CBI CHIEF CALLS FOR PERSPECTIVE ON CITY BONUSES AND PRAISES PRIVATE EQUITY MODEL OF BUSINESS

The Director-General of the CBI today (Wednesday) called for a sense of perspective to be injected into the current debate about bumper City bonuses and the rise of private equity deals.

Richard Lambert said financial markets are not "a zero sum game" but generate major financial benefits for the UK. He described the bonus system, which has seen some City workers reap multimillion pound windfalls, as profit-share schemes which reward staff during the good times but not in the lean ones.

Mr Lambert also praised private equity houses and said they offer a compelling model to improve business performance which has seen companies return to the stock markets in far more robust shape than when they were previously listed.

The CBI Director-General acknowledged concerns about the impact of the vast wealth in the City of London on social cohesion in the UK. Many people feel uncomfortable about the disparity between the salaries of a few high-fliers and the large numbers remaining on low incomes, he said.

But the answer is not heavy-handed regulation or attacks on the City which risk driving talent overseas.

Mr Lambert was speaking after politicians had attacked the City and the financial services sector for creating a 'grotesque' wealth gap in the UK, and after trade unions had labelled private equity houses 'robbers and plunderers' interested only in lining their pockets.

He compared the City's star performers to Premiership footballers who can command equally vast rewards from employers eager to retain their the highly-portable skills.

He also praised the City for its success in growing its markets in bonds and derivatives, for attracting hedge funds to the UK, and in hosting so many flotations to the London Stock Exchange. It success has been such it has eclipsed New York in some aspects, he said.

But City finance houses and private equity need to do a better job in explaining the benefits they create, he said, or they could fall foul of clumsy attempts to curb them which might easily "kill the goose which is laying the golden egg."

The easily-transferable nature of financial services, with their virtual markets and ability to relocate to more favourable locations if business conditions turned against them, has been seen in New York and London recently, Mr Lambert pointed out.

In a speech at a business seminar at London's Dorchester hotel, the CBI Director-General said: "The fact that someone is making a big profit does not mean that someone else is making a big loss. In a growing economy, it is possible for everyone to benefit.

"City firms have created very large numbers of jobs. Total employment rose by roughly 10,000 to roughly 330,000 in 2006, and rises of a further tenth have been forecast for the current year. The success of these firms has brought wider benefits to the professional services sector.

"Three of the world’s four largest international law firms are located in London, along with large numbers of high value jobs in the accounting and consultancy sector. This is why Mayor Bloomberg [of New York] is so worried. He sees that relative weakness in the financial services sector could drain large amounts of wealth from his city.

"And the City has a broader impact on the national economy. Financial services' share of gross domestic product has risen strongly, reaching 8.5 per cent in 2005 compared with 5.5 per cent in 2001. The City generates roughly a fifth of all corporate tax revenues in Britain.

"The UK trade surplus in financial services is likely to have reached record levels of over £20 billion last year, and is keeping Britain’s current account of the balance of payments in reasonable shape."

Mr Lambert also addressed the concerns of the politicians about the social impact of such success, saying: "Social cohesion is something we should be concerned about. Most of us do feel uncomfortable about a society in which small numbers of people are generating enormous levels of wealth for themselves, while large numbers remain on low incomes.

"One answer is straightforward. Let’s chop the trees down, and tax those high earners out of existence. At least one person would throw his hat in the air with delight if you did that: New York’s Mayor Bloomberg.

"The more sensible approach starts with a sense of perspective. Profit shares and bonuses are at cyclically high levels: they won’t stay there forever. But City firms themselves need to get their act together. They should do a much better job of explaining the great value that their success brings to the UK economy as a whole. "

Mr Lambert cited examples of financial services firms working in their local communities, helping schools and families, and raising money, but added: "At the moment there’s an information vacuum. We read about the bonuses, but not about the other side of the story.

"In the end, though, the question is not whether we want to attack City bonuses. It’s about whether we want to sustain the success of London as one of the world’s great global financial centres. And I think the answer to that question is clear."

Private equity-backed companies account for one in five private sector jobs in the UK, Mr Lambert said, and offer a compelling economic model, with real potential to raise the efficiency of businesses both in terms of their operations and their financial structure.

"Since the whole aim of private equity investment is to sell on the asset at a profit after its underlying performance has been improved, managers have a real interest in the long-term health of their business," he said.

"If they strip out its assets and close down its factories, as the critics claim, they won’t have a viable business left to sell at the end of their holding period. The evidence, at least until recently, has been that companies refloated on the stock market after private ownership have performed better than have other new issues.

"According to data produced by the British Venture Capital Association, private equity-backed companies have created more new jobs in recent years than their publicly listed counterparts. None of this squares with the allegations of robbery and plunder.

"In most cases, businesses have emerged from private equity ownership a whole lot more healthy than they were when they went in."

Despite the impact of private equity being "almost entirely beneficial", with the scale of private equity deals increasing dramatically over the past year, Mr Lambert said: "It's right that there should be a debate about the growing impact of private equity on corporate ownership in the UK."

In particular there were legitimate questions to be debated around the spread of risk and the transparency of the sector, he said, although the latter is "more a matter of perception than of reality."

"Well-run companies – however they are financed – will make sure that their employees and suppliers are fully in the picture about how the business is doing, how its strategy is developing, and how it’s performing against plan.

"By and large, the people who need to know about the performance of the business are likely to be at least as well informed during the period of private equity ownership as are their counterparts in the publicly listed sector.

"But perceptions matter. And this represents a real challenge for all the private equity business houses. They should be leading the discussion about appropriate disclosure structures, and they should be doing more to develop common standards of reporting – for example, about their investment returns.

"They shouldn’t be leaving it to others to explain their real value to business, and to the economy more generally. They should be playing a more visible and active role in promoting corporate social responsibility.

"If they don’t start to adapt their approach to match their economic importance, then sooner or later someone is going to do it for them. And that would be a great pity, both for them and for the well-being of the economy as a whole."

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