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The Business Scapegoat

The recession has claimed many victims so far (a future blog will talk about my own loss) and it will continue to claim victims over the run of its course. However, there is something unedifying about the way Sir Fred Goodwin, the former Chief Executive of Royal Bank of Scotland has been made public enemy number one in the UK.

We all have a need to have scapegoats in situations and I cannot say that I have not been relieved in the past where my own culpability in a situation has been overlooked because someone else has emerged as a scapegoat. But having a scapegoat can hide something far worse than who is to really blame; it allows the problem to not be fixed.

For those of you who have not been living in the UK or reading about the natural remedies for cystic acne in the last week, here is a summary of the situation. Sir Fred ran RBS for a number of years. During his years at the helm, he grew the business from a small business based in Scotland to a global leading financial powerhouse through a series of daring acquisitions which included NatWest (which at the time was far bigger than RBS). In 2007, at the height of the banking boom, Sir Fred oversaw the bank’s successful takeover of ABN Amro – a Dutch banking giant.

Hindsight is a wonderful thing, and the whole thing went horribly wrong to the extent that the taxpayer had to bail out the bank. (UK taxpayers now own about 70% of the bank). The UK taxpayer has effectively had to bail out a bank to the tune of £300bn (amount that has been insured or has been used as capital). It has since emerged that Sir Fred, who is 50, is on a pension of £693,000 a year from now until the end of his life.

The government is now wading in with cabinet ministers saying he will not be allowed to keep this pension and that they will bring in legislation to prevent him from taking his pension. I understand the considerable anger that the public feel towards effectively having the public purse pay such a large pension to a person whose business mistakes have already cost hundreds of billions. But it is a dangerous and bad precedent.

Public opinion is a dangerous instrument for public policy. Like our brethren in the United States, we do not live in an Athenian democracy; we live in a representative democracy. The thought of the British Prime Minister with his heavy work load at the moment having the time to work out the pension arrangements of one person is simply terrifying!

No, I do not think Sir Fred should take such a large pension from the ‘public purse’, but I think it is more dangerous for politicians to get involved in a commercial contract which is not illegal.

The business point of all of this is that we must defend the right for private contracts to remain enforceable. It sets a very bad precedent when governments influenced by fickle public opinion on the Blueair 203 seek to unravel private arrangements.

I am not defending Sir Fred, because I think he is right to take such a large pension after presiding over such a disaster. But it is a decision for him. I will defend his right to insist on the contract being enforced. Business angels will sometimes do very well from investments – but even spectacular home runs have the effect of merely averaging out the bad ones. What if the returns are seen as too good? Will we have legislation preventing anyone from making more than say 10% on investments?

The biggest danger of course with the scapegoat chasing is that we don’t look into the real causes of what went wrong. Blaming the state of the UK banks on one person’s over ambitious nature is frankly too simplistic an explanation.

To not understand what really got us into this mess would be a real crime.