Bankers have always been extracting value from society but I am not convinced that discussing their pay is getting us anywhere nor is it dealing with the source of our problems in our economy. In Wales we announced in November 2009 a consultation on Economic Renewal - most of us will contribute to the discussion but are we prepared to provide solutions or share them and get to the source? It has the design of a strategic committee and real business is far removed from that.But we will give it a go.
The job of discussing the value of our banks is indeed being ill-done today. Business enterprise has taken a back seat to financial speculation and I am not convinced we get it right when all we talk about is pay. The role of Banks and the importance of enterprise is key. We all know bankers should not be paid what they get and are in a different galaxy. But we have now become like the committee discussing the price of a pint in the rugby club when the team is at the bottom of the league.
Warren Buffett once said “What the wise man does in the beginning, the fool does in the end.”
But back to Mr Hester The Guardian said “There can be few parents who do not take delight in the achievements of their offspring but if the mother and father of Stephen Hester are proud of his ascent to the pinnacle of one of Britain's most famous financial institutions their approval does not apparently extend to the size of his pay packet.”
Giving evidence to a committee of MPs, the CEO of the 84% state-owned bank admitted: "If you ask my mother and father about my pay they'd say it was too high … some people close to me have that view of bankers." Now on a deal that could pay almost £10m if the bank's share price rises high enough, Hester's basic pay is £1.2m a year.
We need to create an economy on value.I would prefer the evidence of Mr James Tobin, writing in 1984 Nobel laureate economist said:
“ . . . we are throwing more and more of our resources into financial activities remote from the production of goods and services, into activities that generate high private rewards disproportionate to their social productivity, a ‘paper economy’ facilitating speculation which is short-sighted and inefficient.”
John Maynard Keynes profoundly warned: “When enterprise becomes a mere bubble on a whirlpool of speculation, the consequences may be dire . . . when the capital development of a country becomes a by-product of the activities of a casino . . . the job (of capitalism) will be ill done.”
I spent years in the City creating mutual funds or unit trusts as they call them in the UK. Mr Hester should ask advice (not from me of course) but John C. Bogle who has written wisely about our absurd and counterproductive financial sector at length. Writing in the Journal of Portfolio Management in its Winter 2008 issue, here are some of the things that he said about the costs of our financial system: “. . . mutual fund expenses, plus all those fees paid to hedge fund and pension fund managers, to trust companies and to insurance companies, plus their trading costs and investment banking fees . . . totaled about $528 billion in 2007.
These enormous costs seriously undermine the odds in favor of success for citizens who are accumulating savings for retirement. Alas, the investor feeds at the bottom of the costly food chain of investing, paid only after all the agency costs of investing are deducted from the markets’ returns . . . Once a profession in which business was subservient, the field of money management has largely become a business in which the profession is subservient.
Harvard Business School Professor Rakesh Khurana is right when he defines the standard of conduct for a true professional with these words: ‘I will create value for society, rather than extract it.’
Mr Bogle says “And yet money management, by definition, extracts value from the returns earned by our business enterprises.”
Warren Buffett once said “There are three i’s in every cycle: first the innovator, then the imitator, and finally the idiot.”
Sources:
“Enough. True Measures of Money,Business and Life ” John C. Bogle Published 2009
Jill Treanor The Guardian £10m RBS boss Stephen Hester: even my parents think I earn too much Tuesday 12 January 2010 22.15 GMT
Statement of John C. Bogle , founder and former chief executive ofThe Vanguard Group, before the Committee on Education and Labor, U.S. House of Representatives, Washington, DC “Strengthening Worker Retirement Security” February 24, 2009.
