There is little doubt that the UK is heading for yet more financial instability. This instability may be exacerbated by the flawed remuneration structures prevalent in the City.
These structures promote unnecessary risk taking, with investment professionals driven to pursue personal financial gain, sometimes to the detriment of shareholder value. It is time for action to steer the financial services industry back on course.
The existing bonus structures at many financial companies can encourage greed by putting significant financial incentive in front of employees. This attracts individuals motivated simply by personal financial gain and perpetuates a cycle whereby individual reward comes above the responsibilities owed to shareholders.
In turn, the pursuit of these gains may lead investment professionals to make unnecessarily risky investments. As a consequence, there is a heightened risk of market volatility as the investments, somewhat inevitably, falter. Ultimately, the irresponsibility of these so-called investment professionals leaves shareholders (and sometimes taxpayers) footing the bill.
You only need look to the fines levied at Deutsche Bank for the sale of mortgage backed securities ($7.2bn (£5.7bn)) or the fine levied at Countrywide Financial for defective mortgage loans ($1.3bn) for easy proof points of the price of irresponsibility. I would hazard an educated guess and say that in most cases where fines have subsequently been levied by regulators, the individuals involved were meeting their key performance indicators (KPIs) and were being rewarded for this behaviour.
Having spent over half a century in the investment industry, I have learned to reward the values most vital to our business’s long term success. In my view, flexibility, motivation and honesty are the most desirable characteristics in a professional who is responsible for managing client funds and delivering shareholder value.
KPIs, meanwhile, create a culture that has led companies into trouble. Instead of individual targets, we use our share price, on a total return basis, as our core KPI. This team approach mitigates greed and holds individuals accountable to each other. This has facilitated excellent long-term returns for shareholders and clients.
As City of London Investment Group has consistently outperformed our peers, I feel confident in encouraging others to join in and move away from the out-dated KPI-driven culture.
If the financial services industry as a whole is to prove it can change its spots and rebuild its reputation, it is vital that individual KPIs are seen for what they are: simply justification for excessive bonus payments. Once this becomes the consensus, the KPI structure will be overhauled. That is not to say there is an easy one-size-fits-all approach. Indeed, such an approach would be short-sighted.
The rules that are developed should be designed to encourage responsible behaviour and entrepreneurialism in small and large companies alike. The regulatory environment should be flexible to enable the success of companies of every size and encourage them to thrive. A smaller organisation with more line-of-sight management and day-to-day managerial involvement needs to be treated differently by regulators than a large multinational.