Operate before drug wears off

The beleaguered life insurance industry was administered a big, fat dose of sedative yesterday, courtesy of the financial services authority. The so-called stress tests, which govern whether individual insurers are solvent or otherwise, have been relaxed. There was a deep breath of relief across the sector, and share prices said as much.

Previously, insurers had to test their financial strength on an assumption that the entire stock market was 25% lower than it actually was on any particular day. This always carried the risk that in a big, bad bear market (like the one we are in right now), compounded market falls would cause insurers to start selling equities on a near-daily basis to protect their capital ratios. In extreme circumstances (which we are not yet in), there was a chance of a vicious downward spiral: stocks would fall, insurers would sell, causing prices to fall further, triggering renewed forced selling.

The move to a 90-day moving average valuation of the market smooths price volatility. Effectively, the FSA has allowed the insurance industry to reduce the size of the cushion it maintains between assets and liabilities. That might sound like a bad thing, but the alternative - selling-fed share price declines - threatened much more damage.

This is a sensible move by the FSA. But it does nothing to eliminate much more deep-seated problems. Insurance company balance sheets are dark, subjective places. When the financial weather is sunny, nobody bothers to delve inside; but when the weather is really bad, nobody dares to do so.

Despite a week of turmoil, the FTSE 100 ended last night higher than it began on Monday. Short-term pressures may have eased, but the authorities still need to get deep inside this opaque industry - before the drug wears off.

Blame game


In its mission to stop corporate book-cooking in America, the securities and exchange commission, the powerful regulator that had been asleep on the job, is now making clear that it expects the chief executives of every big company to sign off the accounts - in person. This amounts to a public statement of where the buck stops.

While it has been said repeatedly that no determined fraudster can be stopped, this will certainly make the identification of scapegoats easier.

The SEC is working hard to restore its credibility. Its head, Harvey Pitt, who is under fire on all fronts, will not rest until he can say that the culprits have been found and penalised.

In Britain, where we have been reminded by Sir David Tweedie, the accountants' accountant, that we should not be resting on our laurels, it would be far from easy to ensure that any wrongdoers would be singled out.

Despite the arrival of the all-singing, all-dancing FSA, Britain's regulatory system still lacks the power to track down wayward individuals inside companies. The FSA can take action against individuals only if the company they worked for has also been found to have offended.

Rogue executives are not within the FSA's grasp. They do, however, fall under the wing of the Department of Trade. That is not very comforting.

Near enough


And so to the latest example of scandalous executive pay.

It may not amount to the most outlandish piece of fat cattery, but Boots' latest round of boardroom bonuses stands out for its sheer cynicism. According to the company's annual report, chief executive Steve Russell was awarded a £173,000 bonus last year for missing the company's profit target and coming bottom of its own peer-group comparison.

Mr Russell's salary, benefits and bonuses for the year to April amounted to £764,000 - an increase of £132,000 on the previous year. That is relatively modest when compared with other FTSE 100 remuneration packages. What sticks in the craw, however, is a £173,000 short-term bonus payment for "almost meeting" an unspecified profit target. (The target, you understand, is commercially sensitive.)

Reading further into the annual report, it emerges that in a peer-group comparison with 10 companies operating in similar markets - including Debenhams, GUS, Kingfisher and WH Smith - Boots "achieved position 10".

Asked why Mr Russell and six other directors were sharing £625,000 in short-term bonus awards for "almost meeting" a profit target, a Boots spokesman said the bonuses were based on a sliding scale. That is, executive directors were entitled to some of the bonus for coming close to meeting the target; more of the bonus for meeting the target; and all of the bonus for exceeding the target.

"If, say, it becomes clear at the beginning of the year that the profit target is not going to be met," argues the Boots spokesman, "some people might say it is not be worth trying for the rest of the year. That is why the bonus works on a sliding scale - so you always have something to play for."

In other words, underperforming executives are paid bonuses on top of their basic pay in the hope they do not underperform even more.