ShareSoc Chairman's Blog

They are (or should be!) only so highly paid if they have performed exceptionally on the basis of their talent (rather than merely having access to the bank's balance sheet) - but THIS area is something that bank managements (and their institutional investors) have been EXTREMELY weak at tackling over the last couple of decades.

This is the nub of the problem (as far as the pay aspect is concerned). Performance pay at this level is what has encouraged too much risky behaviour. If clever people know that they can earn huge rewards by gambling other people's money, then why are we surprised that they use every possible means to "earn" those rewards?

A US culture, epitomised in Liars Poker, has infecting global banking. Only by stopping these huge performance bonuses will we get prudent behaviour. And that's why the "banker bashing" continues. Until it is recognised that amoral behaviour is unacceptable, lay people have every right to demand change. Cultural change needs to start at the top - and Diamond's $120m+ fortune amassed by infecting Barclays with that culture is an excellent illustration of what needs to change. That is why ShareSoc is pressing on this issue.

I have no problem with genuine entrepreneurs who risk their own money, to create products or deliver services that clearly benefit buyers becoming as rich as they can (providing they act responsibly and don't, for example, attempt to lock-out competitors and create unchallengeable monopolies). It's quite a different matter when intellectual talents are diverted into dreaming up financial products that few understand and which create systemic risk.

This issue isn't about envy. It's about justice and creating a reasonably  stable society and a reasonably stable economic environment. There will always be booms & busts and a degree of "creative destruction" can be beneficial - but it's a question of scale. Nothing good whatsoever came out of the Great Depression. Ever growing inequality damages that aim, and will IMO ultimately lead to social disorder on a horrific scale. We're already seeing increasing support for extreme polticial parties of the right and of the left in European countries where the populus is suffering economic deprivation (as well as in the US). That is a trend that really scares me.

Regards,

Mark

In reply to marben100, post #29

Hi Mark and EE

Fascinating discussion , a few points that I'd make;

1) There is something deeply unappetising about our political and journalistic class framing the debate and indeed proposing to intervene in the role of "conscience of the people" , for instance when Bob Diamond was trying to explain that the relativities between Bank Libor submissions were critical as they demonstrated that he who lied largest stood to imply a degree of financial strength that was wholly undeserved there was a startling lack of comprehension or follow up by MPs , I may have missed something as I was listening to 5 live and lost the signal in the channel tunnel..but this struck me as a vital point.

2) Forcing Bob Diamond out has effectively destroyed any appetite from other Bank Chiefs to whistle blow on systemic malpractice elsewhere, the WSJ reported Libor concerns back in 2008 , where were our political leaders then?

3) Barclays took a decision 16 or so years ago to become serious about investment banking the Wall St way and understandably paid comparable rewards to bring in such a beast, it seems wrong to now complain that he is behaving just like his CV said he would.

4) Few dispute that we need a form of Glass Steagall in the UK ,personally I'd prefer a "bob diamond" version rather than a Cameron/Milliband knee jerk populist solution .

In reply to marben100, post #29

Mark,

This will be my last contribution to this debate.

Only by stopping these huge performance bonuses will we get prudent behaviour. And that's why the "banker bashing" continues. Until it is recognised that amoral behaviour is unacceptable, lay people have every right to demand change. Cultural change needs to start at the top

That is absolutely incorrect. There is no problem WHATSOEVER with "huge" performance bonuses - IF they are actually earned by dint of some special skill. That is capitalism. What you are advocating (using ShareSoc as a vehicle to harness popular envy of the well-paid) risks destroying the profit motive in a very large section of our economy. It is also completely unnecessary - because bank managements and large shareholders are ALREADY bearing down on employee costs where they can do this without causing significant harm to their businesses.

I've emboldened that last bit because the line you and many others (including anti-capitalist anarchists) are taking is effectively seeking to eradicate "high" pay at any cost! It is not "amoral" to earn large amounts of money.........there is no necessary relationship between the two!

It's quite a different matter when intellectual talents are diverted into dreaming up financial products that few understand and which create systemic risk.

It doesn't matter one iota to the rest of us that bright dream up stuff that few people understand - providing that it doesn't create systemic risks. This is the ONLY point that matters and the ONLY reason why banking has become such an important issue - the way the last Government (and their counterparts elsewhere....though not, for example, France) went about regulation allowed systemic risks to develop on a massive scale ....and that shouldn't have happened! If there had been no systemic risks created, then banks and other over-indebted businesses (eg GM) wouldn't have had to be bailed out by Governments - and Joe Public wouldn't have cared a jot that bankers had lost their jobs and shareholders had lost fortunes.

The ENTIRE focus of this debate should be about the future avoidance of systemic risk* - ensuring that never again are Governments forced to step in to preserve the integrity of the payments system, cash circulation and other services that are crucial to daily life in a modern economy.

*If they offered a larger font I'd have used it! It is the only thing that matters!

I agree with you about the risks of social disorder - but the misdirection of this debate to personally villify honest bankers is making the chances of such disorder much higher, not lower! Your talk of "justice" betrays the point that the tack being taken by ShareSoc is based on envy, despite your denials.  Politicians (Brown in particular) stoked the fires of revolutions when he attacked bankers, rather than doing a Mea Culpa for overseeing an utterly disastrous regulatory regime - he should be taken out and shot in front of his family ( /Clarkson mode off). He has done the country a MASSIVE disservice by misdirecting this debate into areas that are no concern whatsoever of politicians! The ONLY thing they should be concerned about is the avoidance of systemic risk (that and making sure they collect proper taxes from the highly-paid)!

Finally, turning to rhomboid's points, I agree with every single one of them. The politicians on the Treasury Select Committee were wilfully blind to the point that Diamond was making about the relative levels of LIBOR (which was that the authorities should have been concerned about most of the other 15 banks being too low rather than Barclays being too high) - they were too interested in their own self-aggrandising but pathetic imitations of the Jeremy Paxman approach to interviews......in particular that pillock David Ruffley (Conservative, Bury St Edmonds) who was busy "getting off" by demanding "yes or no" answers to matters that clearly required a lengthy explanation. The transcript is here for anyone who wants to see politicians playing to the gallery rather than doing what they are paid for.

The fact that all of the "serious" (hah hah) newspapers sent their diary correspondents along so they could write clever pieces of utter derisive nonsense merely shows how dangerously far off-topic the whole subject area has become. Our politicans and journalists should be taken out and shot (I've leave the full Clarkson mode off this time).

ee

Fascinating and very high quality debate. Just as a related observation discussed here (http://www.stockopedia.co.uk/content/why-has-ceo-pay-ballooned-66909/), the academic evidence that option-based pay actually drives improved corporate performance is sketchy, at best.

To cite one conclusion by Stathopolous:

  “The overall impression one gains from this vast body of work is that a link between executive pay (including stock option payoffs) and corporate performance does exist.  However, the link is quite weak, statistically significant, but far from compelling” . 

As Jeroen van der Veer, Former CEO of Royal Dutch Shell has observed:

"You have to realise: if I had been paid 50% more, I would not have done it better. If I had been paid 50% less, then I would not have done it worse".

In reply to Murakami, post #32

the academic evidence that option-based pay actually drives improved corporate performance is sketchy, at best.

Which is why shareholders shouldn't have turned a blind eye to rising pay for 25 years!

However, I'm not aware of any academic or other studies on the performance impact of underpaying teams of staff so that they leave en masse and take clients with them - and that is a risk that was undeniably present on a continuing basis for all bank managements.

That really is it now.....

cheers

what exactly is it that GB is to be blamed for?

Gordon Brown's biggest mistake was to run a 3% budget deficit at a time of economic boom in 2006-08. If he really believed the stuff about The Golden Rule then the budget should have been in surplus then. Did he not realise that the economy was booming then? It was pretty obvious to some of us ( http://boards.fool.co.uk/happy-new-year-to-all-garp-investors-as-some-may-10969641.aspx was six months before the Lehman collapse). To be fussing about whether regulation should have been light touch is missing the key point that the govt budget shouldn't have been in deficit at that time - obviously an economic downturn would add to the govt budget deficit which would cause big problems. Gordon Brown didn't manage the economy for the long term good of the UK as a whole, he managed it to win the next election and damn the long term consequences.




"there is a vast over-reliance by institutions on the advice of box-ticking consultants who advise them which way to vote on resolutions without themselves having reached rational conclusions"

Agreed. But why should institutions spend time on analysing governance issues that are immaterial to them? Everyone else has a choice [and if you want to compel "institutions" to do the analysis on such matters, where do you draw the lower line on the definition of "institution"?] If it is in the public (but not their own) interest to devote resources to governance issues, shouldn't the institutions be remunerated for doing so, from public funds?





I'm not really following the splitting banking into retail and investment banking debate closely. But I assume ordinary home loan lending would be part of retail banking. Would the activity of a bank making lots of domestic-sized loans to individuals, then packaging them up and securitising the package in a stratified structure and selling off the resulting high-risk and yet AAA-rated assets, be part of retail banking or investment banking? Surely that's just funding ordinary home lending? If that isn't retail banking, where do you draw the line on what activities aren't permitted in a retail bank?

Posted by ShareSoc at 09:07, July 8 2012.

Osborne supports high bonus levels, but ShareSoc does not

The Financial Times has reported that George Osborne is going to oppose the EU Parliament initiative of a cap on bankers bonuses of no more than 100% of base salary at the EU finance ministers meeting on Tuesday. Top bank executives apparently claim that it would “drive up base salaries, increasing fixed costs in highly-cyclical industries”.

Bearing in mind that ShareSoc has argued that bonuses in all companies should be no more than 50% of base salary (see our submission to the Cable pay consultation here: www.sharesoc.org/ShareSoc%20executive-remuneration%20response.pdf ), do bankers have any justification for their comments?

Is banking any more cyclical than other sectors? If they mean the boom and bust of the banking sector in the last few years, they might be right, but the key point is to encourage executives to not be financially driven by a boom and bust mentality, i.e. that they have to make pots of money in the good times because when times are poor, the pay will be also.

The argument that it would drive up total pay is surely wrong because if pay is set by what the market demands for banking staff, then there is no reason why it should increase overall. Indeed bankers might accept less total pay if it is more secure (after all they have to pay their large mortgages like everyone else).

Even at Barclays, the bonuses of the executive directors are not a significant cost factor in relation to their overall profits (£3bn a year even in these tough times, which rather puts the £290m fine for manipulating LIBOR into perspective).

Posted by ShareSoc at 13:36, July 10 2012.

Insuring your pension?

The weekend press reported that the Government proposes that people be offered some insurance to protect their pension savings against stock market falls. Pensions Minister Steven Webb suggests that people are deterred from saving because of stock market volatility. As a result, many have lost confidence in pensions, and that a guarantee is therefore required. You can expect a consultation paper later this year on the idea.

Two comments:

1) People can of course already purchase such insurance in that they could buy a FTSE put option to protect themselves against market falls. But presumably a more “retail packaged” offering is anticipated with a longer term horizon – for example as long as to one’s retirement date. One can see a great opportunity for banks and insurance companies to charge nice fees for this service, with possible misleading sales advice, excessive charges and all the other baggage that goes with selling apparently simple but in reality complex financial products to unsophisticated consumers.

2) The biggest impact on the value of pensions in recent years has not been stock market valuations, but simply that the income from an annuity (which you are forced to buy when a pension matures) for any given capital value has been falling. This is because annuity rates are closely tied to gilt interest rates and the UK Government has been manipulating the gilt market via Quantitative Easing so gilt interest rates have been falling. This has devastated pensioners’ income a lot more effectively than any problems in the stock market.

Perhaps the Government should simply consider promising that pensioners will get a real interest rate (not negative after inflation as at present) when their pension matures, and then confidence might be restored to the pensions savings market. In the meantime, potential savers will say “why bother?”

So you may consider this idea of insuring pensions as simply a great political swindle to divert attention from the real issue. At least that’s my view. Unless the Government is to also guarantee annuity rates, and they will undoubtedly not want to do that.

Posted by ShareSoc at 16:03, July 11 2012.

Voting against a delisting and against a dividend

Delistings are a common problem with AIM companies – leaving the shareholders high and dry if you stay in, sometimes for years, but otherwise scrambling to get out with a resulting collapse in the share price after the announcement of a proposed delisting is made.

The latest example is Lighthouse (LON:LGT), an IFA company. ShareSoc has issued a press release advising shareholders to vote against the proposal – see www.sharesoc.org/press_releases.html .

It probably stands a good chance of being defeated because we understand there is some institutional opposition, so any shareholder in this company should make sure they can and do vote!

Incidentally it was amusing to see that YCO (LON:YCO), which just delisted, recently took a two page spread advertisement in the glossy, ultra large size FT weekend supplement called “How to Spend It”. This might have cost them as much as the price of maintaining the AIM listing I would guess.

Another company where shareholders might wish to consider how they vote on some of the resolutions at the upcoming AGM is British Smaller Companies VCT (BSV). This is a company that changed the management incentive agreement to be “dividend based” in 2009. I warned the Chairman, Helen Sinclair, at the time this would have perverse consequences, as it had done in Spark VCT a few years previously. Last year the total expenses of the company were 6.6% of net assets, which is an enormously high figure for any investment trust. Why? Because the managers incentive fee rose as the company paid out 23p in dividends last year when it only had earnings of 2.9p - in other words it paid dividends out of capital rather than current earnings. Shareholders may wish to vote against the dividend, however perverse that might seem, and against the re-election of the directors for putting in place such a peculiar arrangement.

Vote against the directors at the Intercede AGM
Posted by ShareSoc at 11:58, July 15 2012.

ShareSoc recommends that you vote AGAINST the re-election of the three non-executive directors (resolutions 2, 3 and 4) at the forthcoming Annual General Meeting of Intercede Group. Intercede is an AIM software company run by an Executive Chairman.

ShareSoc has previously criticised the Long Term Incentive Plan (LTIP) introduced in August 2011 where two of the main beneficiaries of the scheme were the Executive Chairman, Richard Parris, and his wife (who also works for the company). It was certainly an inappropriate scheme which was poorly designed, too generous and in essence unjustifiable. Despite our representations on this subject, nothing was done about it.

The three non-executive directors who are standing for re-election should have ensured that the LTIP scheme was not introduced in the form used. In addition it now seems that some awards under the scheme were “retrospective in nature”. Questions will be asked at the AGM about this but that certainly sets a new precedent for an unjustifiable bonus arrangement if the performance criteria used (which set low hurdles) were already partly achieved.

So our reasons for suggesting you voting against the three directors up for re-election are:

1. It was they who introduced the LTIP (they are all on the Remuneration Committee), and have done nothing to correct this error.

2. Their independence is very questionable. Jacques Tredoux represents a major shareholder in the company and he is also a director of the company’s corporate finance advisor who were paid consultancy fees last year. Royston Hoggarth and Jurek Sikorski have both been on the board for ten years or more, which would not be viewed in a positive light under the Combined Code of Corporate Governance in listed companies.

3. There is no Remuneration Resolution on the AGM agenda which we requested be added so that shareholders can express a view on remuneration policies at this company.

4. The company still has an Executive Chairman when it needs a fully independent non-executive Chairman to ensure that this kind of problem does not arise again. The existing non-executive directors should be using their power and influence to ensure that one is recruited.

Please support our campaign on this company by voting against the directors if you are a shareholder in this company. It is directly contrary to your interests as shareholders to have large numbers of shares being issued to insiders on low performance criteria because it dilutes your interest in the company. Only if shareholders put a stop to this kind of prejudicial pay award in AIM companies will your interests be protected.

More information is present here: www.sharesoc.org/campaigns2.html (see the foot of the page for details on the voting recommendations).

Posted by ShareSoc at 16:31, July 16 2012.

Asterand delisting – a sorry tale indeed

Asterand (LON:ATD) is a fully listed UK company (but not for long) which operates in the human tissue field. In June 2011 it had a market cap of £15m but now it’s £1m, although there appears to be a substantial risk that it will go into administration.

To buy a US company called Bioseek, it took on substantial debt including debt obligations to the vendors. When the performance of the company declined, covenants were breached and the lenders asked for their money back (at least I believe that’s a simple summary of a rather complex story which has not been very clearly explained to shareholders). As a result the company put itself up for sale.

But no buyer for the whole business could be found, so they looked to sell the two parts separately (the original Asterand business and the acquired Bioseek one). Buyers have now been found for the Asterand business but the cash obtained will only just cover the debt owing, still leaving a very tight cash position. They have for example outstanding professional fees of $1.1m (yes over one million dollars for this rather small company – last year’s revenue was only $24m) on which they are trying to agree some deferral.

But one thing they want to do is delist, to save what they estimate to be $1m per annum. This will leave shareholders holding shares in a private US company to be renamed Bioseek and they will not be covered by the Takeover Panel rules, or the Combined Code.

This appears to be a case of gross mismanagement and shareholders will no doubt have some questions at the General Meeting to approve some of these matters on the 30^th July. But it certainly seems to be the case that a main market listing is no longer justifiable.

Posted by ShareSoc at 08:04, July 21 2012.

Press Release on EasyJet and the issue of too many directorships

ShareSoc has issued a press release urging shareholders to vote in favour of the removal of Sir Michael Rake as Chairman of EasyJet. Sir Stelios Haji-Ioannou has requisitioned an EGM at the company to call for Rake’s dismissal. Our main concern is the number of roles that Rake has – see our press release here: www.sharesoc.org/press_releases.html

ShareSoc is becoming increasingly concerned about the number of positions taken by some non-executive directors, particularly bearing in mind their ever increasing obligations. This is of particular concerns in FTSE-100 companies and in banks (Rake has just been appointed Deputy Chairman at Barclays) or where the director has a role on specialist committees. We suggest a reasonable limit if someone is to perform their role adequately is 4 non-executive directorships. As Baroness Howe has recently said: “I would limit the number of Non-Executive positions that can be held by any individual at one time. If there’s a crisis you need to drop everything and focus on sorting out the situation. But you can’t do this if you owe multiple boards your time.”

This issue rose only this week at another company – Templeton Emerging Markets Investment Trust where director Christopher Brady actually has 7 positions. Surprisingly he got a substantial number of votes against his re-election so it would seem that institutional investors are coming to recognise this as a problem. A full report of that AGM (and the similar issue of the presence of a director on the board who is associated with the fund manager) is present on the ShareSoc Members’ Network.

There is also a report on the AGM and GM to approve a “Reverse Tender Offer” at JPMorgan European Smaller Companies Trust on the Members’ Network which may be of interest to those who have not come across one of those transactions before.

Posted by ShareSoc at 10:35, July 23 2012.

Lighthouse Chairman berates dissenting shareholders

 David Hickey, Chairman of Lighthouse Group, the company proposing controversial delisting plans, has labelled dissenting shareholders and critics as “ill informed or ignorant” as quoted in an article on IFAonline. Despite the share price having halved and shareholders being offered no exit, he claimed that “the approach we are taking is the more honourable route”.

 Shareholder Simon Taylor-Young has objected strongly to this arrogant and patronising comment. He says that shareholders who cannot or do not want to hold unlisted shares have been hung out to dry as the share price halved on the announcement. He condemns a public company Chairman making veiled threats to shareholders when the Chairman said “we could have taken alternative routes without consulting shareholders”, and suggests it is ironic that Lighthouse is signed up to the FSA’s Treating Customers Fairly initiative (TCF) yet they are treating shareholders so badly.

 The comparisons that the Chairman makes are misleading or innaccurate. Mr Hickey says that the share price has fallen over ten years from 75p to 3.5p. The share price on 22 July 2002 was 51.5p. It was 5p prior to their announcement. Secondly, in mid 2002, the number of shares in issue was 22.5m. Since then the Company has issued a further 105.2m shares, mainly dilutive, for example the 43.9 million shares issued at an equivalent of 22.5p in April 2008 for the Sumus acquisition. The Chairman has made a price comparison that is extremely misleading. He has failed to address why the Board has done so little to promote the Company and has allowed there to be such a “heavily discounted share price”. The Chairman has stated that “Lighthouse is in good financial shape”.

 The Company has failed to explain why it cannot offer an alternative to shareholders who do not back the delisting. The Company has boasted of net cash (and no debt) of £11m compared to the market capitalisation prior to the announcement of just £6m, and at current levels £4m. A tender offer by the Company for shares would actually be earnings enhancing and lift net assets per share.

 Mr Hickey has commented: “we will keep all the current governance structures in place”. However the two current non-Executives “who have particular expertise in quoted companies” will be standing down. Should this be reconsidered as would be more appropriate if the Company wishes to “maintain high standards of corporate governance”, is still subject to the City Code on Takeovers and Mergers and has said it might in the future be considering offers for the Company.

 Mr Taylor-Young urges the Company to withdraw the delisting proposal in its current form. He would like the Company to come back to shareholders with:

 - An offer to those shareholders who wish to sell at, or at a slight premium to, the pre-announcement price.

- The provision of a share trading facility after the delisting.

- A statement that, trading circumstances allowing, the dividend will be maintained.

- Continued support for independent shareholders by experienced non-Exec Directors.

ShareSoc continues to urge shareholders to vote against the delisting until the Company can come up with a better structured proposal.

Posted by ShareSoc at 08:46, July 24 2012.

Kay Review Final Report issued

The final report of the Kay Review was issued yesterday with Professor John Kay outlining his arguments at a well attended meeting in London. ShareSoc issued a press release with some initial comments later in the day. Although some of the content was anticipated in yesterday’s media, there was an astonishing lack of comment this morning. Are the financial press all on holiday? Or too distracted to study the report (which is incidentally well worth reading)?

If the Government accepts the recommendations, there are some potentially really substantial changes in the offing. For example Prof Kay was quoted as saying that “The ideal investment chain has a lot less people in it” so clearly some of the proposed recommendations are aimed at reducing “intermediation” and lowering the costs to investors in managed funds.

In addition he suggests that funds should have much more focussed portfolios so as to encourage stronger “engagement”. But perhaps the fact he seemed to reject any compulsion in his recommendations might encourage some to think that no significant changes will take place.

But at least he supported that the Government should explore how individual investors can hold shares directly on an electronic register. That would indeed be the revolution that ShareSoc has campaigned for so our submissions to the Kay Review seem to have had an impact. We will need to try and ensure this proposal is not run into the long grass by those who have an interest in keeping the existing nominee system.

Posted by ShareSoc at 00:00, July 28 2012.

Rensburg AIM VCT Campaign Has an Impact

ShareSoc has been running a campaign to reform the Rensburg AIM VCT since last October. This company is an investment trust, small in size as are most Venture Capital Trusts, but with almost all their shareholders being individual investors. This has an advantage in that they are mainly on the share register and hence easy to communicate with, but often being retired with small shareholdings, getting them out to attend the AGM or even to vote is another matter.

There is a full report on the AGM held last week in Leeds in this document on our web site: www.sharesoc.org/Rensburg%20AIM%20VCT%20Newsletter%207.pdf

In summary the directors got over 26% against their re-election. Changes in this VCT as a result of our campaign have been very positive, although they seem to be adamantly against any change of investment policy. It at least demonstrates that company campaigns can have a major impact.

For example, the investment management fee has been reduced very substantially, with no performance related element. How I wish other investment trusts would follow that policy! In addition cash is being returned to shareholders with an active buy-back policy to control the share price discount. The position of shareholders has improved very substantially since ShareSoc commenced its campaign.

Posted by ShareSoc at 20:06, July 31 2012.

Lighthouse Delisting Defeated

At today’s General Meeting of Lighthouse Group, the proposed delisting was defeated. In fact the vote against was 53% versus 46% “for” when they needed 75% approval to get it through, so it was a very long way from passing. Shareholders might wish to ask how much this wasted exercise has cost and why the board did not find out the mood of the majority of their shareholders before attempting to delist.

ShareSoc can claim some hand in this matter because we publicised the issue widely (for the press release we issued, see www.sharesoc.org/ShareSoc_Press029%20Lighthouse%20Delisting.pdf – it spells out the case against the proposal).

Some shareholders are calling for the Chairman to resign, particularly because of his comments to the media in an attempt to justify the delisting.

At least it might discourage other similar opportunistic delistings, particularly of AIM companies, which are all too common. Shareholders can exercise power over these matters if they propagate their message and get the vote out, and ShareSoc is always willing to assist worthy causes.

Posted by ShareSoc at 11:14, August 1 2012.
Hiscox – Another poke in the eye for corporate governance buffs

After an AGM of Hiscox Plc in May which ShareSoc described as “one of the worst” on the basis that Mr Robert Hiscox as Chairman did not appear to want to spend much time on the event, nor respond to questions from shareholders, he gave a parting shot against corporate governance generally yesterday.

Robert Hiscox has announced his replacement as Chairman to be Rob Childs, currently the “Chief Underwriter” of the company. Appointing executive directors, or former directors, as Chairman is contrary to the principle of having an independent Chairman under the Combined Code.

This appointment was at the end of a recruitment process using a headhunter apparently, which makes it even more odd as there were other external candidates on the short list according to press reports. But Mr Hiscox indicated he was against a “box ticking” approach, and that 30% of his shareholders had been consulted and supported this move - what he did not say is how many of those 30% represent his own family interests.

Posted by ShareSoc at 09:23, August 2 2012.

Northern Rock Judgement, and Royal Bank of Scotland (RBS) nationalisation

The European Court of Human Rights (ECHR) has declared the application by former shareholders in Northern Rock for a review of the nationalisation to be inadmissible. This looks like the end of the legal road for any challenge to the nil compensation for shareholders.

There have always been wildly contradictory views among the public on the merits of both the nationalisation and the associated zero compensation for shareholders. Those who held the shares, both short and long term (including those former staff members where the shares were a significant part of their life savings) were outraged by the artificial terms set for compensation which ensured a “nil” valuation. It seemed to fly in the face of most business valuation principles in that the “Independent valuer” had his terms of reference artificially constrained. But politicians at the time, and many members of the media, thought that Northern Rock was bust in principle when the Government bailed it out so shareholders should get no compensation. The latter view was upheld in the UK courts to a large extent – or at least that the Government had the ability to determine the matter as it was a political decision that the courts should not interfere with.

The plaintiffs argued that it was disproportionate for the Government to acquire all the assets of Northern Rock (which were substantial and are going to result in profits to the Government) simply by a short term bail-out involving the supply of cash (and from which they are profiting by charging supra-normal interest rates). This is contrary to principles of salvage law for example where the situation is similar, where the owner of the property pays a fair fee but does not lose their property.

The ECHR decision reviews the facts and the arguments. It covers the previous ECHR case law and how it impacts on this matter and the “margin of appreciation” (i.e. the discretion) allowed to Governments when deciding compensation for confiscation of property.

But it says “The applicants contend that the statutory assumptions inevitably resulted in the payment of nil compensation to the shareholders”, but they reject that argument. The Court seems to have little understanding of the valuation principles normally used in commercial deals or the impact of the “in administration” assumption on that. Their understanding of commercial realities seems weak.

However, the final argument they rely on is that the confiscation of the property was not “manifestly without reasonable foundation” because it was clearly based on a policy of avoiding “moral hazard”, i.e. that shareholders should not benefit in any way from Government support. Particularly bearing in mind that the support was being provided under LOLR so as to maintain financial stability, not to protect the interests of shareholders.

Moral hazard is surely a very dubious approach. It was the argument used by Bank of England Governor Sir Mervyn King when delaying the initial supply of funding to Northern Rock and blocking the potential merger with LloydsTSB Bank which compounded the difficulties of Northern Rock and undermined confidence in the whole banking sector. When it became apparent that the Bank of England would not provide liquidity to even solvent banks, investors really took fright. There was a swift “about face” later when RBS and Lloyds/HBOS ran into similar problems and they were given secret loans of over £50bn.

It is particularly dubious when one bears in mind that shareholders have little control over the financial management of banks, and particularly so in the case of smaller shareholders. Punishing shareholders for past mistakes of the bank directors is surely questionable.

But this principle has now been enshrined in UK law in that if the Government has lent any money to any financial institution, it can now he taken over without any compensation. So shareholders should be very wary of holding any bank shares that might be at risk from such a provision. The ECHR decision simply upholds that principle.

This is not solely a theoretical issue. Only this morning the press have reported that the Government is considering nationalising the remainder of RBS that it does not already hold (about 18%) by “buying out” the minority shareholders. This follows continuing dire financial performance at RBS and its failure to provide the lending to businesses that the Government desires, i.e. it wants full control. What compensation might be paid? On the above basis nothing because the Government could argue that it was a matter of national economic policy that it should take control and hence compensation was not applicable. That would apparently stand up in a court of law. So any remaining shareholders in RBS should be very aware of this point.

The full decision of the ECHR can be read here: http://hudoc.echr.coe.int/sites/eng/pages/search.aspx?i=001-112312

In reply to ShareSoc, post #46

What compensation might be paid? On the above basis nothing because the Government could argue that it was a matter of national economic policy that it should take control and hence compensation was not applicable. That would apparently stand up in a court of law. So any remaining shareholders in RBS should be very aware of this point.

I don't think Northern Rock is relevant to the situation at RBS. And neither does the market, otherwise RBS shares would have plummeted.

Northern Rock was bust. HBOS was bust. RBS is not bust.

Whether RBS is bust or not may be irrelevant because under the Banking Act 2009, if the Government has provided financial assistance to any bank, they can determine the compensation arrangements and set the same terms as they did with Northern Rock, i.e. nil. Please read it. It is here: www.legislation.gov.uk/ukpga/2009/1/section/57
In other words it is entirely at the Government's discretion whether they would pay the minority shareholders anything!

You need to be reminded that RBS was bailed out by the Government when they ran out of cash. That is exactly what happened at Northern Rock also. So there is no difference in essence. In both cases these banks had a liquidity problem, but were not balance sheet insolvent. I don't see how you can call one bust and not the other.

As to why financial journalists have not picked up on this I do not know. I suspect the experienced folks who might be aware of that Act of Parliament are all on holiday, leaving junior staff to man the desks during the holiday period. Or they may simply be wishing to avoid creating a panic.

Whether the Government in their wisdom would pay anything to RBS shareholders I do not know. But it is now clearly at their discretion whether they would pay or how much. They can rig the compensation terms to suit themselves, in exactly the same way as they did with Northern Rock and B&B.