Northern Rock Bank and Directors Remuneration

Some things dont just make sense. Northern Rock, a Nationalised financial institution in the United Kingdom has just confirmed that it paid its former Chief Executive Adam Applegarth who resigned amidst claims of taking high risk ventures, a sum of nearly £800,000 as golden handshake, £360,000 as pension top-up and he continues to enjoy cut-price staff mortgage. The Bank also paid its former CEO £5,000 towards personal legal fees and around £7,500 for his personal security at home.

Northern Rock sought government assistance from the Bank of England in September 2007. The Bank made a pre-tax loss of £167.7m in 2007 against profits of £626.7m in 2006(www.ft.com). This followed it writing-off £239.7m in bad debts and another £232.2m from investments linked to the US sub-prime property market which affected the Bank massively for not spreading its investments across many business lines.

Against the background of this mismanagement, it is sad to note that the taxpayers money has gone towards redeeming the troubled bank as well as paying its former directors as a tocken of appreciation for simply mismanaging the bank.

Meanwhile, job-cuts are looming, the bank has also intensified repossessions of properties under mortgage on its books, the exact time during which the bank is to repay the loan of about £25bn owed to tax-payers is very uncertain, the general economy has suffered leading into other banking institutions also asking the government for protection. Tax payers will have to incur alot of costs to lawyers, accountants, consultants and PR companies.

My concern is that terms of employment contract that allow directors to a huge payout following business failure is wrong as is absurd. It is the shareholders who suffer massive losses as these Executives are guaranteed their income for steering companies in hard waters. Its seems just 7 years after the collapse of Enron, most corporate governance regimes including the the self-regulatory UK’s Combine Code has alot of work to be done. The Sarbenes Oxley Act 2002, in the USA does place emphasis on CEO and CFOs responsibility to ensure that their risk management procedures are adequate otherwise they are punished by not paying out their bonuses.

If I were a shareholder of Northern Rock, I would be asking serious questions to the CEO and Finance Director to explain how a pre-tax profit of £626.7m in 2006 became a loss of £167.6m in 2007. Sadly, the former CEO has his career intact and his income unaffected and yet the shareholders have lost everything following the Nationalisation.