Top banks benefit from an implicit guarantee from the government, as investors believe they will be bailed out should they get into financial trouble – a guarantee the Bank of England believes was worth up to £220bn in 2009 and 2010 alone, though this figure is disputed.
Treasury Select Committee (TSC) chairman Andrew Tyrie told City A.M. that the way in which executive pay is determined does not properly reflect this state support.
“Corporate governance is crucial for the long-run health of the industry and the economy, and clearly we don’t have it right at the moment.
“Shareholders who invest in firms which carry an implicit guarantee arguably carry some responsibility to make sure effective corporate governance is exercised over the remuneration structure to make sure it does not incentivise excessive risk-taking.”
For example, basing bonuses on the return on equity at a bank may look like a results-driven process, but it encourages execs to take on debts that could backfire in the long run.
His comments come as business secretary Vince Cable re-examines his plans to reform executive pay rules.
The TSC also heard from Lloyds’ remuneration committee’s Anthony Watson that not all shareholders look out for firms’ long-term interests – including pension fund managers who “behave like traders,” looking to make gains on stocks.
“To the extent this is true, is it of considerable concern,” said Tyrie.