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Also Sprach Evelyn

Created:
14 May 2008
Written by:
Alistair Blair

The opinions page in last Friday's Financial Times was a humdinger. Stephen Fry pleaded for readers to set their faces against "ghettoised television channels fulfilling some ghastly and wholly-insulting demographic profile" and to repel "the barbarians at Auntie's gate". In one of his occasional post-retirement pieces, Samuel Brittan advised that financial crises are an inevitable aspect of capitalism.

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And to complete an impressive hat-trick, Sir Evelyn de Rothschild - retired chairman of the UK Rothschild bank - offered an analysis of where the current financial crisis came from and how to avoid the next one. Under the headline, "Ethical standards must be restored in finance", the article concluded that "Ethics is not only a question of acting correctly… it is also a matter of not trying to avoid regulation even if one thinks one can get away with it." I had to read that twice and am still not crystal clear on its meaning, but I think I get the sense of it, which was also embedded in specific proposals to restore discipline to the financial sector.

Sir Evelyn said shareholders, "whether institutions or individuals", should "make themselves more alert to how appointments of senior executives are made and how remunerations are set". This proposal overrates the influence of individual shareholders. I have no doubt - have you? - that individual shareholders would be very willing to bash down cosy appointments and generous remuneration, if such gestures were not rendered hopeless by the block vote of institutions. But his heart is in the right place. Perhaps it is difficult for a Rothschild - by mindset individual, although by wealth, institutional - to understand the emasculation of ordinary individual shareholders.

Criticising pay in general was insufficient. Sir Evelyn also fired a broadside against annual bonuses… "it is frightening that some of the bonuses that have recently been paid .. have been awarded with so little consideration for shareholders and without taking into account the efficiency of the people who received them".

Next, he proposed that problems inherent in the financial instruments which have caused the current mayhem "must be brought to the attention of senior executives much more forcefully by accountants". Sir Evelyn is certainly right to be dubious about the role of accountants, but his attack should be directed at auditors rather than accountants in general.

Moreover, although the auditor's first port of call should be the senior executive, the effect Sir Evelyn desires will only be achieved when it is established that the auditors' doubts must routinely be aired with shareholders in a more grown up way than is possible under the established black or white routine of the audit report. If he reflected further on the matter, Sir Evelyn might recognise that auditors, being in thrall to senior executives by virtue of being nominated by them, will usually find it difficult to report to anyone about shortcomings of understanding or any other category exhibited by those executives.

Sir Evelyn also cited two other issues requiring reform: the rating agencies and financial institutions' enthusiasm for making billions of dollars worth of bets "in parts of the world where they have only a tiny presence".

It would be intriguing to know the views of other Rothschilds on these matters. Is Sir Evelyn's distant nephew, hedge fund manager Nat Rothschild, troubled by the bets his sizeable hedge fund routinely makes in distant parts of the world? Does distant cousin, Baron David de Rothschild - who merged Rothschild Paris into Rothschild London a few years ago and now runs the combined operations and seems to be well on the way to buying out Sir Evelyn's branch of the family altogether - think his peers and rivals' annual bonus policies are too reckless? Does Nat's father, Lord Jacob Rothschild - who 30 years ago chose exile from NM Rothschild & Sons rather than to share power with Sir Evelyn - believe that institutional and individual shareholders should make themselves more alert about the appointments and remuneration of senior executives?

Somehow, I doubt it, three times over. I would suspect that they would each regard the world as a messy place which throws up opportunities advantageous to well-placed people with talent and resources. And that it is not their business to suggest systemic reforms. So Sir Evelyn should probably not be regarded as a spokesman for the Rothschilds as a whole, who have always harboured much diversity under a single name.

Nevertheless, the idea that the thoughts sketched out by Sir Evelyn are harboured anywhere in the senior levels of the Rothschild clan, should be a signpost for policymakers.

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Alistair Blair is a past winner of the Business Writer of the Year Award, and has worked in investment banking and fund management.

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