Over thirty years ago, the London Stock Exchange (LSE) switched from traditional face-to-face share dealing to electronic trading that helped it outpace competitors and become a magnet for international banks. The City jumped from the 19th Century into the threshold of the 21st and a long way since a broker named John Casting listing prices of commodities at Jonathan’s Coffee-House in 1689. Trading has since grown to over £5bn per day; powered by the febrile financial hub of Canary Wharf, the LSE has leaped from 19th please to be among the world’s top three markets.
There is a cogent argument that it was the key stage of boosting the British economy out of the doldrums that beset it in the 1970s and pave the way for two decades of steadily growing prosperity. There is also a cogent argument that it produced the 2008 Financial crash. And, considering developments over the last decade since, it also spawned recent headline-grabbing financial train wrecks captained by Fred ‘The Shred’ Goodwin at RBS, Phillip Green at BHS and Philip Green (no relation) at Carillion. Each calmity from which executives stroll away rich make those of us not on their boardroom gravy train wonder just who is looking out for Joe Public. In all such cases, the workers, suppliers and small investors are the ones who take a bath, if not lose their shirts.
We are not talking about unintended consequences here, as when a new computer hedge program runs out of control and causes wild market fluctuations. Nor is this about tough and/or changing market conditions, such as those sinking Maplin Electronics, Toys’R’Us or Mothercare as viable concerns. In those cases, directors and managers broadly exercised their best (if flawed) judgement, but were swamped by market conditions, such as the internet’s effect—first on the High Street and, later, even on giants of retail.
What we are discussing here is pure, selfish greed and abuse of power to satisfy it. Once the shock waves of the Big Bang dissipated, some clever people started exploiting the new opportunities offered. The end of fixed commissions and fast electronic trading were just the thin end of the wedge. Bowler-hatted ‘something on the City’ gave way to brash boys in bright braces, who found Mergers and Acquisitions, currency speculation, market manipulation and pension fund plundering offered far richer pickings. And, as scrutiny was still exercised by the bowler hats, something of a lawless frontier ensued.
While it was only a matter of a few Young Turks bagging themselves a few thousand by having the cojones to follow their hunches, small harm ensued. But the braces brigade were overtaken by heavyweights hunting for big game. Much snapping up of small fish by big fish ensued. The first major example of fiscal indigestion was Robert Maxwell had to plunder £1/2bn from his Mirror Group’s pension fund in 1991. A quarter century later its fund (and its pensioners) are still in trouble. Next year, the stakes got higher. Britain tried to keep the pound within the Exchange Rate Mechanism (ERM—forerunner of the Euro). George Soros bet against the pound so forcefully that on ‘Black Wednesday, the UK admitted defeat. The pound left the ERM, having cost the Treasury £3.3bn, much of which had landed in Soros’ bank account.
Through the ’90’s, while Sid did get a little richer by buying shares in BA, Ngen, BT, RailTrack, etc, the already-rich did even better, thanks the legal and accounting firms whose creativity with accounting wheezes and offshore tax havens made their clients both rich and grateful. Benefiting most from such business were the ‘big five’ accounting and consulting firms, viz:
- Ernst & Young.
- Deloitte & Touche.
- Arthur Andersen.
Every FTSE100 (i.e. major) firm in Britain had its books audited by these firms—at a cost of millions each year. But who was checking on these ever-cosier relations? Companies House simply registers firms; the CBI only represents British industry; the Financial Services Authority lasted 2001-2013, replaced by the Financial Conduct Authority was set up to avoid another 2008 crash. Few boardroom bandits have been brought to book by either—especially considering their beefy 3,800 staff and hefty £430m budget.
There might be some argument that the 2008 crash happened before their watch. And indeed the excesses of junk mortgages, toxic fiscal bundles and acquisition over-reach (as when the RBS python tried to swallow an indigestible ABN-Amro) all smack of a lawless frontier. But even after major corporate corpses like Lehman Brothers litter the landscape, the big five did not change their cosy practices—nor has the FSA/FCA seen any urgent need to make them.
Which makes the latest series of dubious accounting causing fiscal train wrecks all the more reprehensible. In each case, both the board and the auditors have been complicit in creating and concealing accounting practices that—while technically legal—violated most sensible, if not moral principle. Unless you happened to be a boardroom benefactor Phillip Green drained £580m from BHS over his 15 years in charge, then sold it in 2015 for £1. It rhen went bankrupt, with a loss of 11,000 jobs and a £500m hole in its pension fund.
Now this month, Carillion, holder of 450 lucrative Government contracts, including Birmingham’s new hospital, goes into liquidation. Executives are still receiving £450,000 salaries, plus bonuses in the most egregious example of draining company assets by those whose responsibility is to safeguard them. To quote a Carillion insider “For any other organisation, this kind of activity would be gobsmacking. For Carillion’s directors, this was business as normal“. Auditors KPMG signed off the accounts as healthy less than three months before. This collapse leaves almost £1 billion in debt, more than £500m of pension deficit. It puts 19,000 employees and 30,000 unpaid subcontractors out of work..
There is the usual wringing of hands and gnashing of teeth by parliament and regulators alike. A damning report from a parliamentary select committee does not mince words, condemning the practices that led to this. But, as with BHS and RBS, nobody in the cab of the train when it wrecked will even have their pay docked. Two years after BHS, Phillip Green hasn’t even barred from being a company director. Rather than another select committee buried in the bowels of Westminster, such practices need public exposure and serious repercussions for silk-suited wide boys who are taking the public (not to mention employees, shareholders and suppliers) for a ride. What rhis needs is:
- A Business Standards body with swingeing powers. It should be staffed with a balance of laymen and professionals, plus experienced directors.
- Swift and brutal powers to remove (if not reversing) bonus awards, all outside of board control and guided by long-term fiscal performance
- Eye-watering fines for accountants who fail to sound alarms when they should
- Funds from above sources to be used to publicise good practice and broadcast the misdeeds of shameless miscreants
- Consideration that any bonus (and part salary?) be paid in company shares
- A ban on politicians serving on boards —and vice-versa
- Permanent exclusion from directorshipd for the worst cases (r.g. Green)
Such steps may not redress damage already done to public trust in board members by the behaviour of a greedy few. But they may inhibit the sleazier aspects of the ‘Big Bang’ and so drag capitalism in Britain out of the morass into which it has sunk. Curbing the excesses of a rich-list-bias and resurrecting a free market accessible by all might restore Joe Public’s faith in putting his shoulder to the common weal. And benefit us all.