Who really runs Ireland? The question was thrown into sharp relief last week as the government and AIB squared up on the issue of banking reform. For the past 12 months, AIB has been on notice that regime change and a reduction in top salaries was the price it would pay in return for taxpayers bailing out the sector with fresh capital and taking the risk on the €54 billion National Asset Management Agency (Nama). The changes were supposed to reflect the lowered — and precarious — status in which AIB now finds itself. They also reflected the reality that the state effectively owns 25% of the business and that the bank is on a life-support machine funded by the public purse.

AIB, steeped in controversies such as the disastrous acquisition of Insurance Corporation of Ireland in the 1980s and a rogue-trader scandal a decade later that threatened its demise, has more experience than the government when it comes to toughing it out. So that is precisely what it did when responding to the demands being made of it. Instead of being grateful that €3.5 billion of taxpayers’ funds had been diverted into its coffers to prevent its collapse following a series of irresponsible property loans, Eugene Sheehy, AIB’s chief executive, displayed no urgency in vacating his office. When he did finally announce his departure date, the real drama began.

Remarkably (incredibly, even) the board’s search for an external candidate had not managed to identify a single banker in the world who was prepared to work for €500,000 a year, the salary cap imposed by the government on chief executives employed by financial institutions who avail of the state guarantee. Instead, the only suitable candidate was deemed to be Colm Doherty, the head of AIB’s capital markets division and the person the bank had intended to be Mr Sheehy’s successor all along. Mr Doherty is now group managing director while Dan O’Connor, another insider, is executive chairman. In terms of banking reform this makes the situation at AIB worse than the one that prevailed under the old regime.

This was an issue on which the opposition should have gone to war last week. Instead, they got sidelined by a bogus argument about the €630,000 a year that AIB intended to pay Mr Doherty. When it eventually emerged that Mr Doherty would settle for €500,000, Brian Cowen read into the Dail record a press release prepared by AIB, hailing this outcome as a victory. It is nothing of the sort. All the attention, as AIB had hoped it would, has been focused on Mr Doherty’s salary and apparent climbdown. The bigger picture is that AIB has succeeded in getting exactly what it wants: the internal candidate it wanted to head the bank has now assumed that role.

In addition, the appointment of Mr O’Connor as executive chairman flies in the face of best corporate governance. The chairman is supposed to be the independent voice on the board, the shareholders’ eyes and ears when it comes to monitoring executives. He (or she) is not supposed to be part of the executive club. Dermot Gleeson, AIB’s former chairman and one of the best non-executive directors in the country, has been replaced by an official with extended executive powers.

Mr Cowen, seemingly unaware that he has been outmanoeuvred, is happy to endorse this arrangement. He may think that public anger will recede because the government has “won” the public-relations battle on salaries. The only winner is AIB, which has ensured that no outsiders will stalk their executive suites, lifting the lid on the extraordinary lending practices in which it has engaged in recent years.

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