Prem Sikka has been one of the most consistent, and most consistently right commentators on accounting, tax and financial responsibility issues over the last fifteen years or so.
Prem's now written on the Northern Rock fiasco, and the point he makes is, as ever, highly pertinent. He says:
As the financial turmoil continues, there should be a serious scrutiny of who is responsible for safeguarding people's savings and investments.
The reason?:
The UK law requires that companies, including banks and insurance companies, should be run primarily for the benefit of their shareholders. So if directors invest in risky financial instruments and their gambles pay off, shareholders receive higher dividends and stock market appreciation of their shares. Directors receive fat cat salaries, but savers pick up measly returns. If the gamble fails and the company teeters on the edge of collapse then savers stand to lose their savings. Yet they have no voice in the way companies are governed.
His remedy:
The current financial woes should encourage reforms of corporate governance. Savers at banks and insurance companies should elect directors and auditors. They should have the rights to receive information, question directors and auditors. Directors and auditors should owe a "duty of care" to savers. Their interests should not be subordinated to the interests of shareholders.
His conclusion:
Only democratisation of the financial industry holds out the possibility of durable reforms.
I agree.
Disclosure: Prem and I are both members of the Association for Accountancy & Business Affairs.
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You could put your money in a mutual.
I think that there are a number of reasons for preferring to put money in a building society: for example, the reluctance of customers to move accounts inhibits competition, so market mechanisms do not work.
The agency conflict with regard to risk, is, yet another reasons to prefer building societies, or other non-conventional ownership (the Cooperative Bank, owned by a cooperative society, is another example).
If Northern Rock’s members had not chosen to convert it from a building society, they would have had precisely the protection Prem Sikka suggests. They chose a short term windfall profit instead.