Marcus Evans Group | Worldwide Headquarters | American Offices | Latin America | European Offices | African / Asian Offices

Cameron is coming for the crony capitalists – whoever they are

Everyone agrees with the prime minister that ‘the market should be made to work’. The tricky bit is identifying exactly where that isn’t happening

Let’s improve markets, not undermine them, said David Cameron on Thursday, because markets, when they work properly, “create a direct link between contribution and reward, between effort and outcome”. What’s more, Conservatives are best placed to pursue this vital work because they “get” the free market and “know its failings as well as its strengths.”

So please tell us: are the bonuses that Royal Bank of Scotland may shortly award its top executives an example of fair rewards for hard work and success? Should we celebrate that John Hourican, head of RBS’s investment bank, may collect £4m? After all, his division has made £10bn or so of profit in the past three years and the state’s 83% stake in RBS would be even deeper under water without those gains.

Yet, if we’re supposed to looking at outcomes, surely we can’t ignore the ugly fact that RBS shares are worth half what we paid for them. What’s the right response here? Rip up Hourican’s contract or lock him into a new one?

The prime minister ducked the RBS question, which was concentrated on the potential £1.5m bonus for the bank’s chief executive, Stephen Hester. The point, though, is the same: appealing for a version of capitalism where effort is fairly rewarded is the easy bit; the tricky part is making it happen by identifying specific failures and remedies.

The government will try to move onto the latter ground next week when business secretary Vince Cable unveils his blueprint for reforming boardroom pay. “We need to make the market work and we will do that by empowering shareholders and using the power of transparency,” said Cameron.

Fine principles in theory, but isn’t it odd to invest so much faith in shareholders to make the market in the services of top executives work efficiently? A few institutions do indeed “get it”, as Cameron might put it: Fidelity Worldwide received a name-check after speaking out this week against examples of “over-generous” and “over-complex” pay. But Fidelity’s stance is not typical – it was speaking for itself, not for its industry.

Indeed, an alternative version of the passage of Cameron’s speech about “financial wizardry” in the City might have included a pop at the fund management industry itself. The size of the commissions it earns from savers strike many outsiders as miraculous when set against the miserable returns suffered by stock market investors over the past decade. Are they a suitable case for a blast of competition to advance the cause of real capitalism? Don’t bet on it: fund managers – the institutional shareholding club – currently represents the government’s best hope of curbing boardroom excess elsewhere.

Indeed, for a speech that called for “more competition” as a key ingredient in making a free market work properly, there was a glaring lack of detail on where the principle should be applied in practice. Ed Miliband has named his own targets – rail companies and energy companies were singled out on Thursday – and Cameron will be obliged to spell out his thinking in those and other fields if Thursday’s speech is to bite. The Competition Commission has not been overburdened by referrals under the current government.

Surely, it might be said, everyone can applaud Cameron’s warm words for Nick Clegg’s “John Lewis economy”. Yes and no. Knocking down barriers that lie in the way of the creation of employee-owned businesses is a reasonable ambition, even if the chairman of John Lewis itself says the model “is not right for everybody”.

But Cameron is on slippery ground in encouraging staff to become shareholders in the companies they work for. Shares go down as well as up – as the majority owner of RBS should know – and it’s a foolish employee who stakes his financial well-being on the success of his employer.

In short, there were few surprises in Cameron’s attempt to claim rights over that prized patch of political land called “responsible capitalism”.

He should be judged on what he identifies as cronyism in action and his broad-brush statement offered few clues. Were any crony capitalists frightened by yesterday’s speech? Of course not: it was impossible to tell which vested interests Cameron wishes to confront. © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds