Don't mess with my pension
Beyond the profit motive: why companies aren't just about making money and how staff would do well to understand the wider context behind the capital
Years ago, the chief executive of one of Australia’s biggest conglomerates told this journalist about his difficulties in drawing up a company-wide mission statement. “Everybody here thinks they’re employed just to make money,” he bemoaned. “They don’t understand that the company has a higher purpose.” He was referring to all those other roles that companies play in their community whether they like it or not.
More recently, in a reflective moment the founder of a global distribution company expressed his view about why his own business had prospered against all the odds. (In about ten years, he’d seen off no less than three, much better capitalized rivals.) “I tell my people that we need to do two things,” he said. “One is profit, which we need to survive. The other is service, something that customers value and that has nothing to do with profit. If we don’t provide the service, we don’t deserve to be here.”
The point that these captains of industry make is regarded as pretty obvious by most people toiling way in the wider economy. A commercial ethic is fundamental to doing business. But as we all know, many of the pillars of the investment-banking establishment somehow forgot this in a headlong rush for ever greater profits. They made the profits but forgot about the service.
There are conferences every few months on the subject. “Today it is fashionable to believe that by analysing the correlation between finance, ethics and economics that one is better able to anticipate market needs,” as the latest one in Paris concluded.
The £16bn row over the “pension” pocketed by Sir Fred Goodwin, former chief executive of Royal Bank of Scotland, illustrates the difficulties. To recap, Sir Fred has insisted on keeping his pension despite running this 281 year-old institution to the brink of ruin and being forced to leave in October. Sir Fred’s response to the government’s request to take, as a gesture, a “material reduction” in his pension says it all. Cogently argued and outwardly reasonable, his letter to UK’s City minister Lord Myner says that he’d already paid for the mistakes he’d made by waiving a year’s salary as well as share-related awards worth around three-month’s salary. “I accept responsibility for that which I was responsible for,” he wrote.
This then leaves the matter of the pension. It was originally pegged at a total value of £16bn, calculated on the basis that Sir Fred would work for the bank until 60. Bitter shareholders might point out that this sum is a third larger than the total capital raising of early 2008 that was supposed to save the bank. Even though he’s ten years short of retirement, the remuneration committee agreed to pay it out in full anyway at around. Sir Fred says the pension pot had been built up over many years and therefore a reduction “is not warranted.”
His letter could serve as a document for our times, and it probably will. It embodies the same attitude shown by Dick Fuld, head of Lehman Brothers, and other titans of Wall Street. In last year’s testimony to the House of Representatives committee on the collapse of the firm, Mr Fuld owned up to having banked $350m in compensation since 2000. That level of remuneration almost makes Sir Fred look like a volunteer, but the principle is the same.
Sir Fred’s pension is only a pension in the most technical sense. By virtue of its size, it looks very much like another form of bonus. Quite how bankers’ remuneration lost touch so utterly with reality is another issue, suffice to say it’s clear that head-office culture became increasingly isolated from the real world. Chief executives like Sir Fred and Dick Fuld simply forgot banks are here to provide service as well as a profit.
Lloyd Blankfein, chairman of Goldman Sachs, and his team waived their bonuses last year although they achieved a profit in difficult circumstances – but there are quite enough Sir Freds and Dick Fulds to make the point.
Meantime France could have the answer. From April, it introduces a compulsory new regime for “variable remuneration” that among other things bans their payment of bonuses if the institution is in trouble or has otherwise harmed its clients. By that measure alone, Sir Fred’s “pension” and similar Croesus-like remunerations already belong to another era.
