Leading article: Ethical capitalism must start with shareholders

The Prime Minister will achieve little by appealing to executives themselves

Barely a day goes by at the moment without a politician laying claim to "ethical capitalism" and pronouncing on the measures needed to institute it. Notwithstanding the political jockeying, their efforts are to be welcomed. The financial crisis has exposed instabilities and injustices which are neither desirable nor sustainable. The problem is that the remedies being proposed are still tilting at the wrong target.

There is certainly no shortage of ideas. Ed Miliband thinks there is mileage in curbing hidden surcharges, cracking down on energy companies and tweaking company takeover rules. For Nick Clegg, the priority is employee ownership, as a mechanism for boosting social rather than purely commercial aims. Next week, Vince Cable, the Business Secretary, will set out reforms to control executive pay. All are ideas worthy of consideration and all may have a part to play. But, so far, they are tinkering, at best.

Yesterday, it was the Prime Minister's turn. In a speech larded with rhetoric about the Conservatives' unique role as the guardian of social responsibility, David Cameron set out his vision for a "better economy" that is "fair as well as free". He talked of a "popular capitalism" with wider economic participation, of tougher banking regulations, and of changes to tax rules. All well and good. But the looming furore over the pay of Stephen Hester, the chief executive of the Royal Bank of Scotland, will test his ideas to political destruction.

It is hard not to be outraged at Mr Hester's likely remuneration. Although the share price has dropped by more than a third, and the bank has cut thousands of jobs, the boss is in line for a bonus of around £1m on top of his £1.2m salary. Given that RBS is majority-owned by the taxpayer, surely here is Mr Cameron's opportunity to confound the sceptics and prove his commitment to a newly moral capitalist system?

The problem is that the job that Mr Hester was hired to do – to shrink a bloated, over-indebted behemoth down to a more manageable size – almost guarantees a falling stock price. And the task is a complex one, requiring expensive skills. Arguably, in cheaper, less competent hands, the banks' owners stand to lose a lot more. That is not, of course, to suggest that Mr Hester's astronomical pay should not be challenged. Far from it. But, in a culture of corporate excess, there is little the Prime Minister can do without further risks to taxpayers' money.

There's the rub. In practical terms, there is not much politicians can achieve by appealing to executives themselves. If the business leaders meeting at the World Economic Forum in Davos next week volunteered to scale back their remuneration, en masse, then perhaps there might be progress. But they are unlikely to do so, and Government cannot force it upon them.

There is, however, another route. While individual executives may be unable to change an unpalatable corporate culture, even at the behest of the Prime Minister, such issues do fall within the remit of companies' owners. If managers are overpaying themselves, or pursuing unduly aggressive, short-term strategies, it is up to shareholders to do something about it.

Mr Cameron has not missed the point entirely. He spoke yesterday about "empowering shareholders" and using the power of transparency to shame executives into restraint. But he is pitching at the wrong crowd, blinded by a Tory vision of plucky small businesses and individualist investors. Spreading participation in the economy more widely is a laudable aim. But the vast majority of Britain's shares are held by institutional investors that are either too idle or too much part of the same corporate culture to wield their enormous power as they might. If Britain's politicians are serious about ethical capitalism, it is here that they should be focusing their attention.