Examination of Witnesses (Questions 180-189)
MR JOHN
CRIDLAND AND
MR ROD
ARMITAGE
15 JULY 2003
Q180 Mr Hoyle: That is the way you
see it—to use enforcement?
Mr Cridland: Yes.
Q181 Sir Robert Smith: Following
on from that, like most of the witnesses, you see shareholder
activism as the key to unlocking this problem, and you have cited
some examples already. Do you think the existing corporate governance
mechanisms are adequate to that task?
Mr Cridland: Yes we do. As you
will imagine, as well as contributing to this consultation we
have spent a good deal of the year working on the Higgs Report
and our concern was if we are not very careful we could set the
corporate governance infrastructure back, not that Mr Higgs intended
to do so by the law of unintended consequences. We think the initial
drafts of the combined code that came out of the Higgs Report
would set the case back because they would weaken "comply
and explain" and make it more prescriptive. The challenge
is to ensure that there is a strong and effective dialogue between
companies and institutional investors and other shareholders,
the old adage "it takes two to tango". We need the investment
community to come to the table a bit more actively but we need
the business community to do so as well. We have seen with the
ABI/NAPF guidelines of last December a series of constructive
contributions by the investment community. What we are now trying
to do in the consultations with our members is say what does business
stand for in this particular area? I think in the discussions
we have had with CBI members who are active on remuneration committees
there is an appetite for more guidance, not an appetite for more
prescription. They do not see a need for changes to the combined
code but they do want help because at the time when they are appointing
somebody they are trying to attract the best talent and get them
to move from a job they may already be doing which is successful
and satisfying them into a business where they have got pressure
on them from headhunters and a range of professional advisers
to do a deal which attracts the individual. In that cocktail it
is very important that they have clear best practice guidance
voluntarily adhered to and voluntarily offered as to what is a
sensible way to construct a contract.
Q182 Sir Robert Smith: In one aspect
corporate governance seems to break down this whole thing because
the 1980s was all about public shareholding and widening shareholder
participation and this latest debate is all about shareholder
activism. However, the witnesses we have had to date have said
now they are finally using the votes they are entitled to use
at shareholder meetings but they are not certain their votes are
being recorded. There is an audit trail to find out how their
votes have been used, especially proxy votes, and the whole system
seems to be very much in the 19th century rather than 21st century.
Do you think at least at that nuts and bolts level the most important
thing if we are going to shareholder activism is a transparent
voting system?
Mr Cridland: I think we do need
to make some progress in this area. I am conscious of the weaknesses
and I have listened to the evidence of other witnesses. I will
ask Rod in a minute to comment on that particular point. What
I would say as a generic point, though, is that whilst that is
important I do not think we should assume because there are these
problems with voting the current system is not working. The fact
that a remuneration committee's vote is not accepted at an annual
general meeting or is only accepted with a very significant sizable
minority against is a signal that no board of directors will ignore.
There is clear evidence of that.
Q183 Sir Robert Smith: You must have
confidence that the vote reflects the investors' wishes.
Mr Cridland: Indeed. At the macro
level we are already making progress but I accept there is an
issue of how votes are registered. Rod, do you want to comment
on that?
Mr Armitage: Yes, I was a bit
surprised to find in the evidence of the ABI and NAPF that there
was a feeling that in some circumstances they felt that perhaps
the votes that some institutions cast were not accurately recorded.
From my knowledge of the company voting system, because I was
also company secretary of my company, typically the company does
not do this, this is done by outside registrars who keep the shareholder
register. Recording votes cast is of course an extremely important
aspect of company policy because it is not just about corporate
governance, it is about when you get approval to go ahead with
a takeover or a merger. It obviously needs to be looked at and
discussed with the registrars who are, of course, highly automated.
All I would say is each shareholder gets a voting card which has
a bar card on the back. I appreciate that no technology is perfect
but if all the bar cards are returned it should be accurately
recorded.
Q184 Sir Robert Smith: I think it
may be when they bring together large numbers and they do not
add up to the same number, the computer normally thinks there
is an error somewhere. The other aspect of shareholder democracy
is should it not be automatic rather than advisory that the shareholders'
votes count in the sense that if they say, "No, we do not
like this package," it is thrown out? Should there not be
a way of building into the process the ultimate sanction of shareholders?
At the moment the shareholders' vote on the remuneration package
is in effect advisory. Should it not be that the contract is subject
to approval by the shareholders?
Mr Armitage: At the moment you
also have each individual director coming up for re-election and
that is another process that the institutions can go to where
they can vote against the contract or election of that individual
director. Most prefer not to do that because that is a very draconian
signal but they already have that in their armoury. I would have
said that is not necessary at the moment because they already
have that draconian action.
Q185 Sir Robert Smith: It is a slightly
less draconian way to be looking at the package itself rather
than whether the individual should have the job.
Mr Armitage: I do not think it
is necessary. We have got the new Government initiative with the
voting on remuneration policy. We are already getting some quite
high profile examples of that being voted against and companies
coming back and saying, "We will re-present it at the next
meeting." As I said, you have got the other end of the spectrum
with the individual directors. I think we should see how it goes
over two or three years and if necessary review it after that
period of time.
Q186 Chairman: We have spoken about
the Green Paper and this is just one amongst several documents
that have been going the rounds. There is the Company Law White
Paper, the Higgs and Smith Reviews and the Myners Report. Do you
think that taken as a group, as it were, that the whole will be
more than the sum of its parts in relation to executive remuneration
or do you think that we are getting weighed down with reports
and there is a lot of reforming clutter. What is the view of your
members?
Mr Cridland: I think we are getting
weighed down with reports. There is a danger of missing the point
as to why on this long voyage that began with Adrian Cadbury's
Report we have had success. We have had success because we have
had ownership. This is not and should never become a compliance
issue, a tick box issue. It has to be something which boards of
directors, chairmen of companies and investors believe is a sensible
and worthwhile tool. From Cadbury onwards we have maintained that
ownership, not by being complacent because every few years the
business community has had to move on another step, we have had
another report and that has happened. That was the danger with
Higgs—that something that was going through that had not
got the ownership of the broad business community. That would
have been the danger if Archie Norman's Bill had proceeded because
it is fine to initiate a debate in these areas but we need to
allow plenty of time for full ownership to be developed. With
the Higgs Report we are nearly there now. I think the work of
the Financial Reporting Council has been excellent. The way the
Government has dealt with this consultation has been very laudable
and I think something good could come of it. At the end of the
day I do think the business community needs a period of stability
now to implement these new rules, to reflect on what the media,
Parliament and other commentators are saying to them, and to reflect
that in the way that they operate over a further cycle of time.
I think we have about exhausted the appetite and usefulness of
further reports, other than of course your own!
Mr Berry: Very wise!
Q187 Sir Robert Smith: One last question.
One concern raised by Will Hutton, on his own or amongst others,
is that as we are busy and the spot light is on this issue of
remuneration he was suggesting in a few years' time we will be
doing a retrospective inquiry into the rebirth of share options
as a means remuneration that he felt would again distort the whole
executive pay issue. Is that something you are aware of?
Mr Cridland: In our consultations
thus far a very clear feeling has come through from the business
community that this needs to be looked at as a whole and we should
not allow any individual element of the remuneration package to
dominate the debate. It is certainly our view that the same broad
principles apply to each element of remuneration, whether it is
share options, shares generally, pension accrual, bonuses or standard
remuneration. We need to be clear at the point the contract is
signed what the entitlements are and we need to use terminology
that reflects what the payment is. You might need to buy out somebody's
existing rights but is it sensible to call that a "guaranteed"
bonus? We need to be clear which elements of the remuneration
package would be used for the purposes of severance if that eventuality
arose. We believe the key elements are the basic elements, not
the additional elements. We then need to disclose that and we
then need to adhere to it. I think those general principles—which
is where I see CBI members coming to, although our consultations
are not yet complete—will apply as much to share options
as they would to pensions, as they would to basic pay.
Q188 Chairman: Thank you very much,
gentlemen. That is very helpful. We were happy to put off our
meeting until this morning for you to come. Our report will be
out in the autumn and if we need any additional information we
will drop you a line.
Mr Cridland: Please do. We appreciate
your patience. Thank you.
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