COMMENT : Dangers in the City's runaway gravy train

`Before preaching to the rest of us about capital being a scarce commodity and the importance of keeping wages under control, perhaps the City ought to think first about setting its own house in order'

Everybody knows the City pays itself too much. What is not generally appreciated, is that the very high rates of bonus enhanced remuneration securities firms pay their staff are almost certainly not justified by the profits and return on capital they earn. If those who pay themselves so much in the City were to find such runaway excess in the ordinary commercial and industrial firms they invest in and analyse, they would rightly run a mile, thinking this symptomatic of massive management failure.

And yet that is precisely what the latest numbers on the financial performance of Stock Exchange member firms show. Boosted by big bonuses, the trend in staff costs continues upwards at a brisk pace. Admittedly, they are not yet as high as they were at the peak of the last bull market towards the end of 1993, but don't forget that most organisations have downsized by anything up to 20 per cent since then. Furthermore, bonuses for the year to the end of last June were at record levels with every prospect of moving higher still this year.

Other costs have been cut quite sharply with the result that overall costs have only increased year-on-year quite marginally by 1 per cent. It ought to be clear what is going on here. Staff are, in effect, gobbling up all the efficiency gains being made in these firms through enhanced pay and bonuses. The oddest thing about it is the apparent willingness of those who own these businesses to tolerate the persistence of this extraordinary gravy train, for it isn't as if the returns even in present market conditions are that remarkable.

If they were, the owners would perhaps be justified in sharing it around a bit. But they are not. As the Exchange report concludes: "The long-term average return is only 6 per cent and despite recent favourable conditions, the modest return of the past year would be lower still if firms in aggregate had not reduced the amount of capital employed." Some firms will be doing better than that, of course, but on the whole this doesn't look like the sort of business you want to be in, not as an investor in any case. Now if you are an employee, it is a different matter, for the astonishing irony is that modern-day securities firms seem to be closer in terms of who they serve to worker co-operatives than the corporations most of them are supposed to be. Perhaps before preaching to the rest of us about capital being a scarce commodity, the importance of keeping wages under control and all the rest of that annoying but only too true free market guff, the City ought to think first first setting its own house in order. Some chance.

Eurotunnel investors keep their cool

Small fire in the Channel Tunnel, not many injured. The reaction in the financial markets to the blaze on board one of Eurotunnel's freight shuttles on Monday night was remarkably sanguine. The shares were off just 3.5p yesterday and the price at which its debt trades was barely changed at a shade under 40 per cent.

Perhaps the markets have become so accustomed to Eurotunnel's never-ending succession of crises that they cannot summon up the energy to worry about one more. When you have debts of pounds 9bn and no hope of making a profit until well into the next millennium, what do five burned-out wagons and a two- thirds reduction in capacity matter, even in the run-up to Christmas?

But perhaps the markets are being just a little too phlegmatic in their response. There is something about passengers emerging from a tunnel under the sea choking on the fumes and pursued by "blow-torch" like heat that has a special resonance. Fires on board ferries are not much fun either, as one of Eurotunnel's bankers was quick to point out yesterday, but at least you can swim for it, whereas the options 30 metres underneath the sea bed are somewhat more limited.

If the images from Monday night resonate loudly enough with travel agents and the InterGovernmental Safety Authority, which licenses Eurotunnel to operate, then the company and the project could be in trouble. There are two worries here. Will the fire and the resultant adverse publicity blow a big enough hole in Eurotunnel's revenues to make the arithmetic for its pounds 8.7bn debt rescheduling look even more dubious?

Second, will Eurotunnel find itself having to make expensive and time- consuming modifications to its freight shuttle design to give lorry drivers the same degree of fire protection afforded to holidaymakers? If it does then Eurotunnel will find its operational efficiency and hence revenue- earning capacity being hit. Sir Alastair Morton may yet be summoned out of retirement for Channel Tunnel 2: The Ultimate Crisis.

Sorting smart firms from counterfeits

The pursuit of long-term success in business is the holy grail of all executives, investors and policymakers, so we should not perhaps get too worked up about the launch of the Kleinwort Benson Tomorrow's Company Exempt Trust, a new unit trust dedicated to investing in companies that take an "inclusive approach" to management.

All the same, KB has latched on to a quite compelling and highly saleable investment fad here which others are bound to follow. Even accountants, long the object of wrath for their concentration on the numbers, have started talking about a "balanced scorecard" approach to financial reporting, while recent changes to accounting standards have done much to help readers of financial statements gain a wider view of company performance. A fund that seeks to move away from pure number-crunching and towards a more balanced approach to what constitutes "a successful company" should do well.

The Tomorrow's Company report, which inspired the creation of the new trust, was criticised by many when it appeared last year for being too wishy-washy. Even so it did set out some clear criteria, including paying attention to "stakeholders" other than shareholders, for companies seeking to qualify as "inclusive". Kleinwort has gone on to list five "behavioural aspects" to consider alongside business processes and financial results. They are communicating the company's purpose and values; identifying key sources of sustainable success; developing a unique success model and measuring its results; placing a positive value on key relationships with such groups as suppliers, customers, the community and employees; and maintaining a healthy licence to operate.

The idea is that, soft and intangible as these criteria may be, they are still capable of being measured, and of having a positive financial effect. For instance, environmental concerns become financial issues when a pollution incident occurs, while a company that has its systems all running perfectly is still likely to find itself in trouble if it neglects customer service or investment in the development of its people. The only problem with all this is that every chief executive is going to claim that his or her company is meeting all these criteria. It will be up to the researchers to distinguish the real smart company from the many counterfeits.