Stephen Hester's decision to waive his bonus was right – but government policy towards the banking sector remains a jumble
Public opinion was adamantly against. The government, sensing the strength of public feeling, urged him not to accept it. Labour, spotting an opportunity, opposed him getting it at all. So did those who used to work for him and have now been laid off. Even Boris Johnson was critical. Amid all that, it is not surprising that Stephen Hester, the chief executive of RBS, has taken the decision to waive his infamous £1m bonus. His decision is the right one. But it solves nothing beyond the immediate problem of handling the politics of a toxic issue. Government policy towards the banking sector, and in particular the banks which it owns, was a jumble before Mr Hester took his decision. And it is still just as much of a jumble afterwards.
It is less than two weeks since David Cameron made a striking speech in which he extolled the idea of responsible capitalism and called for an uprising of active shareholders to get a grip on corporate strategy. But the prime minister's words, fine though they may be, lacked any visible connection to his handling of the RBS bonus problem, as well as doing precious little to inform his approach towards the publicly owned banks at all. The reality is that taxpayers own four-fifths of RBS and two-fifths of Lloyds. That makes us the controlling shareholder of the former and the effective controller of the latter. And that means that government must assume the responsibilities which go with being the dominant shareholder.
But this is precisely what it has not done in the case of Mr Hester. And, judging by Downing Street's insistence that it will not intervene to block any bonuses for Mr Hester's colleagues either, it is exactly what it is still refusing to do more generally. This is not an academic possibility, but a real and urgent issue not just next year but this. One of these bonuses, currently said to be worth around £6m, is due to be paid to the RBS investment chief John Hourican. Yet Mr Hourican has not only presided over the shedding of thousands of RBS jobs in his division. He has also headed up a division which has failed in its task of responding to ministerial and business urgings to lend to small business. So the self-same issues which Mr Cameron flunked in Mr Hester's case will also arise in Mr Hourican's even larger example.
A truly responsible capitalist or an active shareholder would not be in doubt how to proceed in such cases. They should have set out the terms on which, as chief shareholders, the bank was to be run and the bonuses, if any, which were to be earned. But ministers have not done this. UKFI, the Treasury-controlled body that was set up to manage the government's shareholdings, has not done it either. There has been no coherent government drive to change behaviour. So behaviour has not changed. And because this has not happened, RBS has concentrated on rebuilding its balance sheet rather than on lending and helping the growth strategy which Mr Cameron now says he yearns for. Another round of large bonuses is not just a public relations disaster – though it is that too; it is also an indictment of the government's continued hesitant mishandling of the banking sector.
Some of this comes back to the Labour government's unwillingness to set an effective framework for the expression of the public interest in the banking sector. But this government, faced with effective ownership of two major banks, has also failed to agree clear targets. The current policy of shrinking the banks should not be the be-all-and-end-all of the public interest. Ministers need to be explicit about their responsibilities, so that they can in turn be much clearer about what is expected of the bankers, including the terms on which bonuses are earned. Yes, ministers need to be tougher, as Ed Miliband urged yesterday. But they also need to be smarter. Serious intentions about corporate reform, including bonus taxes, would concentrate minds helpfully. If ministers choose not to go down that path, they will have only themselves to blame when the next banker bonus furore erupts in their faces, exactly as Mr Hester's has done.