Throughout January 2010, the dominant news story in both the financial and general press concerns the appropriateness of banker bonuses. Many banks released their results in January, which in other circumstances would be hailed as great successes: Goldman Sachs reported $13.4 billion net profit for 2009 (up from $2.3 billion net profit in 2008); JP Morgan Chase reported $11.7 billion net profit for the year just ended; Bank of America made $6.3 billion net profit, and so on.
Of course, the point of contention is not the high level of bank profits per se, but the associated high level of banker bonuses. Goldman Sachs stated they’ll pay $16.2 billion in compensations and benefits (up 48% over 2008) which is estimated to equate to $500,000 per head at the bank. At JP Morgan Chase, investment bankers earned $9.3 billion in pay and bonuses. You get the drift.
On both sides of the Atlantic, the level of these bonuses has become a source of public interest (to say the least!). The question often put about in the press is: can these bonuses be justified after these banks received preferential treatment through Government bail-outs to survive them through the recession?
This question, in substance, was recently put to the RBS Chief Executive by MPs on the Treasury Select Committee. He replied that RBS bonuses (speculated to be £1.5 billion) would be based on the financial performance achieved, and market rates for bankers. This explanation however has not satisfied all shareholders, including some indirect shareholders (certain high profile tax payers), who take the view that if they own 84% of the bank they should be able to dictate a change in the bank’s bonus culture.
The RBS case study to date surfaces a strategic issue that perhaps gets at the heart of the matter – that in a firm there are different forms of stakeholder value. A common way of viewing a firm is that it consists of a number of stakeholders who form a coalition of interests. Although each stakeholder (i.e. customer, funder, suppliers, executives, and society at large) have different interests, the firm nevertheless acts as a vehicle for different stakeholders to interact in pursuit of their own agendas and needs.
However, we would take the view that some stakeholder interests are in direct conflict with those of other stakeholders and therefore actions by the firm which benefit one group of stakeholders can only be possible if other stakeholder groups are disadvantaged. This is not to suggest that the coalition that is the firm is a zero sum game; there may well be strategies that benefit all stakeholder groups. Taking into account the interests of all stakeholder groups is a monumentally difficult task. It is highly unlikely that a strategy will add value to one stakeholder group without necessarily impacting others. It is also highly unlikely that a strategy will add value incrementally to all stakeholder groups simultaneously. There will inevitably be tradeoffs. Navigating these trades offs is one of the major strategic challenges that Governments, Regulatory Authorities and Banks now face.
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