Ericsson pays bonuses for losses

ERICSSON spent last year racking up losses of almost £1.5bn and removing 20,000 employees from its payroll. The company's finances are sufficiently stretched that it has been forced to ditch the dividend.

Any reasonable analysis would conclude that 2001 marked a low point in the group's fortunes. Yet Ericsson's board has calculated that 3,000 executives deserve a bonus. The payments have been triggered because Ericsson ended the year with cash in its balance sheet. How it did so and what this signifies about the state of the company are irrelevancies to the lucky executives. The important fact is that the money was there.

It is a shame the directors who devised this scheme did not apply the same ingenuity to the running of Ericsson's core businesses. On Thursday, Nokia proved that it is possible to make money from phones so Ericsson's failure to do so cannot be blamed solely on the depressed state of the industry.

Institutional fund managers, investor trade bodies and international government departments have spent years trying to ensure that the interests of the board are aligned with those of shareholders. Directives have been issued and guidelines have been published.

Yet somehow, however badly the shares perform and however many workers lose their jobs, the people at the top seem to manage to line their pockets. Ericsson proves this point more boldly than most.

Weasel words

TRANSPORT Secretary Stephen Byers put Railtrack into administration four months ago. Its status is not expected to change for the rest of the year. Byers' preferred successor to Railtrack is the so-called company limited by guarantee (CLG), chaired by former Ford boss Ian McAllister and advised by UBS Warburg, coincidentally the firm behind the original privatisation structure of British Rail in the 1990s.

One of the key questions facing the new team is how the railways will be financed. Around £34bn of private sector money is needed, including £8bn or so in the immediate future. It is supposed to come largely from institutional fund managers, who are not minded to put up the cash without a guarantee that it will be repaid.

Chancellor Gordon Brown is dead against this because such a move would imply putting Railtrack's debt on to the Government's balance sheet. Those close to the negotiations say much of the debate between the CLG, UBS and Byers' officials involves how to offer a guarantee without officially appearing to do so.

This smoke-and-mirrors exercise could drag on for months, but in the final analysis investors will not lend unless they have some comfort from the Government. Squabbling over weasel words seems an irresponsible waste of time and money.

SIT situation

SCOTTISH Investment Trust is one of Britain's largest and most prestigious funds. It manages more than £1.5bn of assets and is chaired by Sir Angus Grossart, a colossus of the Edinburgh financial community. SIT ran into a spot of bother last year, involving US vulture fund Sierra Trading and a group of British insitutions led by Hermes.

The dispute was eventually settled but in its annual report SIT reveals that £300,000 plus VAT was paid to investment bank Noble Grossart for advice on the Sierra fracas. Noble Grossart is chaired by none other than Sir Angus Grossart. Sir Angus, 64, has been chairman of SIT since 1975.

Some shareholders may question SIT's choice of financial adviser last year and wonder whether it put the rest of the board in a rather delicate position.

SIT is a big fish in the investment trust world but a minnow in the wider corporate arena. The principle of a company appointing as financial adviser a firm headed by its own chairman is, however, a dangerous one. SIT's annual meeting on Monday may be livelier than the trust expects.

Assessment

THE City is about to be deluged by the banking industry reporting season. Ten banks will be delivering their results for 2001 and, more importantly, their predictions for 2002.

Credit rating agency Standard & Poor's recently declared that 211 companies with debts of more than £80bn defaulted on their obligations last year. The figure was the largest ever and almost three times higher than the previous record set in 2000.

Against this backdrop, British banks have stayed relatively serene. Their confidence comes after heavy investment in top-quality risk assessment software designed to ensure they do not lend money to customers unlikely to repay it.

S&P has access to the best risk management systems in the world, yet it failed to spot or even vaguely predict many of last year's defaults. This could mean S&P analysts need to improve their techniques. Or that banks' blind faith in their own systems should be treated with a touch of scepticism.