Bank share give-away flawed

Philip Booth

23 June 2011

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Mechanisms to ensure the political acceptability of privatisations should not be rejected automatically, simply because they are inefficient and raise less money for the taxpayer.

Political “buy-in” is important – however the particular mechanism suggested by Nick Clegg, which involves giving 45 million British residents shares in RBS and Lloyds, is flawed.

There would be a tremendous administrative cost – £250m has been suggested – at a time when the Government needs to reduce spending.

Legal records of 45 million shareholders would need to be kept and all those people would be entitled to the information that any company has to send its shareholders.

Many of those people will be suffering from recent tax rises and would prefer the increase in disposable income that would arise from the Government selling the RBS and Lloyds stakes and reducing the pain of recent tax increases.

Perhaps the main flaw in the Clegg approach – which has previously been suggested by the Centre for Policy Studies – is that is could wreak havoc with corporate governance.

Many politicians have been very critical of the way in which banks’ managers and directors were not held sufficiently accountable by their shareholders.

Indeed, Vince Cable suggested a review of issues relating to corporate governance only on Wednesday.

Funnily enough, one of the terms of reference of that review was the problems caused by increasingly fragmented share ownership!

The Clegg plan will make shareholders so dispersed that effective control of the company by shareholders will be impossible.

At best, this could lead the bank to be run very inefficiently; at worst, it could lead managers to run the bank recklessly.

We have one Liberal Democrat Cabinet minister arguing in favour of one policy (increasing shareholder accountability) and another arguing in favour of the precise opposite!

Apparently Vince Cable supports the Clegg plan. The mind boggles.

Read the rest of the article on the Sky News website.

Philip Booth

Philip Booth is Senior Academic Fellow at the Institute of Economic Affairs. He is also Director of the Vinson Centre and Professor of Economics at the University of Buckingham and Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham. He also holds the position of (interim) Director of Catholic Mission at St. Mary’s having previously been Director of Research and Public Engagement and Dean of the Faculty of Education, Humanities and Social Sciences. From 2002-2016, Philip was Academic and Research Director (previously, Editorial and Programme Director) at the IEA. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. He is a Senior Research Fellow in the Centre for Federal Studies at the University of Kent and Adjunct Professor in the School of Law, University of Notre Dame, Australia. Previously, Philip Booth worked for the Bank of England as an adviser on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.

4 thoughts on “Bank share give-away flawed”

Mark Pennington

Posted 23/06/2011 at 19:29 | Permalink

Spot on Philip.
Felix

Posted 23/06/2011 at 20:52 | Permalink

Of course, this is a vote-winner. And in the mind of the politician, vote-winners trump any sensible suggestion
Philip

Posted 24/06/2011 at 11:42 | Permalink

I am not actually sure whether this is a vote winner. In order to qualify for CGT relief you actually have to buy the shares from the Treasury up front (and most people would not have the spare cash). If you do not pay that sum up front, the shares are only worth their value over and above what the government paid for them (ie nothing at the moment and quite possibly for years). I think people might well feel completely conned.
D.R. Myddelton

Posted 25/06/2011 at 10:19 | Permalink

Hasn’t Mr. Clegg got anything useful to do? What are we paying him for? Reforming the House of Lords?

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