The decision to sell off state-owned shares in RBS had a particular resonance when it emerged last week.
I happened to be reading Colin Mayer’s 2014 book Firm Commitment, an exploration of corporate governance and the company. In chapter three, Meyer discusses governance in the context of UK banking.
He makes these observations of the 2010 Independent Commission on Banking, and its failures:
Its remit was not to address the fundamental deficiency of the banking system, namely to finance high-risk small and medium-sized enterprises. Its proposals to ring-fence retail from investment banking were designed to protect and preserve what were regarded as key components of banking from another financial crisis. In the process it was hoped that SME lending which was included in the ring-fence would be enhanced, but there was no specific recommendations to this effect and, by requiring activities within the ring-fence to be low risk, it was destined to have exactly the opposite result.
With much of the British banking system in public ownership following its failure during the financial crisis, this was a golden opportunity for the government to restructure British banking in a form in which it would perform a valuable social function.
A governance issue
Many will be recalling those words as George Osborne arranges for the sale of RBS shares, passing ownership back, more than likely, into the hands of large institutional shareholders.
Put aside the economic argument for the moment. The decision by the chancellor also tells us something about the attitude towards who should “govern” an institution as large as RBS.
In effect the chancellor’s decision affirms a belief that such an important institution is best controlled under what Mayer might describe as the “shareholder value” model. This is a model Mayer criticises. Osborne’s decision is as much a governance decision as it was “economic”.
Mayer is not alone in criticising this model. The Financial Times‘ chief economic commentator Martin Wolf also believes it is faulty, as he revealed at the International Corporate Governance Network conference in London two weeks ago. A debate about a different model of governance for RBS might have led to a different conclusion about how it might best be used in the future.