Duncan Hamilton: Clarity in public relationship with banks is no bonus, it's vital

Published on Saturday 5 December 2009 18:53

IT IS very easy to criticise RBS, so let's get cracking. In a spectacularly inept move, the bank this week decided to pick a fight with the government over £1.5 billion of bonus payments to its employees. Bad timing, given that the banking bailout was this week revealed to have cost each family in the UK £5,530 and RBS and Lloyds confirmed that they were unlikely to meet their 2009-10 commitments for £27bn in lending to firms.

So, just to recap – if you will pardon the financial pun – we go up to our oxters in debt to keep the banks open, they fail to hit agreed lending to kickstart the economy, the government is forced to take an unprecedented risk by flooding the market with cash via measures such as Quantitative Easing, that artificially boosts the markets (the FTSE is up 29 per cent on 12 months ago) and, as a consequence, the investment bankers want a bigger bonus? Ever feel you are in the wrong job?

To pick a quarrel on bank bonuses was simply bizarre. RBS brought a knife to a gunfight. Sure, the bank needs to rebuild but it must have noticed that the government needs to get re-elected? The government will soon own 84 per cent of the shares and had, with the full backing of public opinion, previously explicitly said that it would step in to cap excessive bonuses. What kind of company picks a fight with the government and public opinion which it cannot win? What did the bank expect – thousands to line the streets from Gogarburn in a candle-lit vigil united in a chorus of John Lennon's "All we are saying, is give them the cash"? It was a horrible, foolish error. In the public mind, these are the bonuses of Christmas past.

The wider point is the need to redefine the dysfunctional relationship between the government and the banks they own.

Part of the problem is our understanding of "ownership". That, to the taxpayer, suggests an operational control which, in truth, is neither desirable nor manageable. Yet talk of "nationalised" banks creates an expectation that we, the people, own RBS and that accordingly it should be run in a way compatible with the "public interest".

By contrast, RBS continues to run as an organisation driven by the need to make a profit and to benefit the shareholders. The fact that the state is currently the principal shareholder does not, for RBS, change that focus

The point is this – these two approaches are both legitimate, both are supported by government pronouncements but, in truth, they are often entirely mutually exclusive.

As Lord Mandelson put it: "The government does not run RBS, it is run by its management and its board. Equally, we own a very large part of it, and we are entitled to express our views as we see the public's interest, and we are entitled to represent and reflect public opinion equally."

Just analyse that passage for a moment. The bank is owned by the state, run by the business, influenced by the "public interest" and must be receptive to public opinion. That is an utterly unsustainable model of governance.

Consider the bonus row. Plainly the paying of bonuses is offensive to public opinion yet the business tells us they are essential to drive the bank back to prosperity. In that example is the "public interest" served by reflecting the will of the masses or by aiding the bank's recovery, which in turn will yield a greater and quicker financial return to the taxpayer? And who decides that question – the boards we trust to run the banks or the government which owns the banks? One doesn't give two hoots about public opinion and the other cares too much about it.

So what do we do?

First, there needs to be a clearer public statement of the role of the government in these banks. Are they active or passive? Do they want to have a say in the running of the bank or not? What does acting in the "public interest" mean, and how does the public interest differ from the interests of shareholders, who are, of course, the public? What, to the government, is the difference between the "public interest" and public opinion? Public expectations need to be managed. That failure has resulted in public outrage fuelled by a misperception of our role.

Secondly, banks like RBS need to grasp that public opinion now has a seat in the boardroom. That may be difficult, uncomfortable and ultimately unsustainable. But it is the reality of the next five years. The banks are, in every sense, public property – easy copy for the tabloids and, inevitably, under scrutiny in parliament. Pretending that the government is just a shareholder like any other is outdated, naive and ultimately damaging.

The perception of "shareholder value" must change for banks such as RBS. Yes, it is about cash and profit, but it is also about considering what the taxpayer considers to be "value". That means lending to businesses, doing more on mortgage rates and assisting the recovery. And it means not just saying it, but doing it.

This forced marriage of public and private is an unhappy one. But if we do have to cohabit, we need clarity and understanding about the terms of the relationship. More spats between banks and government don't help each of them get our money back and wash our hands of involvement with RBS. And personally, I want the return of my 5,530 to be seen as a priority, not a bonus.