Paying the bankers. The Chairman of the Australian Prudential Regulatory Authority John Laker will not have been surprised that the international body of regulators like himself, the Financial Stability Forum, has decided that the way bankers are paid has contributed to some of the current bout of problems in the international financial system. The Financial Stability Forum has advised finance ministers meeting in Washington that “compensation schemes in financial institutions that encouraged disproportionate risk-taking with insufficient regard to longer-term risks” were a problem. “These risks,” the Forum reported in a paper, “were not subject to adequate checks and balances in firms’ risk management systems.” That sounded a lot like Mr Laker when he addressed a seminar held by the Australian Reserve Bank back in August when he said:
Executive compensation that helps to deliver strong risk-adjusted returns on capital over time and rewards genuine out-performance of competitors does not raise prudential issues of itself. For a prudential regulator, agency risk issues arise if compensation arrangements encourage management to focus on a shorter term horizon than the long-term approach that would also be in depositors’ best interests. Incentives to drive up the share price more rapidly than competitors can tempt management to pursue aggressive growth strategies or to ‘hollow out’ the institution by paring back capital buffers or cutting costs, particularly in middle and back offices where risk management functions reside.
As a prudential regulator, APRA does not involve itself in the details of executive compensation arrangements. These are matters for boards and shareholders. Nonetheless, growth strategies, the size of capital buffers and the resourcing of risk management areas are major elements of APRA’s supervision of banking institutions and form crucial inputs into its risk-rating system, discussed below. Moreover, boards of banking institutions seeking accreditation to use the more advanced Basel II approaches must sign-off that performance assessment of, and incentive compensation for, senior executives with profit centre accountability take into account the amount of risk assumed and the management of that risk.
Perhaps the only thing Mr Laker would want to change now is not involving APRA in the details of executive compensation arrangements. The disclosure of the ANZ Bank’s strange funding of brokers with their risky margin lending is clear evidence that boards cannot be trusted on their own.
A trustworthy Pom. There’s one thing we do know about Sir Peter Gershon, the adviser called in by Australian Finance Minister Lindsay Tanner to advise him on management of government information and communication technology (ICT). He is a man politicians have found they can rely on.
Proof of that came back in June 2006 when then British Prime Minister Tony Blair was getting a bit of stick about a decision to buy a couple of aircraft for what in Australia we would call the VIP fleet. The existing planes in the RAF fleet were deemed unsuitable to take Mr Blair on his international travels which led to the embarrassment of him arriving in Brussels for a conference aboard a chartered one carrying the Austrian flag. Sir Peter was the man, in the words of the Prime Minister’s Official Spokesman, commissioned “to do a proper report into the costings” and he came back with a proposal which was for two second hand planes to be leased. Not really for the PM at all really. They would be at the disposal of The Queen and other members of the Royal Family, but also, then, Ministers, including the Prime Minister. One plane would be for short-haul, and the other for long-haul, with sufficient space for Her Majesty’s lobby. What had not been decided was which type of plane would be used, as it was part of the tendering process, nor the precise fit, for the same reason. The PMOS said that “we were accepting Sir Peter’s proposal, as we believed that it was the right approach, as it would provide the necessary security and communications.”
Not that Lindsay Tanner has called on the English knight for that particular service to government although it might come in handy given the bitching from the travelling press pack about the difficulties caused by them trying to follow Kevin Rudd on a charter. Sir Peter made his name and earned his gong for his earlier work as a Chief Executive of the UK Treasury’s Office of Government Commerce and several major strategic reviews for the UK Government on procurement, including ICT and public sector efficiency.
As a result of the reviews conducted by Gershon, says Minister Tanner, the UK Government achieved an estimated £23 billion in budget savings. Not that there is unanimous agreement on the size of those savings. The distinguished Financial Times columnist Peter Guthrie wrote last month that the reality was that the cost-cutting drive instituted by the Gershon review had flopped. “According to a report last February from the National Audit Office, only £3.5bn of £13.3bn in savings then claimed by government stood up to serious scrutiny,” Guthrie wrote. Nicholas Timmins, Public Policy Editor for the FT, drew attention to aspects of the program that have made it an easy target for derision.
The Ministry of Defence, for example, claimed a £4.6m saving from decommissioning some Jaguar and Tornado jets early – a move greeted by critics as evidence not so much of more efficiency as of less defence. The programme was allowed to claim efficiency savings without accounting for the investment needed to achieve them. To have attempted to put precise numbers on investments already in the pipeline would, the government judged, represent a huge bureaucratic exercise that would divert public servants from the real goal – achieving efficiencies. Thus, for example, the Department for Work and Pensions has scored a £300m saving that will add up to £1bn over five years by switching benefit payments from giros to bank accounts. It has done so, however, without netting off the £164m investment in a Post Office card account needed to help make that happen. Some 80,000 jobs may have gone. But for all the publicity they have attracted, they amount to only around 10 per cent of the total savings – and it looks as though around £1bn will have been paid out in redundancy costs to help achieve that.
In Australia Sir Peter will concentrate on identifying ways in which the Australian Government can strengthen the whole-of-government management of ICT and maximise the benefits from ICT to drive greater efficiency and better services. The review will also examine the way in which agencies manage ICT investments, including maintenance, intra-agency links, development and staffing.
And there is one thing he cannot be accused of. He is not working for the money. Sir Peter has asked that the Australian Government make a donation to a charity in lieu of any remuneration.
Let the paying of the bribes begin. When politicians wander around the country on election campaigns they like to have some goodies they can hand out to the voters to show what influential and nice people they are. This largesse at taxpayers’ is dressed up with a grand title designed to make the little bribes a little more respectable and hence the Safer Suburbs Plan of the Labor Party. It promised $15 million to address crime and anti-social behaviour “by establishing important community safety measures including closed circuit television and improved street lighting”. With the election run and won the time has come to hand out the money and Minister for Home Affairs, Bob Debus yesterday began the process which will see CCTV installed in 25 communities. Not that there will be any money wasted mind you. Mr Debus assures us that organisations earmarked to receive funding will work closely with the Attorney General’s Department which will be seeking detailed project proposals from nominated organisations. Proposals will need to demonstrate good practice in crime prevention and mesh with other crime prevention activities in relevant locations. Upon acceptance of the proposal, the Department will work with organisations to develop a funding agreement. Mr Debus gave no estimate of how many millions all this bureaucratic paper work would add to the $15 million of election bribes.
The Daily Reality Check
If it wasn’t for John Howard this would be a politics free morning on the internet news sites’ most read stories lists unless you count the Queensland Premier having her two bob’s worth on whether a Christian school has the right to stop a homos-xual couple attending a school formal. At least we know that the ABC attracts sweet tooths. The most read story there reported the decision of Cadburys to stop tours of their Tasmanian chocolate factory.
The Pick of this Morning’s Political Coverage
It takes a difference of opinion to make a leadership contest and the various News Limited sites gave us that this morning. The Courier Mail, covering the Australian comeback speech of John Howard at a fund raising tribute dinner in the paper’s home town, had a gracious former leader offering to quietly help his besieged successor Brendan Nelson. A duumvirate from The Australian interpreted the same speech by Mr Howard quite differently. In their version the man who led the Coalition to defeat last November was prepared to quietly help the Liberal Party while initially being reluctant to support Dr Nelson. Which left the rewrite journalist at the news.com.au website where they pick and choose from the coverage of all the papers in the group with something of a dilemma – was Mr Howard offering to help Dr Nelson or not? It was the national daily which won out with the combined version opting for a reluctant John offering Brendan support. Which will surely irritate Alexander Downer – a Liberal who knows all about being an unpopular leader. Michelle Grattan, keen to be covering a real story after being on tour with a Prime Minister, in her leadership story seized on remarks by Mr Downer accusing unnamed frontbenchers of destabilising Brendan Nelson by briefing the media against him to change the leadership.
- Howard offers Nelson a hand – James O’Loan, The Courier-Mail
- Howard slow to offer helping hand – Sean Parnell and Patricia Karvelas, The Australian
- John Howard reluctant to offer Brendan Nelson support – By Staff Writers, news.com.au
- Downer blast over sabotage bid on Nelson leadership – Michelle Grattan, The Age
- Visa review welcomed, but warning on free trade – Kate Hannon, The Canberra Times
- WA home prices ‘to fall 20pc’ – Daniel Hatch, The West Australian
- More pain on the way – Michelle Singer, The Australian Financial Review
- Spotlight on ASX at inquiry meeting – Patricia Durkin, The Australian Financial Review
- Premier welcomes gay debate: School formal stance on gays sparks widespread debate – Robyn Ironside, The Courier Mail