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Saturday, May 23, 2009

Committee calls time on ‘reckless City risk-taking’ - Tribune

IN THE midst of the current parliamentary turmoil we can forget we are still learning the lessons of the financial crisis. Many believe that the bonus schemes run by banks and poor corporate governance contributed to the near-collapse of the financial system. The House of Commons Treasury Committee has been examining the issue and its latest report, published last week, concludes that “bonus-driven remuneration structures encouraged reckless and excessive risk-taking.”

There were large disparities between the pay of different groups of employees within the banking industry. But the committee focused on how bonus schemes may have affected behaviour. Employees were encouraged to take risks which had unknown implications for the banking system and the schemes seemed one-sided. As Mervyn King, governor of the Bank of England, put it: “It was a form of compensation which rewarded gamblers if they won the gamble but there was no loss if you lost. It is obvious that if you do that you give incentives to people to gamble.” Pay needs to be linked to long-term performance and the interests of shareholders, concludes the committee.

The financial sector has become detached from the rest of society, resulting in the current backlash. This is true not only of bonus schemes but also other aspects of corporate governance, too. Various bodies are reviewing their structures but there is really no substitute for some direct and level-headed leadership from government.

The committee worries that banking has not fully appreciated the need for change and is waiting for the return of “business as usual” but we know that will only store up problems for the future. The 7,000 people marching for jobs in Birmingham last week were highlighting what can happen to people’s lives when financial risks are not properly managed.
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