Opinion: Bonus waiver a sad day for capitalism

Stephen Hester, chief executive officer of the Royal Bank of Scotland (RBS), as pictured in London in November.

Story highlights

  • David Buik says little correlation between role and remuneration of chairman and CEO
  • He believes political expediency and public opinion bullied Hester into waiving bonus
  • Buik says Hester has done a good job at RBS
  • He says it is shame that Hester's case has not been objectively presented
The announcement on Sunday night that Stephen Hester, the Royal Bank of Scotland chief executive, had bowed to political pressure in the UK and decided to waive his bonus -- worth £963,000 ($1.5M) in shares -- will turn out to be a very sad day for commercial democracy.
The UK taxpayer, through the government, owns 82% of RBS, after bailing it out in 2008. If there had been any concern about the democratic process, then UK Financial Investments -- which manages the government-aided financial institutions -- and the UK Treasury should have filled the RBS board with their appointees at the time, rather than rely on commercial appointments under the chairmanship of Philip Hampton.
Hampton's credentials as RBS chairman look exemplary to me: he is formerly chairman of retail giant J Sainsbury, finance director of BG Group and holds board positions at Lloyds Bank and BG Group. If ever a person is qualified to make sure the job was being done, then Hampton is as good a candidate as any. He took a personal decision at the weekend to waive his own bonus -- but that probably did not help Hester's cause. There is very little correlation between the role and the remuneration of a chairman and a CEO. A chairman's job is to make sure that the board's policy is complied with: the CEO's job is to form that policy and execute it.
David Buik, partner at BGC Partners
The fact remains that political expediency and public opinion in the UK have bullied Hester into waiving his justified bonus. There is no doubt that opposition Labour lawmakers and the Lib-Dems, the minority party in the ruling UK coalition government, would have won any parliamentary vote ordering the rescinding of Hester's board-approved emolument. Such a vote may not have necessitated RBS to change its mind about Hester's bonus but it would have made his position untenable.
Hester's job at RBS during the past three years has not been made any easier by the incompetence of EU politicians, whose inept and moribund approach to the sovereign debt crisis has trashed the banking sector's value. This level of incompetence has taken the EU and the UK to the brink of recession. What bank in its right mind would lend money to counterparties, which may not be able to repay?
Many, like me, think Hester has done a very good job. The bank will be in profit this year (2011) for maybe £2 billion against a loss of £1.6 billion last year and a gargantuan loss of £26 billion in 2009. The balance sheet under his stewardship has been cut from £2.2 trillion by circa £700 billion. The investment banking division is being wound down. Corporate broker Hoare Govett may be sold to Jeffries of the U.S. this week to include only about 50 people. Bonuses will drop substantially at RBS next year. Yes, there will be a furore over the bonuses due to John Hourican of ABN/AMRO and Ellen Alenamy of Citizens Bank, who are both owned by RBS -- but that has little to do with a CEO's compensation package.
I hope that Hester does not resign -- but frankly he has grounds to. The support of his political masters looks very flaky. The job is immensely stressful. Does he need the grief if the support is not there? Frankly, the office of CEO has been rubbished by the unparalleled pressure heaped on Hester by UK politicians, who understandably pander to public opinion.
It is such a shame that Hester's case has not been objectively presented. It is quite unfair that his bonus should be used as the yardstick for investment banking bonus culture as Ed Miliband, leader of the opposition Labour Party, would have us believe. The £1.2 million salary is cast in stone: Hester needs to keep a team of the best people incentivized so that the taxpayer gets its £45 billion returned pretty damn quick.
The bonuses awarded to Hester are only meaningful if RBS's share price rises, resulting in the UK taxpayer being repaid. That strikes me as pragmatic and sensible.