With governments around the world propping up free markets, the rise of the state as an owner of capital was a theme raised by a panel of speakers at the International Corporate Governance Network in Sydney last week.
Three of the four mega banks in the United States are now recipients of the Troubled Assets Relief Program (TARP).
The US government bailouts thus far had exceeded the country’s expenditure on World War II and the Korean and Vietnam wars combined, according to Nuveen Investments director Mark Anson.
Congressional Oversight Panel TARP committee member Damon Silvers said: “We are effectively spoon-feeding capitalism.”
Yet on the day of the presentation, Goldman Sachs announced it would pay bonuses of up to $22 billion to its executives.
With a large proportion of the global financial services industry effectively state-owned, the implications of such executive bonuses is something states are now forced to address.
Already United Kingdom regulator the Financial Services Authority is developing a remuneration code of practice for UK directors, noting that “guaranteed bonuses for a period of more than one year may be inconsistent with effective risk management”.
The US government is also pushing for the implementation of ‘say-on-pay’ legislation that would require all public listed companies to give shareholders a non-binding vote on executive remuneration.
Closer to home, the Australian Prudential Regulation Authority (APRA) has also acted on executive remuneration.
Although the federal government did not have to bail out any local financial institutions, its bank guarantee spurred the prudential regulator to develop a set of principles for executive remuneration for APRA-regulated institutions.
The principles are yet to be drafted, but an APRA statement said: “Regulators need to analyse this debate and the associated circumstances, and to influence where they can the actions of the boards of companies, in order to create more appropriate and better balanced remuneration arrangements.”
Hopefully the new arrangements for executive remuneration would provide a better framework for investors, Risk Metrics director Dean Paatsch said.
Paatsch noted it was possible for financial services companies to adopt a constructive approach to executive remuneration that was in keeping with corporate governance principles.
For example, he said Macquarie Bank was able to curtail its bonuses for its executives amid the market turmoil, allowing the firm to claw back its profits in the form of lower executive remuneration.
“More of that sort of approach needs to be encouraged,” he said.
But with executive pay set to boom under companies such as Goldman Sachs, Paatsch does not hold much hope.
“Whether we will see the commercial excesses of executive pay fall remains to be seen, but to date I see no evidence of that,” he said.
