Northern Rock

Northern Rock Name: Institution: Can high salaries be justified for the senior management of Northern Rock? Should senior management pay be regulated? Northern rock is one of the savings bank in Britain, and has been on the lime light all for the wrong reasons, especially in the wake of the economic recession of the year 2008. As a result of the mortgages subprime crisis that hit the bank, the government took the matters further and nationalised the bank to save it from collapse (Islam 2007). This was due to the lending rates that the bank had dived into, offering its customers mortgage loans that were worth more the the properties they were purchasing. Majority of the customers that were extended these loans had no regular way of servicing these loans, so when the recession hit the global market, the bank felt it the most as opposed to its competitors. One of the most contentious issues that have irrupted in the past is that of the senior managers being offered high salaries, even after the bank cost the taxpayers millions of pounds. Despite the fact that the bank made a loss of more than one and half a billion pound (£ 1.4 billion), it is now clear that the senior staff and some of the junior staff will enjoy some bonuses. Various sources on the news indicated that the juniors who would benefit from the pay rise, would take home more than ten percent (10%) in bonuses. This was in form of the loan notes and not cash and it would have to be deferred to the year 2010 (The Economist 2007). This rise was as a result of the banks’ ability to clear much of the loan that it owed to the government. For the senior officers in the bank the same is the case although, some of them were the ones that lead to the banks downturns in the year 2008. One way of looking at the bonuses is as a sign of gratitude to the senior management who have worked very hard to bring the bank back on its feet. These bonuses will thus be as a motivational factor to the managers so that they can even take the bank back from the government. Although the bank did bring losses that cost the tax payers lots of money, it is not practical to victimize the managers for ever (Parliament UK 2013). In reality it does of mean that the bonuses are a way of thanking the managers for the mistakes, but rather a means to recognise their efforts and encourage them to grow even further. As such it is only justifiable to increase of award the senior management bonuses as a sign of recognising their efforts. Equilaterally, it is important that the senior management’s salaries are regulated with reference to their performance levels. As the Northern Rock reported there is going to be some form of criterion that is going to be used to select the staff that are eligible for the bonuses. The government also mentioned that all those senior staff that had been involved in the run down would not be recognised. Looking at the figures that some of the top officials take home at the end of every month, some of them will take away as much as twice their salaries. For example those earning roughly 100,000 pound would have bonuses that amount to almost a quarter of the salaries, would see their income double (Wall 2010). Socially it is demeaning to the customers, who not more than five years ago got the the raw deal of having their capital investment fall as a result of sloppy financial management from the institution. It is for the same reason the public out cried, when the news that were apparently top secret came to the media. These are monies that the tax payers are contributing for better services which then end up with the people that are running the economy down. These salaries should therefore be regulated and the benefits of recognition to go to the people that actually deserve them. As much as the bank is doing much better, the regulation will help the customers to regain fully their confidence in the bank. This is because the customers would actually see the managers responsible for run down take the responsibility, while those that were not involved are recognised and rewarded (Lansing 2011). When the bank run down in the year 2007-08 a huge number of workers totalling up to a third of the workforce then lost their jobs. Most of these were from the lower ranks some of whom were working under contracts. Increasing the salaries using the bonuses only sours the morale in the work force (The Telegraph 2009). The bank is set to make even more losses in the future, before it can finally stand on its own, as such, there should be some form of check, be it legislative or otherwise to regulate the salaries that the managers are awarded. The financial services authority should therefore consider the implication that the bonuses are having on the customers and the general tax payer before awarding the managers a penny (Barrow 2011). This should also be considered within close quarters of the fact that the bank did cost England economically. Regulating the salaries of the top officials is not a form of punishment but is meant to increase the public confidence as well as reduce the amount of tax payers’ money the ends up in venture, where it is less likely to be paid back. Do you agree with the view of Milton Friedman that shareholders are the most stakeholders? According to Milton Friedman, the only social responsibility that was to be borne by any of the corporate companies was that of maximizing profits so as to increase the shareholders revenue. This theory became known as the stakeholder model of doing business. In this case, the organisation did not owe any responsibility to the society in which it was situated in but rather to the shareholders only (Sethi 2012). Although this model has come under very strong objection in the recent past from other business theorist, it still holds its own within some business circles. Most of these other theories that have come up against the idea that Friedman had, lean towards the idea of having some responsibility to the community in which it transacts it business. Friedman, through his theory called for the co-operations to maximize and personalize their profits, while the liabilities they accrued would be externalized. Edward freeman is one of the theorists that felt that even cooperates had to bear some of the responsibility to the stakeholders/ community. His theory became known as the Stakeholder Theory, which required the corporate sector to take their social responsibilities much more seriously (JeffSmith 2003). All the organisations depend on the social support that comes from without the organisation, which is from the stakeholders. It is not possible for the organisation to exist within the society as a single and self fulfilling entity without interacting with the stakeholders. It is therefore not morally upright to have an organisation that acts in total disregard of the stakeholders, especially where they maximize on the shareholders revenue at the expense of the stake holders. Today most of the companies have shifted their attention to the stakeholders, although it has come from the pressure that some of the nongovernmental organisations have put on them. Milton’s theory can hold much, in this era, as it is not possible to accord all the focus on the shareholders and leave out the stakeholders who form part of the most crucial support systems in the business sector. Friedman advocated for the limited liability of the companies while they focused on the sole purpose of maximizing the profits (Trotman 2012). It also allowed the companies to tax or imposes costs that were hidden from the customers, in a bid to increase the profits. From this point it is evident that the theory put forward by Friedman, advocated for the companies to shun away from the consequences of their actions as they tried to rake in as much profit as they could. Legislatively, the managers of the company do not have the right to impose taxes on the stakeholders. Taxes can only be imposed by the government officials and even then, this government will have to be first democratically elected to office. The managers do not have the right as well to spend the money that they collect from the stakeholders (Metro 2012). Taking such decisions is therefore a violation of the property rights. As such theory’s weakest support is the assumption that all that mattered to the companies was the fact they were making profits, while hiding from the responsibilities to the stakeholders and spreading the consequences to the same stakeholders. Any corporate organisation is build on the support it gets from the stakeholders and the shareholders, it therefore means that the theory put forward by Friedman is lucking and unbalanced. The social matrix is a complex entity and thus it is not possible to look at one of the elements of the social settings in isolation, such as Friedman tried to imply with the limited liability. This theory by Friedman is mostly an illustration of what ideas he had for the economy. In his view, the limited liability provided the businesses with the most enabling environment to conduct business with the sole purpose of maximizing profits (Cave 2010). However, he reality is that, even thought the organisations are single entities, they are part of a social system and can only benefit fully by embracing the social responsibilities that every other member of the community has, which also requires the organisations to embrace the liabilities that come with it. It is therefore not possible for the limited companies to have limited liabilities to the stakeholders while they put profit on the higher ground (Lexicon 2013). The other reason as to why the theory was in total disregard of the stakeholders was the fact that it was rested on the idea of private property. In his argument, Friedman felt that private property belongs to the owners; in this case the company belonged to the shareholders and therefore their sole property. It therefore was upon them to manage the property as they so wished to make more profit. If they so wished to employ someone to do it for them, such as a manager, he/she too was obligated to operate the business in a manner that would profit the owners. As such the managers worked for the shareholders are they are the owners of the business and not the stakeholders. The stakeholders should therefore not mingle in the affairs of the private property, which in this case is the limited liability company (Living MBA 2010). The liabilities are basically a drain of the profits that the company has made; as such it was important that these liabilities were externalized as they ate away at the shareholders’ dividends. This however is not as absolute as the theory would have people believe. There are costs that are borne by the stakeholders for the companies to thrive economically, as such, it is not fitting that the shareholders are more important than the stakeholders. Use any moral theories to critically evaluate the actions of the seni...