As is well known, the directors of RBS threatened to resign if Alistair Darling blocks the bonuses they want to pay their traders; apparently they’ve had legal advice that this would breach their fiduciary duties – though the row has already cooled, with the directors caving in. I must say, I found the legal advice hard to understand, if it really was as claimed: how can you breach a fiduciary duty by complying with a compulsory requirement imposed by government? It seems to me like saying you breach fiduciary duties by complying with the law on, say, pregnancy and maternity leave – which surely costs shareholders – or with regulatory orders and requirements of the FSA. Maybe some city lawyer types can explain. RBS has been supported by government through the bank recapitalisation scheme, in relation to which Alistair Darling said this last year:
If the Government is to provide capital, the issue will carry terms and conditions that appropriately reflect the financial commitment made by the taxpayer, including in relation to dividend policy, remuneration, lending policy and wider public policy issues.
Obviously one of these conditions was his consent, or UK Financial Investments’ consent, to any bonus packages. So if the RBS board thinks submitting to Treasury clearance of its bonus package is inconsistent with their duties, surely they should never have taken part in the bank recapitalisation scheme in the first place. By doing so, on their own view, mustn’t they have breached their fiduciary duties already? It’s a bit late to bring this up now.
I think the better view must be that the board was acting perfectly in accordance with its duties when it agreed to the very necessary government backing last year – and the conditions on which that support was offered. Neither that decision, nor complying with those conditions, is a breach of duty any more than agreeing to a normal commercial loan – or subsequently repaying it. Repayment is I believe normally a condition of obtaining a loan, but in itself is hardly favourable to shareholders.
The question raised by all this, though, is why the government hasn’t already taken legal power to control bank bonuses – that could remove even the possibility of any such row. Parliament is now considering a proposal in the Financial Services Bill requiring the FSA to impose remuneration policies on banks, and empowering the government to order the FSA to audit those policies against the principle of effective risk management, and international “implementation standards”. Not the strongest regime, I would have thought; this appears no more than is required to meet the G20 agreement earlier this year. And why only now?
I wonder whether the government might have missed a chance here for almost eternal public popularity by insisting that these bankers who made the threat are removed forthwith?
@ Peter Hargreaves
Perhaps we should also wonder why the government chose not to remove these (apparently incompetent) people. I think there’s rather more to all of this than has so far become public. A start point might be a consideration of the internal relationships of the board, and the board’s relationships with the shareholders. It seems to me that the majority shareholder is severely lacking in expertise, perhaps that is why it is so passive.