Draft Directors' Remuneration Report Regulations 2002

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Miss Johnson: May I advise the hon. Gentleman that he is not paid by the minute?

Mr. Waterson: Or even by result.

There are many legitimate concerns about directors' pay. We are perfectly happy and enthusiastic that full details of directors' pay packages should be available to shareholders, as they are already for such companies, and that shareholders should have every opportunity to comment on them, particularly if they are unhappy with them.

In a recent case, Mr. Jonathan Bloomer, the chief executive of the Prudential, was to have a package of some 18 million. However, the company was, as the Daily Mail reported,

    ''Forced into an embarrassing climbdown''

over the scheme. That had nothing to do with the regulations. It was to do with public pressure, media attention and the muscle of institutional investors. Barclays bank had a similar experience. Small shareholders protested at the annual meeting over the award to Mr. Matt Barrett of a 15 million three-year package. Those shareholders had no need of these regulations to make their point. Even if the regulations had been in force and they had had a vote, it would have made no difference.

5.39 pm

Dr. Vincent Cable (Twickenham): The hon. Member for Eastbourne made some fair points, albeit at extraordinary length even by the standards that we are getting used to in Standing Committees. I shall try not to take up much of the Committee's time. I welcome measures that seek to strengthen shareholder influence over senior executive pay. There clearly are abuses, and corporate governance needs strengthening.

I agree with much of the critique suggesting that the measures are relatively weak, and I wish to make two criticisms. The first has been rehearsed at some length, which is that many of the measures, but not all, are included in the listing rules. Of course, some companies are not listed, so it takes us further in that respect, and as the Minister explained, additional measures including voting at the annual general meeting are steps forward.

The second criticism?I shall concentrate my remarks on this?is that a lot of thought is being given to how to improve corporate governance in the round, and to ways of getting shareholders more proactively involved in setting the principles of pay and in setting the pay of major executives. That may come in later legislation, but not enough attention is given to it in the regulations.

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I return to the principles. I share the views expressed by the Government and the Opposition; we are not arguing about the principle that people should be paid substantial sums for important jobs. Most of us accept that sportsmen and entertainers should be given a large remuneration, and that people who head up big companies, who take big risks and are responsible for the livelihoods of tens of thousands of people should be paid well by international standards. I have no quarrel with that. However, abuses arise, and some have already been listed.

The most usual abuses occur when executives secure or arrange a package unrelated to performance, although some also get stock options?we know of cases at Barclays, Vodafone and others?but there are wider abuses. One of the most sickening pieces of financial news over the past few days was the titbit in the Financial Times at the weekend about the executive remuneration package for Jarvis, the rail maintenance company. Against the backcloth of Potters Bar, the associated uncertainties and the related cynicism of the company, its chief executive has been given a 60 per cent. pay increase. That kind of abuse leads to people demanding action.

What are the options? We are all agreed that it is not useful to try to deal with executive pay directly through regulation. We saw an element of that in the late 1970s, but it did not work and it has left a legacy of distortions. I did not realise until recently, from our lengthy debates on bloc exemptions and the car industry, that that peculiar problem originated from an attempt to control executive pay in 1978. The industry found a way of escaping the regulations by allowing executives to buy cars at discount prices, hence the chain of events that is still with us almost 25 years later. Direct regulation is not the way to deal with the problem. It will be better done through improvements to corporate governance, which the regulations are designed to achieve.

In some respects, we need to go rather further than the regulations. The first question is how to get shareholders more directly involved in setting executive pay. They need to be involved in a proactive way, not just vote at the end of the year on whether they approve existing pay awards or even of the company's pay policy, and there are ways of achieving that. I set out in an article this morning an idea that is gathering some support in the business community. I propose representative shareholders. I know that that is a difficult concept. What is representative? How does one assemble such a group? Who should vote for them? A representative shareholders group?a council?could be directly involved in setting policy and in approving and negotiating executive pay, not only at annual general meetings. It would not then be left to remuneration committees. That could be made to work.

We need to take a comprehensive look at non-executive rules. At the moment, remuneration committees, which will retain their basic authority under the regulations, are made up predominantly of non-executive directors, but we all know that that system often works extremely badly. There is a relatively small pool of non-executive directors, some

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of whom are recruited through headhunters, while others often come through the chief executive and may be old school friends. As it is a small pool, many non-executive directors are on far too many boards and do not focus on their responsibilities. They are not trained?frankly, many are incompetent?and they are easy meat in the hands of manipulative chief executives. We need a comprehensive reform of the system to ensure that non-executive directors who play an active role in companies, particularly on remuneration committees, are competent, focused and trained.

We may hear more about this, but I hope that company reforms will not simply be a matter of holding an annual meeting and passing a non-mandatory vote. I hope that they will acknowledge the fact that we need to think much more deeply about how remuneration is set, because the current arrangements are fundamentally unsatisfactory.

5.45 pm

Mr. Paul Marsden (Shrewsbury and Atcham): I must make a declaration?I am a director. Before Millbank gets too excited, however, I should add that I am a director of the citizens advice bureau in Shrewsbury.

I must echo some of the comments of the hon. Member for Eastbourne. Why on earth have there been such long delays in dealing with this issue? The Minister alluded to consultations that have been taking place since December, but there has been a consultation paper since July 1999?for three long years. As I said earlier, Labour was quite clear in 1997 that shareholders should give ''prior and explicit approval'' before pay packages are agreed. That seems to have gone out the window, and I would like to know why. If that is what has happened, let the Minister by all means seek to justify it.

I understand the point about not requiring an amendment to directors' pay packages and entitlements, but why can we not refer the issue back? Why can we not consider meaningful regulations, instead of the ineffectual ones before us? Meaningful regulations would mean that companies had to reflect more forcefully on matters if shareholders disagreed. Likewise, why can we not consider remuneration per director, rather than taking or leaving the whole package?

How will the success or otherwise of the regulations be judged? What is it in the regulations that will have made a difference in a year's time? What is it that will stop the headlines, mean that we no longer have great fat cat packages and allow companies to hold their directors to account through their shareholders? Those things simply will not happen because the regulations are weak and ineffectual and they will not stop the abuses. The good companies, which do the right thing, have nothing to fear, but I am afraid that the bad companies that the Government are targeting will carry on regardless. The regulations will not help in the process of justifying remuneration packages; they will simply allow abuses to continue.

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5.48 pm

Miss Johnson: I am grateful to hon. Members for their contributions. I am particularly grateful to the hon. Member for Twickenham (Dr. Cable) for his speedy and thoughtful comments, which covered many interesting points.

I shall run through some of the points that I have not already tried to answer in the debate, although I shall not run over ground that I have covered in interventions. First, I should make it clear that the listing rules are insufficient. Their scope is limited, and only UK-listed companies are covered. As I explained, the regulations cover a much wider range of quoted companies. The requirements are also limited, and there is only the single, nuclear option of delisting in response to a failure. Compliance with those requirements is not sufficient. The regulations are therefore not simply about bells and whistles, as the hon. Member for Eastbourne tried to suggest. They will provide a clearer linkage between pay and performance, and I think that we all accept that that is important. They will give shareholders better information and the right to have a say, which they currently do not have.

Secondly, what is new about the disclosure element of the regulations is the improved disclosure of remuneration policy, which is forward-looking and through which the shareholders' views can have a clear influence. The linkage to performance, the annual vote by shareholders and the comparisons that can be made across the piece with other relevant companies will allow clear measures to be presented. The regulations also provide for the explanation and justification of compensation payments, a performance graph and a vote on the whole report.

Those measures all go much further than what we have gone at the moment. The hon. Member for Eastbourne seemed to suggest on the one hand that the measures were cumbersomely regulatory, on the other that they did absolutely nothing and on the third hand that some very important points were covered by their remuneration report aspect. I am a little confused by Conservative policy on this matter, as one would be by the party's policy on many other areas at the moment.

The directors' report cannot be voted down at the annual general meeting?the accounts are laid and there is no compulsory vote. The hon. Member for Twickenham (Dr. Cable) talked about shareholder engagement, and we hope that there will be more engagement with shareholders. The vote is aimed at encouraging companies to sit down in advance of the annual general meeting to discuss pay and I entirely agree with the hon. Gentleman that it is important that there is much more general engagement. However, those who are trying to persuade their shareholders that they are doing the right thing and are involving them in discussions will want to engage more as a result of this process, and that is important.

In relation to the role of non-executives, the Government have commissioned a review by Derek Higgs. The consultation document was published on 7 June and the matter is still out for consultation. Through that review, Derek Higgs is considering many

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of the points that the hon. Gentleman rightly raised about the quality of non-executive directors.

On the timing of the regulations, we decided to think carefully about the combined code that was introduced in June 1998. The indication is that it has not made the difference that we wanted it to make, hence the introduction of the regulations at this time. The listing rules give no requirement to comply with the combined code, only an obligation to disclose whether the code has been complied with, or, if it has not, to explain why. Compliance in this critical area has been disappointing.

To clarify matters for the hon. Member for Eastbourne, he has misread the regulatory impact assessment. The RIA says there will be no change to

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the arrangements for private and unlisted public companies. Only listed companies are affected.

The regulations will bring a greater transparency to the setting of directors' remuneration. They will make companies more accountable to shareholders in this area and provide for the demonstration of the linkage of pay with performance and I commend them to the Committee.

Question put and agreed to.


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

Committee rose at seven minutes to Six o'clock.

The following Members attended the Committee:
Hurst, Mr. Alan (Chairman)
Atherton, Ms
Atkins, Charlotte
Cable, Dr.
Fabricant, Michael
Gibb, Mr. Nick
Hendry, Mr.
Hepburn, Mr.
Johnson, Miss Melanie
Mann, John
Marsden, Mr. Paul
Pearson, Mr.
Prosser, Mr.
Simpson, Alan
Waterson, Mr.
White, Brian

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