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Banks need to be owned by families

One shareholder described Barclays as “ruthless, heartless, cruel”. Another accused it of “dividing society”. It was quite clear that there is something seriously wrong with this business, and it’s also quite clear what that is: the owners are fatally disconnected from the management.

“You’re better off talking to Barclays,” said the old adverts. Not any more, because the bank stopped listening a few years ago. Specifically, when the people in charge realised that they could sideline high-street banking, with all those irritating little people with their piddling accounts, and instead rent a walloping great building in Canary Wharf in London that looks like a dormitory for Daleks, get into the derivatives game and make a fortune for themselves.

They might start listening again now. On Friday hundreds of shareholders turned up at their AGM to harangue the board, livid about the vast piles of cash their top bods threw at themselves this year. Bob Diamond got £17 million (€20.9 million), and the bank even paid a £5.7 million tax bill to relocate him to London from New York, where they’d moved him just 18 months previously. Staff were paid bonuses totalling £1.2 billion, while dividends to shareholders were just £700 million.

It was an odd meeting. The board sat at a long desk on a raised platform like a politburo of plutocrats. One shareholder described the bank as “ruthless, heartless, cruel”. Another accused it of “dividing society”. It was quite clear that there is something seriously wrong with this business, and it’s also quite clear what that is: the owners are fatally disconnected from the management.

In a recent article in the London Review of Books, the Bank of England’s Andrew Haldane pointed out that in Victorian times banks were owned by the managers. This obviously reduced risk-taking, because if the bank went bust, so did they. The rise of the joint-stock company, shareholder-ownership of banks and limited liability contributed to the recent crisis, Haldane suggests, because the directors have less skin in the game. Do you think that the Barclays board might be more careful with the bank’s image if their fate was tied more closely to it? Me too.

It’s a clear benefit of the family business model. Even if the family owns just a fraction of the business, or has limited control, that non-managerial (not only managerial) input means they put the brakes on. The owner has power, which Barclays’ shareholders don’t feel they have. And they are often more alive to the negative consequences of actions than employees, who are perhaps blinded by the prospect of profit.

It’s precisely the consequences of their actions – obvious to most of us – that the Barclays board failed to predict. Which is weird, seeing that bankers always tell us that they are good at managing risk. Well, they got it wrong here. I know that bankers and ethics go together like spaghetti and mercury, but there’s a theory that might help here: negative consequentialism. This says that when making decisions your priority should not be bringing about good consequences, but avoiding bad ones. Bad things, the argument goes, are often worse than good things are good.

Bad things like destroying the reputation of a once-trusted brand, for example, or becoming the pin-ups for mad, staring greed. There are lots of complicated theories about how to make banks work better, but the regulators would do well to learn from the family business book and adopt a simple principle: the more owners are involved in decision-making, the better.

Comments

How true this article is and the analysis does not just apply to the banks but to the whole corporate sector. Because the shareholders effectively have no control and in the case of most shareholders, individual and institutional, little interest the directors do not need to be concerned about them under our corporate system.

In the United Kingdom, Boards of Directors are self-perpetuating. The Board appoints a new director which appointment does not have to be confirmed until the AGM. These appointments are always confirmed because the shareholders do not have any alternative.

The system of a small number of professional non-executive directors acting on many different Boards and remuneration committees means that everybody is scratching everybody else's back to the great benefit of the directors and dis-benefit of the shareholders.

The Board selects and appoints the Chief Executive and Chairman, it is nothing to do with the shareholders. So there we have a nice little club whose main objective is to benefit themselves.

There is no way that these huge salaries and bonuses are deserved or that such vast sums have to be paid in order to employ the best. Their own trade union system has been developed for their own benefit not for the benefit of the companies that they supposedly run.

It was long ago scientifically established that incentives and very high pay rates do not cause people to work more productively so why do the 'elite' still pretend that this is necessary.

I proved this for myself 50 years ago when I abandoned incentive schemes in our factory, consolidated the pay and bonuses and found that productivity went up. This was because pay was more stable, arguments about output were eliminated, jealousy no longer was a factor and relationships greatly improved. I did this after I read Lord Wilfred Brown's book 'Piecework Abandoned' written in 1962.

Business Culture is critical and we all know that a participative culture is far more successful than an authoritarian one. Yet for some unknown reason the authoritarian culture is admired, respected, promoted and employed by our governments and has become the dominant method in the corporate sector.

A brave attempt to wreak a change has been made by Michael Schluter with his 'Relationship Global' template

http://www.relationshipsglobal.net/Web/

This theorises that what most matters to us all is to build and participate in relationships, this should be the goal of business not profit. If these principles could be adopted then there would be no need for new legislation and businesses would become much more successful.

The fundamental corporate system must be changed in order to break up the present directors cartels and make them impossible, we can all start to do something about it by talking and making a fuss about it and by voting against astronomical pay at AGM's.

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