Whenever there is a recession it is customary to seek out a scapegoat, although a modern economy is far too complex and sophisticated for it to be the fault of any single group. Currently the scapegoat appears to be "bankers", although that phrase is employed without thought for what it actually means. In one sees a banker can be almost anyone who works for a bank, including the teller who takes your deposits over the counter, and enables you to withdraw money through human interaction rather than via the more impersonal (but convenient) ATM. However, no-one is blaming bank tellers for the current state of the economy; rather it is the bankers at the top of the banking tree who are to blame. The recession, largely off the back of the financial crisis which began in the USA in 2007, is the fault of excessive risks taken by those on the Boards of Directors of banks. Now, I am not entirely sure where the line is between an "excessive" risk and an "acceptable" risk; the presumption in the rhetoric seems to be that the latter are those which succeed, while the former are those which do not, which is logically absurd.
That bankers are neither inherently good nor evil seems to me to be obvious. That some bankers have been provided with bonuses of which they are entirely undeserving is a matter of fact (the finger points squarely at Sir Fred Goodwin). That this requires change is self-evident. However, not all bankers are Sir Fred Goodwin. Investments, both financial (as made by banks and other financial institutions) and real do not always prove to be profitable. However, I would argue that there is no need for additional regulation of banking per se. Perhaps regulation of the conditions under which bonuses can be paid (superior performance comes to mind!) can be justified, but this ought to apply to all industries, not just banking. But this is largely a question of governance, not of banking itself. And good governance of any company comes via its shareholders, not solely from outside bodies. Good regulation comes from thoughtful consideration of the issues in the long-term, not from a knee-jerk reaction to current populism (of which politicians are all too fond). And who are the major shareholders of most UK listed corporations, including banks? This would be the UK pension funds, who for too long have been largely passive investors in their shareholdings.
For many years I have been arguing the case for a change in the governance of UK pension funds. As things stand, contributors to pensions and pensioners have little incentive to worry about the make-up of the trustees of their scheme. Most trusts are made of representatives of the employer and the union which represents the bulk of employees. In the USA things are more democratic: all contributors have the right to elect the trustees of their scheme, with a selection of candidates and their biographies being sent out at the time of election. The biographies include those characteristics which are likely to make a candidate seem attractive and talented to become a pension fund trustee. If such a system of electing trustees were imported into UK pension funds there would be a sea change in the governance of these mighty financial institutions.
Assuming trustees were elected to serve a number of years (rather than one, which could lead to short-termism), they would be much more directly accountable to pension contributors than is currently the case. This does not mean that such trustees would do the bidding of those who elected them; one would hope they would due able to take a more dispassionate, objective view of investment strategy! However, current trustees are largely anonymous and likely to act in the interests of the small groups from which they have come, rather than pensioners and contributors, whereas democratically-elected trustees would need to be closer to understanding and incorporating the views of those they represent. One major change this is likely to lead to is increased "shareholder activism" on the part of pension funds. If this were the case, pension funds would be taking a stronger view on how banks were being run, including the way in which bonuses were paid. Indeed, pension funds would require greater detail on bank financial strategy which would make the banks significantly more accountable to their shareholders, and hence to the general public (most of whom are pension fund contributors or pensioners.
In the mid-1970s (1976) the management guru Peter Drucker wrote an oft-overlooked book, The Unseen Revolution: How Pension Fund Socialism Came to America. If the governance of pension funds were altered as I have argued above (and elsewhere) it would lead to improved governance of banks (and other corporations) eliminating the kind of rhetoric which leads to all bankers being scapegoats for the current recession.
