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Session 2001- 02
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Delegated Legislation Committee Debates

Draft Directors' Remuneration Report Regulations 2002

Tenth Standing Committee
on Delegated Legislation

Wednesday 10 July 2002

[Mr. Alan Hurst in the Chair]

Draft Directors' Remuneration Report
Regulations 2002

4.30 pm

The Parliamentary Under-Secretary of State for Trade and Industry (Miss Melanie Johnson): I beg to move,

    That the Committee has considered the draft Directors' Remuneration Report Regulations 2002.

Directors' pay is at the centre of the debate on effective corporate governance. Directors have an obvious conflict of interest on the issue, and there is clearly public concern about that. The Government have made it clear that they do not support high rewards for mediocre or poor performance. Too often, directors are seen to have been paid excessive amounts when a company has performed badly.

Michael Fabricant (Lichfield): The Minister is very generous in giving way so early. She uses the word ''seem'' in relation to not performing well.

Miss Johnson: The word was ''seen'', not ''seem''. My diction may not have been perfect.

Michael Fabricant: The Minister's diction is probably perfect; it is probably my auditory system that is imperfect. I should nevertheless like to ask a question. She relates a director's performance to how a company has performed in a particular year. However, as she knows, many companies, especially in high-tech industries, must take a much longer-term view than just one year. Is there not a danger that a director's performance may be judged on one year's activities, whereas his activities may bear fruit three or four years hence, especially in, for example, long-term marketing or research and development?

Miss Johnson: Shareholders will have an opportunity to decide whether the time frame that the hon. Gentleman suggests is appropriate for judging such matters. Given his early enthusiasm for the debate, I trust that he will be here throughout to hear the detail and points made.

As I was saying, too often directors are seen to have been paid excessive amounts when a company has performed badly. That is unacceptable to employees who are losing their jobs, and it damages the reputation of business in the wider community.

Mr. Nigel Waterson (Eastbourne): Will the Minister give way?

Miss Johnson: I should like to make a little progress.

Mr. Waterson: It will save time in the long run.

Miss Johnson: I shall give way to the hon. Gentleman, but I feel that I am being a little silly.

Mr. Waterson: I would not allow the Minister or anyone else to suggest that she is being silly.

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Before the Minister goes on to set the tone of the debate, I should like to ask whether the speech was written before the recent dramatic fall in the stock market. As she will appreciate, many of the people to whom she refers have packages that depend on share options, for example, the value of which will have dropped dramatically, as has happened in the case of ordinary shareholders.

Miss Johnson: In proposing the regulations, the Government are taking a view not on remuneration, but on transparency, openness and accountability to shareholders.

We decided to take action to strengthen the corporate governance framework for several reasons. Shareholders need to be fully informed to make their own judgments and to play their proper role. The regulations will increase transparency through greater disclosure of remuneration policy and will strengthen the accountability of boards to their shareholders by shareholder vote.

The Government recognise that it is important for our major companies to be able to attract, retain and motivate high-calibre directors to sustain and improve the United Kingdom's productivity and competitiveness in the global economy. We have consistently made it clear that we are not in the business of becoming involved in setting directors' pay in individual companies. We want to create an open and effective framework in which pay will be set and disclosed, given the conflict of interest that directors face and the consequent public concern. More than six years ago, the Greenbury report set out three relevant fundamental principles: accountability, transparency and performance linkage. The Government think that those are the right principles, but we do not think that the best practice framework has achieved adequate compliance with them.

The purpose of the regulations is to improve transparency, accountability and the linkage of pay to performance in the setting of directors' remuneration. That will be achieved by amending schedule 6 of the Companies Act 1985 to require companies to produce an annual directors' remuneration report, and by giving shareholders the right to vote on that report through the addition of new section 241A. Some of that is not new, as we are merely transposing existing listing rules requirements into the 1985 Act. However, the improved disclosure of remuneration policy, the linkage to performance and the annual shareholders' vote are all new.

Mr. Waterson: Will the Minister say what will be the precise effect of the regulations if the shareholders vote against the directors' remuneration package report at a general meeting?

Miss Johnson: That would indicate the shareholders' concern about how the process had been conducted and the nature of it, which would encourage the company to act in greater compliance with the shareholders' views in future.

Michael Fabricant: Will the Minister give way on that point?

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Miss Johnson: Let me answer the hon. Member for Eastbourne (Mr. Waterson) first. The vote would be purely advisory, and it would therefore have no legal effect, but a strong opposing vote would send the board a powerful signal that it would be unlikely to be able to ignore.

Michael Fabricant: So, a detailed document has to be prepared. That will take time, particularly for a company that is not performing well because it is investing for the future, which takes resources. Apart from offering encouragement and powerful signals, the bottom line is that nothing would come of such a vote, even if there were an indictment by the shareholders, because the regulations are not mandatory.

Miss Johnson: I am certainly not saying that. The hon. Gentleman is getting it very wrong. Obviously, any decent company will have to produce a forward-looking remuneration policy in any event. It makes good sense to have such a policy. The requirement for a vote means that companies will consider remuneration matters carefully, as well as considering the directors' remuneration awards from the previous financial year, which is not a great deal of work in respect of producing a report. Companies will want to respond to the message sent out by the shareholder vote. A non-advisory vote could cause significant legal difficulties with respect to a director's contractual entitlements, as Opposition Members will appreciate.

Mr. Nick Gibb (Bognor Regis and Littlehampton): The Minister has cited Greenbury. I take it that she has also read the Cadbury report, which is the first in that series of reports on corporate governance. It contains a paragraph that says?I paraphrase?that the danger of implementing ever more rules and codes of conduct is that companies will feel that they have to abide by them. The more rules and codes we have, the greater the tendency to obey them but not go beyond that.

Does the Minister agree that we have reached a stage in our corporate governance, company law and regulatory regime at which directors just obey the rules and do not go beyond that by asking, ''Is this issue right or wrong?''? People will end up doing things that are probably wrong simply because of the proliferation of rules, which make them take their eye off what is right and wrong.

Miss Johnson: The rules being proposed do not, in many cases, exist elsewhere. I do not know whether the hon. Gentleman is trying to unpick Cadbury or Greenbury or anything else, but we are endeavouring to ensure that there is greater compliance. If people simply stuck to the rules, they could use the framework that is in place. Suggestions have already been made for more transparent and open ways to deal with these matters. When compliance is not working, we try to inject that transparency with at least the spirit of much of what has been called good practice in corporate governance over the past few years.

Mr. Gibb: We are having an interesting and important debate. The more that such rules are developed, the more companies will be involved with compliance. While they think that all they must do is

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comply with rules, the next stage is to look at loopholes in those rules. We have seen that with Enron and with WorldCom. We want business to take to a wider view and to ask, ''Is this issue right?'', not simply devote hours of the compliance office's time to complying with the rules. Given the proliferation of rules and codes of conduct, we have departed completely from the notion of what is right. All the Minister is doing with the regulations is adding to that problem. Does she understand my point?

Miss Johnson: I see the hon. Gentleman's point; I simply do not agree with it.

When the Conservative party was in government, it did not argue that we should abandon Greenbury, Cadbury or the other corporate governance reports. There is non-compliance with the best practice principles. We support such principles in other areas, and I regret that the hon. Member for Bognor Regis and Littlehampton (Mr. Gibb) is referring specifically to the accounting front in relation to post-Enron issues, because the United Kingdom takes a principles-based approach. As he appreciates, the United States of America has a rules-based approach.

We are not deviating from our support for the principles-based approach for accountancy. We have supported those principles, but they are not working in line with good practice among companies. The purpose of the vote is to encourage debate between the shareholders and the company, and that should take place at an early stage rather than at an annual general meeting.


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