Politicians have got to the point of indoctrination about the State being a drain on resources, and indeed the State, in the form of NHS spending, welfare benefits, defence and education does require much investment. Recent years have seen a blurring of liberal and libertarian values recently, with an accident coalition of Tory and liberal ideologies. This has not led to a consensus in key policy areas, for example control orders from the legislature’s perspective, but has unwittingly produced a sense of inertia. Prof Jeff Sachs writing about libertarianism and saying:
Yet the error of libertarianism lies not in championing liberty, but in championing liberty to the exclusion of all other values. Libertarians hold that individual liberty should never be sacrificed in the pursuit of other values or causes. Compassion, justice, civic responsibility, honesty, decency, humility, respect, and even survival of the poor, weak, and vulnerable — all are to take a back seat.
A major bone of contention is the welfare state, for example, has in fact improved the lives of the poor, weak, and vulnerable, nor that it and other forms of state intervention have served the causes of compassion, honesty, etc.. An argument can be made that the market can be left to look after itself, and indeed more tax interference leads to misuse of monies, and an ineffective State. However, this is to deny that the bankers in the financial markets, not the less well off members of the Society, were directly to blame for the market failure. So it’s clear to many that the State does need to intervene in the activities of some overpaid irresponsible people. What is less clear is how to deal with people with multi-million pound salaries who are not doing anything fundamentally more difficult than putting in a central line into a comatosed patient with hepatorenal syndrome on the ITU.
David Cameron has again criticised the ‘out of control’ City bonus culture and called for a new moral capitalism, and this is a carbon-copy of Ed Miliband’s conference speech in Liverpool at the Labour Conference in September 2011. This is no wonder as excessive bonuses largely do not act as an incentive, and indeed can be deincentivising or demotivating in relation to performance. Deincentivising not only for the individuals concerned who will take their foot off the pedal regarding their own performance, unless there is a strong performance-related pay relationship, and also demotivating for less well paid employees. This potential mismatch in interestsbetween the shareholders and the stakeholders interests in England can lead to the situation where a company makes millions in profits, while simultaneously laying off thousands of hard-working employees.
It’s perhaps unfortunate the government’s effort to crack down on excessive boardroom pay proposals – due by the end of the month – has coincided with the arrival of the bonus season at the big banks. There’s a danger that two related issues become condensed into one. Bonuses will fall because profits in investment banking, the source of most of the big handouts, will be down. The critical issue in banking is whether the bonus machine has been programmed to privilege employees over shareholders. Barclays is a useful example. It’s has been one of the healthier banks during the crisis but this superiority requires heavy qualification. For the past three years Barclays hasn’t earned returns in excess of its cost of capital, a basic measure of success at any profit-seeking company. Yet last year 231 key staff at Barclays earned an average of £2.4m each and chief executive Bob Diamond’s right-hand men, Jerry del Missier and Rich Ricci, got £10m each. Competition for investment bankers is almost non-existent. It is possible that the mechanisms of shareholder resolution in voting against excessive pay is not strong enough.
It is possible that the purpose then of the State is to intervene when things go wrong. This is the exact opposite to the philosophical argument presented by the Conservatives and the Liberal Democrats Party. It is the same argument for the State intervening in the market failure which means consumers have to pay high prices for utilities in an oligopolistic markets. Why Labour failed to do this is utterly irrelevant now, as Labour will not be in government until 2015 at the very least. And the state can intervene – the Coalition, if it wants to, can regulate on the payment of board directors. Most directors of FTSE 100 and mid-250 companies now enjoy at least two incentive plans and an annual bonus. It is only in cases of extreme catastrophe that a bonus is not awarded. These multi-headed arrangements are one of the chief reasons why board pay over the past decade and a half has comprehensively outpaced share prices: at present the FTSE 100 index stands at 1998 levels. A ban on executive directors chairing other companies’ pay committees would also be a sensible development. A ban would not be unhelpful, but nor would it be a cure-all. If greater shareholder involvement is considered a good thing (and it seems to be), why not allow investors to propose their own candidates to chair pay committees?
