How do we prevent a government ’scorched earth policy’?

Although the result is far from a foregone conclusion, the favourites for victory in the 2010 general election must be the Conservative Party. Given that the current Labour government are as aware of this as everyone else, their planning and decision making can’t fail to be influenced by that knowledge.  As we mentioned in our ‘The recession isn’t ending‘ post, this sort of situation could lead to a ’scorched earth policy’, or similar.

Our current constitution includes no mechanism for penalizing an outgoing government, which acts against the best interests of the nation, rather than act in a way, which might help the incoming administration. Whilst ’scorched earth’, or ‘poisoning the water supply’ policies might be more drastic and easily recognisable, even abdication of responsibility is undesirable. It is conceivable that an incumbent administration might fail to respond to the needs of a nation, rather than allow their soon to be victorious rivals to take the credit.

Unsurprisingly, the possibility of such a scenario has been noted in Tory circles:

• The most dangerous thing in Britain is the nothing-to-lose Labour Party
• The start of scorched-earth policy?

It is unlikely that any weak, outgoing government hasn’t been influenced in this manner to some degree. The question is, how do we modify our constitution to ensure governments actually act in the best interests of the people they represent, regardless of political circumstances? This should be a fundamental tenet of natural politics.

Now the UK Border Agency is at it

Today’s political news includes the story about thirty UK Border Agency officials, who are due to receive around £10,000 each in bonuses. Apparently, this is a reward for strengthening our borders and clearing some (not all) of the backlog of asylum applications.

Maintaining our borders is part of the Border Agency’s basic role. People shouldn’t receive bonuses for delivering what’s in their basic job descriptions. There’s a lot of evidence to suggest our borders are anything but under control: according to the Office of National Statistics, UK population growth shifted from a predominantly natural pattern (i.e improved healthcare and greater longevity) to migration in 2002, when “net migration accounted for over 70% of the total population change”. The Optimum Population Trust estimate the UK population at over 62 million next year, growing by a further 4.5 million over the next ten years.

In January this year, Lin Homer, UK Border Agency Chief Executive, responded to a report by the National Audit Office (‘Management of asylum applications by the UK Border Agency‘), with apparent pride in a job well done. Ms Homer’s response included the admission that they weren’t expecting to clear the backlog of legacy cases before 2011.

Ministers claim that Border Agency officials’ bonuses are revenue related, as visa fees generate income. However, visa fee revenues don’t appear to be down to the efforts of agency staff, who could hardly be described as ‘visa sales reps’. Also, there doesn’t appear to be any published evidence that the size of Border Agency bonuses is in any way related to the value of visa revenues.

This is just the latest example of the inappropriate and ill-founded bonus culture, which has prevailed for too long at senior levels within too many organizations. At the moment there is a groundswell of opinion in favour of ending this method of rewarding executives and high ranking officials. With next year’s general election firmly in the sites of our major political parties, there is an opportunity to address this issue and establish fair, sensible and accountable means of remuneration. It’s important, however, that this isn’t allowed to become an all out ‘witch-hunt’; bonuses have their place and ‘bonus’ shouldn’t be allowed to become a dirty word.

Let the RBS directors resign

The Royal Bank of Scotland (RBS) directors have tried to justify paying their investment bankers a massive £1.5 billion in bonuses with a number of arguments:

• In order to remain competitive and retain the most talented banking professionals, they must pay the going rates for their industry.
• They say their legal advisers have told them they’d would have to resign, if they failed to pay the bonuses, as they’d be in breach of contract.
• The RBS investment banking division has made around £6 billion profit this year, for which £1.5 billion is a fair bonus total.

So let’s look at these claims:

• The only people who seem to think the current banking industry remuneration levels are fair, are the bankers. This is an opportunity for the rest of the world to break this ridiculous, self-serving and self-perpetuating cycle. The argument that RBS would lose their best people fails on two counts: Firstly, if they’re so good, how did RBS and most other financial institutions get the world into its current monumental fiscal mess? Secondly, until someone makes a stand on this issue, banks will always be able to use this argument and maintain artificially inflated income packages.
• If the directors would be in breach of contract, surely the government, as our representatives – currently 70% of RBS is publicly owned – are responsible for ensuring that any contracts drawn up support the nation’s best interests, rather than those of a few excessively over-rewarded individuals. Also, if they really want to resign, let them; let’s create an opportunity for some ‘new blood’ to reach the highest levels of their profession, whilst retaining a realistic view of their earnings potential.
• The £6 billion profit figure pales into insignificance, compared to the £25 billion pounds of our money the government used to refinance RBS. The thousands of small and medium sized businesses RBS and its fellow organizations refuse to lend money to could all turn a profit if they were able to enjoy the same type of luxury (also see “The recession isn’t ending“).

Executive bonuses, in banking and other sectors, should be set at realistic levels and dependent on real success. High achieving professionals should be rewarded well, in order to provide genuine incentives and retain the best people. However, simple measures, such as deferring bonuses for three years (already a common practice in some industries) and paying some rewards in the form of share options, could reduce risk taking significantly; it could also encourage behaviour more supportive of an organization’s long term future.

Alistair Darling must defend the nation’s best interests in this matter and, if necessary, let the RBS directors walk. This could send out a strong message to the senior executives of other institutions with or without significant public investment. Perhaps other nations might take note too?

The recession isn’t ending

The government would have us believe the recession is ending, but we don’t see much evidence of it. At this time of year, when many businesses should be shipping more goods than usual, trade and industrial packaging suppliers expect to enjoy their busiest quarter. As a result, the packaging industry is a good barometer of a large cross section of businesses in general. Our direct contacts within the packaging industry inform us that they, their suppliers and competitors are in decline, with many going out of business altogether.

Banks are still paying big bonuses but either not lending, or lending at inflated rates; 6.5% is common, when the base rate is 0.5% currently. SMEs (Small and Medium-sized Enterprises), including what’s left of Britain’s manufacturing and engineering industries are going to the wall due to poor cash flow and an inability to borrow.

So why won’t the present government bring pressure to bear on the banks currently in public ownership? If they were to give business a much needed helping hand, but fail to win next year’s general election, the incoming government might well take the credit. How much does this sort of reasoning feature in the actions of a weak, outgoing government? If it does happen, or ever has happened, it could lead to a highly undesirable form of ’scorched earth policy’. The problem is, how do we prevent such a thing?

Also see “Let the RBS directors resign“.