Outlook: Exit the FSA's Sir Howard Davies, pursued by a bear

Sir Howard Davies was in too much of a hurry at Davos yesterday to give reporters his considered views on the continuing market meltdown and disappeared before he could be collared.

But the word from the Financial Services Authority's Canary Wharf redoubt was that we don't really have to start panicking until the FTSE 100 drops below 3,000. That is the point at which some of the bigger life companies become forced sellers of equities once more and so fuel the vicious cycle which has seen the London market lose half its value since the peak in December 1999.

They have sold off so many shares in the past 18 months – £25bn worth is the FSA's estimate – that even the sharp fall with which London has begun the new year is not yet testing solvency margins. Suggestions that a big life fund was selling shares very heavily were again rumoured but not confirmed.

So the big boys look alright for the time being. Either they still have decent reserves or were able to tap the market for more capital before the tap was turned off.

The FSA is much less sangu- ine about a lot of smaller life companies for whom 3,500 was the trigger for the alarm bell to start ringing. The City regulator is now writing to them demanding to know what their action plan is and, if they have not got one, making a few suggestions.

These consist of taking in less business, closing to new business altogether or reducing bonuses. Alternately, they could cut the dividend and/or attempt to secure new capital. Since many of life funds which the FSA is worried about are mutual organisations, the latter two options are not readily available. So it looks quite likely that there will be a lot more pain to come in the months ahead and, quite possibly, a number of failures in the life sector.

As for everyone else, we can only watch and wait and reflect on the old adage that shares never decline in a straight line, even in the worst bear market. Do they?

Golden goodbyes

What's this? A Tory MP demanding a crackdown on fat cat executive pay-offs. And not just any old Tory MP either. The call comes from Archie Norman who, unlike most of his fellow MPs, knows what it's like in the rough and tumble world of business where you can lose your job at any moment and not just every five years.

Mr Norman's Private Member's Bill to end "payments for failure" has some impressive backers but it has not got the support of the Government and is therefore destined to fail. Which is rather a pity.

Labour had a lot to say about boardroom pay when it was in opposition and a very effective weapon it proved too in attacking the soft underbelly of the Conservatives and the excesses of some of their business allies.

Since being elected, however, the issue of executive pay is the dog that did not bark. The ongoing company law review has almost nothing to say about the subject and the new legal requirement for listed companies to put the remuneration report to an annual shareholder vote is a classic case of shutting the stable door after the failed executive has bolted. Meanwhile the pay-offs roll on, from Marconi and EMI to British Energy and Cable & Wireless.

Mr Norman's Bill would stop failed executives parachuting out with fat pay-offs leaving shareholders and employees to pick up the tab, by allowing the board to take performance into account when agreeing severance pay, irrespective of what it says in the contract of employment.

The Secretary of State for Trade and Industry, Patricia Hewitt, responds that even fat cat directors have human rights and this could trample all over them. She is also worried that the golden goodbye will be replaced by an upsurge in golden hellos.

She prefers to rely on codes of voluntary conduct and moral exhortation and is now promising yet another consultation on executive pay which will in effect kick the issue into the long grass for the foreseeable future.

The truth is, however, that the process of mitigation means that very few failed directors are paid what their contract of employment entitles them to. Rather, the board takes the contract and negotiates a figure downwards.

It is sadly also a fact that, when push comes to shove, few companies are prepared to take an ousted director to court since a combination of a clever lawyer and contract law means they will almost certainly go down in a blaze of bad publicity. It is much easier to settle quietly and then tell shareholders six months later.

In an ideal world, the answer would be to ensure that a director's contract was designed to avoid payment for failure when it is first drawn up. That is easier said than done. In the meantime, at least Mr Norman has come up with an alternative. If Ms Hewitt thinks it will not work, then the onus is on her to come up with a solution which will.

BAE must prevail

Tony Blair has discovered a Third Way of doing everything, and that seemingly includes building aircraft carriers. Time was when the Ministry of Defence would simply send out a tender and get back a quotation with the supplier's profit margin added on to the build cost. The contract would be awarded and the kit, be it a boat, a fighter jet or a tank, would eventually arrive – usually late and over-budget.

But then the Cold War ended and defence budgets began to shrink and cost-plus defence contracts went out of the window. They were replaced by fixed-price contracts put out to competitive tender and run by what have become known as prime contractors.

Because margins were tight there was no money to be made out of welding bits of metal together, so the important thing was to get the prime contractorship – the clever, value-added job of marrying the platform, be it an airframe or a ship's deck, with its weapons and communications systems.

The carrier contract is, however, breaking entirely new ground. Mr Blair and the MoD seem to want to share out the prime contractorship somehow between the British bidder BAE Systems and its French-owned rival Thales.

The compromise might keep Thales happy. It might even help Mr Blair to get the French on board when the bombs start falling on Baghdad. But in all other respects, it promises to be a messy compromise doomed to end in failure.

Politically, it will be presented as the solution which safeguards British jobs since both bidders have already guaranteed that the two carriers will be 100 per cent UK-built. In reality it will guarantee that the contract runs into trouble. Indeed, it will almost certainly make Nimrod and the Astute submarine – currently £1bn over-budget and counting – look like model procurement programmes.

In the same way that you can only have one Prime Minister, and one Chancellor for that matter, you can only have one prime contractor. And if that isn't BAE then Mr Blair will have a lot of explaining to do.

m.harrison@independent.co.uk