Government’s RBS policy may cost the taxpayer

ALISTAIR DARLING’S attack on bonuses last week has caused a furore in the Square Mile. However, the pre-Budget Report is perhaps in the long-term not the most important bonus-related event that has taken place in recent weeks. That was when the government acted to limit bonuses at RBS, of which it owns 84 per cent. Legally, this is troubling. It could also have consequences for the taxpayer.

There used to be a clear distinction between a company’s shareholders and directors: shareholders invested in a company and appointed a board of directors to run its business. Traditionally, shareholders were not involved in the business of the company. If they disagreed with the way in which it was run, they had the power to change the board, but that was about all they could do.

Directors have clear duties set out in the Companies Act 2006, including the duty to act in accordance with the company’s constitution. It would be interesting to know the basis on which RBS’s directors agreed to give the Treasury the right of veto over the payment of bonuses, as recently reported.

Then there is the duty to promote a company’s success. It is difficult to conceive that this includes the obligation to act in a manner which is politically expedient for the government of the day. The fact that the payment of bonuses might embarrass the government could be taken into account if there were clear future funding implications, but the directors might also take the view that it is more important to keep good staff.

The law requires the directors to take any long-term consequences of their decisions into account and have regard to the impact of the business on the community – but what does this mean? It is clearly not desirable that RBS goes bust because its top traders leave, or that it has a reputation for failing to honour employment contracts.

Possibly the most important duty that directors have is to exercise independent judgment and to reach the best decision they can for the company and its various stakeholders. This is becoming particularly difficult for RBS’s directors. The situation could be even more serious for third parties who interfere in running the company. If they influence the way in which the directors reach their decisions, they become shadow directors and can be made liable to contribute to any debts of the company if it becomes insolvent.

If the board of RBS is put under pressure to bow to the political wishes of the government, as a result of which its business suffers and it goes bust, a liquidator will have a fine time making the case that the government should be liable for the whole of any shortfall. And we all know who will pick up the bill.

Stephen Morrall is a partner at Dawsons LLP