A few weeks ago Irish football fans were subjected to an agonising exit from the World Cup qualifying campaign, when the second leg of the deciding match against France ended 1-1 (it was 2-1 on aggregate - France beat Ireland 1-0 in the first leg). As anyone vaguely interested in sport will know, the circumstances of the exit were particularly painful. A late equaliser from France via a blatant handball from Thierry Henry (he handled twice, which is even illegal in volleyball) gifted victory and a trip to South Africa for the world cup finals next year.
This may seem trivial to some, but the implications of the loss of this mere football game are substantial. As a country Ireland's economic plight is well known - and at the very least a World Cup campaign would have provided a much needed boost to economic morale. To give a little bit more context - there are those who go as far as to suggest that when Ireland beat England in the European Championships in Stuttgart in 1988, it played a significant part in the economic recovery that spawned the Celtic Tiger. Amazingly it can be that important for a nation's sense of self worth.
While I love sport, I am not a big football fan. Watching this match helped clarify my rationale for this point of view - it's based in what I would see as the spirit of the game. I don't particularly like the segregation in the stadiums, or the aggression of some supporters, but most of all I don't like what I see on the pitch. For me, what happens on the pitch is the root cause of the problems off of it. It is a game where the rule-makers have managed to foster an environment where cheating (and getting away with it) are a significant part of the skill set of the professional game. The responsibility for correct behaviour has been almost entirely abdicated from the individual player and onto the match referee and his linesmen. It's OK to cheat, you just need to make sure you get away with it - which is down to how well you can dupe the referee at the appropriate moment.
The protections afforded to these poor souls charged with refereeing responsibilities seem fairly limited - their job is highly pressurised and very difficult - for which they suffer regular abuse which largely goes unpunished. The facilities to correct this situation are entirely available - there are countless video angles that record the action at the big games; yet none of this is used to aid the referee during the course of the match, and it is very rarely used to identify cynical or cheating behaviour in the aftermath of a big game.
In the case of Thierry Henry's handball, not only did the player himself know of his foul, but the majority of the people in the stadium, the other players and the millions watching on TV knew that a foul had been committed. That information was captured both in real time and in replay. It would appear that the only person who didn't know there was a foul was the Swedish referee Martin Hansson. It was a bad mistake, but the speed at which things can happen on a football field makes such mistakes almost inevitable. What is tragic is that it occurred at such a pivotal moment in the context of Irish and French sport. In all honesty, if roles were reversed and the situation had involved an Irish player, he would likely have acted the same way as Monsieur Henry - it's the nature of the game. (Though the referee probably would have spotted it!).
In the aftermath, the recriminations have been widespread - some more serious than others. An Irish radio phone-in the day after the match clarified the extent of ill-feeling; one caller went as far as saying he would give up both french fries and french kissing as a protest. In seriousness, the focus of protests has been varied from anger at Thierry Henry, to anger at the referee, to anger at the lack of video replay in these key decisions. For me what's tragic is that those who run the game - FIFA - seem to be of the view that what happened is part and parcel of their sport; just one of the trials and tribulations that the "bounce of the ball" subjects participants to. This is the most maddening aspect of the situation. Their response merely reinforces the importance of cheating well in the game.
I know you're probably thinking that I'm using this week's blog to vent my frustration about the fact that Ireland won't be at next year's World Cup finals! That's only part of the aim.
There is an interesting parallel to be drawn here between the way in which rule makers in the footballing world choose to administer their game, and the way in which regulators have tried to manage the world's financial system. The similarities between Sepp Blatter's approach to running FIFA and the various bodies from the FSA to the SEC who regulate financial markets is dangerously similar, and has in many ways produced the same results. Many of the methods used to "game the system" - the financial system, that is - which have blown up in the past couple of years came because "gaming it" became culturally accepted by individuals (players), their peers (team-mates), their bosses ("gaffers"), and their shareholders (club owners). Football terminology in brackets.
The responsibility for "calling a foul" was abdicated almost entirely onto external bodies - poorly equipped or empowered regulators (who didn't have access to video replay) or rating agencies (who turned a blind eye to video replay). Regulators, while sadly displaying a lot of incompetence in the past few years, did not have the powers to make a meaningful cultural shift happen within financial services. The largest penalties for foul play seen in the past few years in the UK have been fines of a few thousand pounds combined with removal from the industry. These penalties have been nowhere near widespread or strong enough to act as a catalyst to alter the behaviour "on the playing field".
In the same way, until football players are subjected to post match critique that examines cynical or foul play, then they will continue to cultivate this particular art-form. All of the Galacticos, whether they be in financial services or football, are supposed to be superstars. They need to be held to standards that match that status.
Sunday 13 December 2009
Sunday 6 December 2009
Bonus please Darling...
The Christmas lights have gone up in Bond Street and London's investment bankers know that we're entering bonus season. Luxury retailers and banker's mothers wait alongside expectantly to see whether it's Asprey or Asda this Christmas. By all accounts its been a bumper year across the city, with all parts of investment banking operations posting record profits. In any "normal" year the expectation of big individual payouts would be bordering on uncontrollable. This year though it is likely to be considerably less predictable than has been the case in the past. The poor souls, god love them in this uncertain time.
All of the big banks in London will be under pressure to conform to the G20 principles on bonus payouts, but the banks with continued government involvement will be most at risk of having to pay their staff "unsatisfactory" (i.e. low) amounts. In this realm, RBS has been the subject of most discussion. The UK government owns 70% of the ordinary shares and £13bn worth of B-shares, comprising an economic interest that will rise to about 84% upon conversion of option rights. That effectively gives the Treasury the right to interfere in whatever it wants. Given the political ramifications of allowing "excess" at RBS, the Treasury has predictably warned the board off awarding bumper bonuses this year.
There is a strong political imperative behind this veto. The general public - who are facing large scale public sector cuts, tax increases, and an election next year - cannot see why traders at the UK's busted banks should be granted lavish bonuses so soon after their multi-billion pound collapse. It's hard to argue against that point of view - without the taxpayer lifeline in the UK and around the world, the domino effect that Lehman Brother's collapse started would have taken out all but the very strongest of financial institutions. In that context bonuses would have become a fabled relic of an indulgent past. "The fact is that we have gifted vast profits to the banks as a result of our actions," said one MP. "If they were using those profits simply to strengthen themselves that would be okay. But what we can't accept, and what society can't accept, is that they are using those profits to pay enormous bonuses."
The hard line being taken by the Treasury has prompted RBS directors to consider their options amidst concern that it will be tricky to retain key staff if they aren't paid their "market rate". As the Sunday Times reported yesterday, more than 1,000 investment bankers have quit RBS to join rivals in the recent past on the basis of better financial prospects; and a London based headhunter told me a couple of weeks ago that she has been inundated with CVs of RBS staff who are looking to jump ship. The 1,000 who have already left were said to have contributed between £600-£700mm to the bank's coffers last year - funds that the taxpayer would presumably like to be earned in future years as it seeks a nice return on its investment.
As a lawyer friend of mine has pointed out - it seems that corporate governance has come full circle. If RBS lose their top producing staff because the government prevents them from paying them what they need to pay them, then are the board in breach of their fiduciary duty to protect the interests of shareholders? There are reports that lawyers representing board members at RBS have advised the board to resign en masse if the government intervenes to block or cap bonus payments. The argument goes that if the board did accept any restrictions which could be perceived to make RBS uncompetitive then they would be breach of their statutory responsibility, which could have legal implications for each member of the board.
Given that the government owns more than the 75% shareholding required to force a "special resolution" in theory they can force through whatever bonus related concerns they have. In practice, however, if the board still think that this is not in the best interests of these same shareholders they, as i understand it, are not obliged to follow the special resolution. In which case the only option for the government would be to remove the board. Do-able, but it would certainly be a little on the messy side of things.
Presumably the complexity of reducing the bonus payments at RBS is one of the factors behind Alistair Darling contemplating the "nuclear option" of a windfall tax on investment bonuses across the City of London, which would not just apply to the state owned banks, but all international banks operating out of London. This is rumoured to be a central tenet of his pre-budget report due this Wednesday, which will need to outline a host of ways in which the government can increase tax revenues and reduce expenditures. It's thought that a windfall tax could generate £1bn per year - a useful contribution, but unfortunately more of a political ploy than a significant revenue generator. In reality, the transient nature of the the London investment banking community would mean that other jurisdictions will quickly pull workers away from the City. As a consequence the current corporation and personal tax raising capacity from the financial services sector may ironically diminish as a result of the windfall tax.
What is clear to me is that solving for the false incentives that cash bonuses create cannot be isolated to one bank, let alone a city. If RBS can't pay, or there is a windfall tax on investment bankers bonuses in London, the bigger picture issue will not be solved. The financial system needs to be set-up to reward for performance that is real, and not short-termist. It's been acknowledged by the G20 leaders in the past that solutions to the financial crisis, in terms of better regulation and greater transparency, need to be global in nature. If the UK government is acting in an aggressive way, but nobody else is following, it might be good political capital for a baying public, but the real systemic issue of skewed risks and rewards in the financial system will remain, just at a different bank or in a different city.
All of the big banks in London will be under pressure to conform to the G20 principles on bonus payouts, but the banks with continued government involvement will be most at risk of having to pay their staff "unsatisfactory" (i.e. low) amounts. In this realm, RBS has been the subject of most discussion. The UK government owns 70% of the ordinary shares and £13bn worth of B-shares, comprising an economic interest that will rise to about 84% upon conversion of option rights. That effectively gives the Treasury the right to interfere in whatever it wants. Given the political ramifications of allowing "excess" at RBS, the Treasury has predictably warned the board off awarding bumper bonuses this year.
There is a strong political imperative behind this veto. The general public - who are facing large scale public sector cuts, tax increases, and an election next year - cannot see why traders at the UK's busted banks should be granted lavish bonuses so soon after their multi-billion pound collapse. It's hard to argue against that point of view - without the taxpayer lifeline in the UK and around the world, the domino effect that Lehman Brother's collapse started would have taken out all but the very strongest of financial institutions. In that context bonuses would have become a fabled relic of an indulgent past. "The fact is that we have gifted vast profits to the banks as a result of our actions," said one MP. "If they were using those profits simply to strengthen themselves that would be okay. But what we can't accept, and what society can't accept, is that they are using those profits to pay enormous bonuses."
The hard line being taken by the Treasury has prompted RBS directors to consider their options amidst concern that it will be tricky to retain key staff if they aren't paid their "market rate". As the Sunday Times reported yesterday, more than 1,000 investment bankers have quit RBS to join rivals in the recent past on the basis of better financial prospects; and a London based headhunter told me a couple of weeks ago that she has been inundated with CVs of RBS staff who are looking to jump ship. The 1,000 who have already left were said to have contributed between £600-£700mm to the bank's coffers last year - funds that the taxpayer would presumably like to be earned in future years as it seeks a nice return on its investment.
As a lawyer friend of mine has pointed out - it seems that corporate governance has come full circle. If RBS lose their top producing staff because the government prevents them from paying them what they need to pay them, then are the board in breach of their fiduciary duty to protect the interests of shareholders? There are reports that lawyers representing board members at RBS have advised the board to resign en masse if the government intervenes to block or cap bonus payments. The argument goes that if the board did accept any restrictions which could be perceived to make RBS uncompetitive then they would be breach of their statutory responsibility, which could have legal implications for each member of the board.
Given that the government owns more than the 75% shareholding required to force a "special resolution" in theory they can force through whatever bonus related concerns they have. In practice, however, if the board still think that this is not in the best interests of these same shareholders they, as i understand it, are not obliged to follow the special resolution. In which case the only option for the government would be to remove the board. Do-able, but it would certainly be a little on the messy side of things.
Presumably the complexity of reducing the bonus payments at RBS is one of the factors behind Alistair Darling contemplating the "nuclear option" of a windfall tax on investment bonuses across the City of London, which would not just apply to the state owned banks, but all international banks operating out of London. This is rumoured to be a central tenet of his pre-budget report due this Wednesday, which will need to outline a host of ways in which the government can increase tax revenues and reduce expenditures. It's thought that a windfall tax could generate £1bn per year - a useful contribution, but unfortunately more of a political ploy than a significant revenue generator. In reality, the transient nature of the the London investment banking community would mean that other jurisdictions will quickly pull workers away from the City. As a consequence the current corporation and personal tax raising capacity from the financial services sector may ironically diminish as a result of the windfall tax.
What is clear to me is that solving for the false incentives that cash bonuses create cannot be isolated to one bank, let alone a city. If RBS can't pay, or there is a windfall tax on investment bankers bonuses in London, the bigger picture issue will not be solved. The financial system needs to be set-up to reward for performance that is real, and not short-termist. It's been acknowledged by the G20 leaders in the past that solutions to the financial crisis, in terms of better regulation and greater transparency, need to be global in nature. If the UK government is acting in an aggressive way, but nobody else is following, it might be good political capital for a baying public, but the real systemic issue of skewed risks and rewards in the financial system will remain, just at a different bank or in a different city.
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