. So far this year, 126 cars – mainly Continental Flying Spurs – have been sold in China and Hong Kong. The Chinese love the four-door saloons, and sales are expected to soar to more than 1,000 cars a year over the next few years. The next move for Bentley, whose cars are still made in Crewe even though it is owned by VW, is to sell more in Russia. It sold 216 cars there last year but this is set to increase after the opening last month of a new dealership in St Petersburg.

But the UK remains a big home for Bentleys – the Continental GT is Wayne Rooney's favourite car – with 2,000 sold a year.

BP REGRETS TO INFORM YOU ... THEY DIDN'T GET THE JOB BUT THEY DO GET £1.5M EACH

What would you do if you applied for the top job in your workplace but didn't get it? Most of us, I suspect, would go and have a drink or two, kick the wall, go for a run or have a quiet scream. Or, we could resign, if our egos were so dashed, and try our hand somewhere else.

Not at BP. Instead the oil giant rewards its unsuccessful executives with handsome bonus payments dressed up as one-off retention awards. It didn't get much attention because of rights issue fever in the press but at BP's annual meeting last week a third of its investors voted against retention bonuses for two of its directors.

Andy Inglis and Iain Conn were offered £1.5m each when they lost out to Tony Hayward last year in the race to become the oil giant's new chief executive. But, in a rare fit of pique, several of BP's big investors argued that they were not consulted on the retention packages and didn't like the fact that there were no vigorous performance measures. Of the 12 billion votes balloted, some 3.3 billion were against. Inglis and Conn – who is still talked about as a future chief executive – will get their money, but the shareholder revolt is a good warning to BP not to push its luck.

We are going to see much more of this sort of dissent over the coming months as the difference between what people are paid and what they actually achieve becomes all the more apparent. Even the banking industry is having a serious navel-gazing exercise over how it rewards its star performers, particularly in the case of traders, who get such a large slice of what they kill. Actually, it's because the rewards as so great that they kill so much of the wrong thing, such as sub-prime.

Peter Montagnon, director of the Association of British Insurers, which represents a sixth of all shares listed in London, has already sharpened his teeth. He's told leading renumeration consultants that investors are starting to get twitchy about staying bonuses. A good claret is much cheaper.

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