2 November 2011
Greed and the City
A crisis in popularity.
by J.R. Thomas
The leaders of Britain’s major banks are proudly standing together and speaking with one voice. What is it this time, the weary person in the street may say (they would be on the Clapham omnibus but six have just gone past without a seat to spare). Too much regulation? Those annoying bonus caps? The need to raise levels of profitability? The public’s resistance to paying anything whatsoever for banking services? Nope; they object to business short-termism.
Chairmen of banks objecting to short-term horizons in banking? This cannot be true, surely. But on this matter it seems that the chairmen of Barclays, Lloyds and HSBC (the ex-chairmen of the latter two) speak with one voice. Maximisation of short term profits is what is causing so many problems in today’s world of business, they say. And they should know; their three banks are all great publicly quoted companies, and in troubled times for any public company a key objective is keeping the share price up, thus keeping the shareholders happy. Which means making sure that the dividends do not stop, that the release of bad news is very carefully handled, and that sudden demands for cash by way of rights issues are avoided if at all possible. What the shareholders want is a steady increase in the share price, and a progression in the dividend payments. They don’t mind stumping up for new money when times are good and business needs money for expansion – as no-longer-Sir Fred Goodwin, chief executive of Royal Bank of Scotland was delighted to discover when he wanted to buy rival bank ABN Amro. In spite of financial cracks already apparent to many inside and outside the banking industry, the deal went ahead as part of Fred’s fifteen year strategy to build RBS into one of the largest banks in the world. That was short-termism if there ever was a short term – in 2000 RBS had taken over Nat West Bank, three times its size, and the share price trebled in the seven years thereafter – almost up to the purchase of ABN. We all know what happened next. So do those distinguished bankers who spoke last week.
But the problem is not entirely of the banks’ making. Investors want income. Not just shadowy fat cats sitting on yachts in the Med, not just the investment trusts and hedge funds sitting in St James’s Square. You, and even I, are part of the problem. We want more income on our savings, we want our pension funds to show higher rates of return. When our fathers and grandmothers put their money away for their old age they assumed they would live on five, seven, maybe ten years, after retirement. But not any more. Retire at 65 and actuarially you have a good chance of living on to 90, or more. That means a working life of perhaps 45 years has to support a retired life of 25, and a retired life in which the retirees want to travel and eat out and buy luxury cars and smart clothes. With interest rates at constant lows, and prudently allowing for another recession or two and some inflation, and perhaps 10 years in some smart nursing home, that needs a lot of money.
Translating it back to those bank shares, it means if the chairmen cannot produce those ever increasing dividends, then hallo and welcome to some hedge fund or corporate raider who will. You may not have heard of Robert Swannell; he has recently retired as chairman of Marks and Spencer plc, and he too has lashed out against short term thinking in business. “Over the past 50 years,” he says “the pendulum has swung too far towards [the primacy of shareholder value]”. If you are a shareholder in Marks and Spencer you might think it has not swung far enough. The Marks and Spencer share price today is about the same as it was in 2001 (with a sudden blip upwards 2006 and 2007, and back down again in 2008). Mr Swannell’s argument is that business does not invest enough in long term productivity and is too obsessed with the share price. This may be right – the take up of technology by both retailers and bankers has been slow and faltering, the tried and testing goes on running long past expiry dates, any innovation is rare in large companies; but it is the job of management to explain, using return analysis and other not terribly sophisticated tools, why investment might be a good thing. Shareholders mostly understand that defer today to gain tomorrow can be a desirable practice.
Warren Buffet, who is chief executive of the great American investment conglomerate of Berkshire Hathaway, is the guru of long term investment; he understands why the companies in which Berkshire invests need to themselves invest into their businesses. Berkshire is much less interested in dividends than in sustained long-term growth – after all, if the strategy is right the share price goes up, and any shareholder needing cash can always sell a share or two (at US$250,000 per share, selling one or two should meet most needs). For that reason he likes to invest in family companies who take a long term view and want to be around, and run by the family, in a hundred years time. Mr Buffett is 87 and still taking a long term view.
Capitalism is not popular at the moment, at least in the UK. Jeremy Corbyn is in the process, it seems, of convincing a new generation of voters that capitalism is faintly evil and we would all be much happier if the state provided most of our wants, and all those naughty entrepreneurs and senior managers earned a lot less. He certainly seems to get support from one leading politician; Mrs May thinks people, especially for example, bankers, would be better off (morally) if they earned a lot less. Gordon Brown, whose new autobiography, out very shortly, goes further, revealing that he would like to send the bankers who “caused” the 2008 recession to jail. He is apparently not extending this sanction to senior politicians who caused and encouraged a massive growth in credit, or engineered mergers between successful and failing banks (no names, Gordon).
Capitalism undoubtedly has a problem. Like most things, when it pays out it is popular; when it fails to do so it becomes the object of vilification and criticism. The freemarket system has been here before – the excesses of the robber barons in nineteenth century America, and the hard-hearted businessmen who got rich from the First World War triggered a level of interference and supervision of business that met a popular clamour against unfairness and greed. That is why so many leading business people are speaking up against short termist thinking, plead for senior executives to pay themselves less, and want to see business take on a level of social responsibility. If private enterprise cannot convince the voters that it has a moral worth and a role to play in creating both a fairer and a more prosperous society, that it is a guardian of freedom and choice and diversity, then Mr Corbyn will be taking us in a very different direction before we have even noticed that our dividends are subject to a double tax surcharge.
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