THE Government is finding out that owning just 25% of a major commercial entity confers very little benefit but an awful lot of hassle.
Having suffered from a lack of influence on the business decisions of Aer Lingus in recent years — since selling the balance of shares — the Government is faring no better after its purchase of a similarly sized shareholding in AIB.
The latest controversy at AIB involves its decision to award a 3% pay rise to about 5,000 of its 13,000 workers in the Republic, most of whom are lower paid staff.
AIB has done this despite seeking firstly to implement an across-the-board 5% pay cut, which the unions successfully rejected. Instead, the Labour Court recommended implementation of the remaining part of a previous pay deal despite the fact that the bank’s circumstances have changed adversely and dramatically (and those words scarcely describe adequately what has happened at AIB).
The decision by AIB to grant the pay increases, if not entirely across the board, seems to have enraged the general public, especially those who have lost their jobs or have had to take large pay reductions. Members of the public sector, fearful of pay cuts in the December budget, have not been quiet either, pointing out how state money, which is in short supply, has gone to rescue the banks and, in doing so, to paying higher wages.
It has been noticeable too how the main banks which have fallen under state control have not moved to reduce their workforces significantly. Walk into a bank branch most days and it is noticeable how much quieter they tend to be than even a year ago. But while the banks might like to reduce employment levels they might be finding it hard to do so because of the costs involved.
Of course the process by which the banks have fallen under state control — other than at the fully nationalised disaster that is Anglo Irish Bank — has not been completed yet. The state owns just 25% at AIB and Bank of Ireland and will not end up with majority stakes until NAMA comes into being. At that stage the losses that will result from the transfer of property loans to NAMA will destroy the remaining capital in the banks and this will have to be replenished from state money. While the Government is determined not to take full ownership of the banks it almost certainly will have majority stakes. That potential has given the Government more power than its 25% shareholdings suggest, but different banks have appreciated this position in different ways. Bank of Ireland managed to get its own internal appointment as managing director approved last year when, incredibly, Richie Boucher was promoted from his position as boss of the domestic retail division.
Boucher — as I outline in my book Who Really Runs Ireland — had been prominent in spoofing to an Oireachtas committee in mid-2008 that all was well at his bank. While his predecessor, Brian Goggin, was sacrificed for his failings, Boucher must take his share of responsibility for the reckless lending that went on. Instead, one of the authors of the crisis has been put in charge of managing it (because to claim he can solve it would be too much indeed). Not surprisingly, many people who were following these events were outraged at the appointment, although it was left to wealthy tax non-resident Dermot Desmond to make it a public issue.
Finance Minister Brian Lenihan stayed silent and caught the flak for this. Now he is determined not to make the same mistake again at AIB. More than six months ago the Government effectively forced the resignations of AIB chairman Dermot Gleeson, chief executive Eugene Sheehy and finance director John O’Donnell. Gleeson and O’Donnell are gone, but Sheehy remains in place because the bank and the Department of Finance are engaged in a major stand-off about his replacement.
AIB wants an internal appointment, believing that Colm Doherty, a main board director for many years and head of what’s called its capital markets division, should be promoted to the top job. It says he is the best man for the job and that, in any event, no suitable external candidate wants such a big and difficult job at a capped salary of €500,000, hard as that may be to believe. Lenihan, probably fearing the public backlash that would result from Doherty’s appointment — which would send out the signal that it’s business as normal at AIB — is refusing to endorse the promotion. He has tried twice, unsuccessfully, to persuade the bank’s part-time chairman Dan O’Connor — who formerly worked as head of the European financial division of the giant US company GE — to take the job as acting chief executive. There have been rumours that AIB board members have threatened to quit if their choice does not get the job. The stand-off continues and Sheehy remains in charge.
There is history at play here. When it comes to dealing with AIB, governments are advised to sup with a long spoon. There may be relatively few people in the Department of Finance or in politics who remember the state’s bailout of AIB in 1986 when losses at its disastrous acquisition, Insurance Corporation of Ireland, nearly bankrupted it. Within months of the rescue, AIB dished out big dividends to shareholders. AIB was the single biggest banking facilitator of tax evasion by Irish residents over a lengthy period and ended up making a massive settlement with the Revenue Commissioners as a result. It has a colourful history of being caught ripping off its own customers.
In more recent times AIB’s arrogance during the boom and subsequent bust contributed enormously to the economic crisis we now face.
WHILE it did not engage in the criminality that many believe took place at Anglo Irish Bank, for example — and which may result in prosecutions — it was equally reckless when it came to its lending because of its scale and importance in Irish society. When its problems became apparent it was slow to acknowledge them and deal with them, not just maintaining a brave face but paying enhanced dividends it could not afford and then, brazenly and wrongly, saying it would rather “die” than sell fresh equity. When the crash came in September 2008 it was AIB, along with Bank of Ireland, that had to go and beg the Government for protection, resulting in the now infamous bank guarantee.
Since then AIB has astounded the Department of Finance with its apparent ingratitude in private, notwithstanding its public declarations of thanks. The issue over the appointment of a new chief executive is a real and big one.
Doherty may be unlucky — as he may well be the best person for the job and even if he was a main board director, and therefore shares responsibility for the mess, his own capital markets division has remained highly profitable — but the state, via the Government, has practical and political points it needs to make.
AIB needs change and to be changed. That has to come from the outside and that’s why the Government needs to be seen to win the stand-off over who becomes AIB’s next boss.
Matt Cooper’s new book, Who Really Runs Ireland?, deals extensively with the collapse of the Irish banks and in particular with AIB’s role in creating the economic crisis.
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