How Democracy Died at Royal Bank of Scotland

Last Updated Apr 30, 2010 6:31 AM EDT

Holders of nearly 400 million shares voted against Royal Bank of Scotland's controversial long-term incentive scheme. Almost as many shares were withheld.

Yet the bonus plan received 99.9 per cent approval. That shows RBS has a lot of shares, but because most of them are held by the government, no one else's vote ever counts.

This is not democracy. The state is using a block vote to impose its rule on a scale even the trade unions never did. Almost every resolution at the Scottish bank's annual meeting was passed with a 99.9 per cent approval making it look like a Saddam Hussein election.
The government faces a dilemma with its shares in the part-nationalised banks. Treasury minister Lord Myners, a former fund manager, has railed against institutions acting as "absentee landlords" and failing to vote. But with 84 per cent of RBS's ordinary shares, the state has made voting -- and thus the annual meeting -- redundant. It will always get its way, whether the minority shareholders vote with it or against it -- or don't vote at all.

In a concession to democracy the government limits its vote to 75 per cent of the issued equity -- but that is still enough to pass any ordinary or special resolution. Even if it limited its voting to just 16 per cent to put it on a par with the shares it does not hold, that would still be control in practice: if the holder of just one share spoils his form or forgets to vote, the state would have a majority.

So the hope for the minority investors -- the shareholders who used to own the whole of Royal Bank of Scotland -- is that the government considers their interest as well as its own before voting.

Ministers have handed the nationalised stake to the specially-created UKFI, and this nominally indepednent body decides how to vote. It no doubt considered the issues long and hard before announcing on the day of the annual meeting that it would back the board. But at that point there was no point anyone else voting. Most of the 47bn shares polled for all the resolutions were UKFI's.

Had the state agency voted against, directors would have been in trouble -- even out of office. They surely cannot be happy with such an undemocratic situation. They may be as arm's length from UKFI and UKFI is from ministers, but in practice, ministers control the bank and its board.

If the state stake is sold in tranches like previous large privatisations, this electoral anomaly will continue for years and in some ways will worsen. Selling 30 per cent to cut the government holding to 54 per cent would mean buyers acquiring shares with no voting power. Ministers should object to that as much as they rail at absentee landlords. A government that believes in protecting minorities should start with its banks.

(Pic: ell brown cc2.0)