Enterprise and Regulatory Reform Bill

Memorandum submitted by CBI (ERR 01)

1. The CBI is the UK's leading business organisation, speaking for some 240,000 businesses that together employ around a third of the private sector workforce. With offices across the UK as well as representation in Brussels, Washington, Beijing and Delhi the CBI communicates the British business voice around the world.

Executive summary

2. The Enterprise & Regulatory Reform Bill needs to support UK growth. All measures in the Bill should be judged against whether they boost business confidence, free up businesses from unnecessary regulation and avoid creating new barriers to growth.

3. Executive pay reforms should ensure that shareholders have the information and powers to hold boards to account. This means that binding shareholder votes on executive pay should be on the principles of forward-looking pay strategy, not on the details of individual packages, and that votes should respect the democratic principle, with the majority of shareholders carrying the day in determining strategy. In addition, the CBI believes that binding votes on exit payments would prevent firms from removing underperformers quickly; reforms must take account of the wider corporate governance framework; and the role of remuneration committees should be strengthened by companies and investors.

4. Tribunal reform is also a key priority for business. We think that changes are needed to help employers and employees reach mutually agreed settlement and that early conciliation will help parties to resolve disputes earlier. Imposing financial penalties makes no contribution to better dispute resolution and, more generally, a more radical approach is needed to resolving workplace disputes.

5. The competition reforms in the Bill can underpin UK growth by ensuring the new Competition & Markets Authority has a clear focus on competition, and voluntary notification for mergers is maintained not undermined. In addition, the Bill’s proposal to remove dishonesty from the cartel offence is unworkable, and the Bill misses an opportunity to de-regulate small mergers.

6. On regulatory reform, sunset clauses are a welcome addition to the regulatory apparatus and the extension of the primary authority scheme will bring greater consistency for companies across the UK. However, a more ambitious approach is required if the rising tide of business regulation is to be stemmed.

CBI submission

7. The Enterprise & Regulatory Reform Bill needs to support UK growth. All measures in the Bill should be judged against whether they boost business confidence, free up businesses from unnecessary regulation and avoid creating new barriers to growth. CBI priorities for the Bill are focused on executive pay, employment tribunals, competition, regulatory reform and the Green Investment Bank.

Executive pay reforms should ensure that shareholders have the information and powers to hold boards to account

8. The CBI believes that executive remuneration must always be squarely linked to performance. High pay is only ever justified by outstanding performance; high rewards for mediocre performance are unacceptable; and failure should never be rewarded.

9. These reforms should focus on ensuring that shareholders have the right information and powers to hold Boards to account for both performance-related and fixed reward. This means that the proposals in the Bill must work with the grain of the current corporate governance framework, helping shareholders to fulfil this role, without turning them into micro-managers. These should be supplemented with measures to improve disclosure and transparency around pay practice, and the CBI will work with the Government as proposals in this area are crafted for delivery outside the confines of the Bill.

10. The version of the Bill currently before the House lacks detail on executive pay and substantive additional clauses are expected in Committee stage. The CBI’s key priorities are as follows:

Binding shareholder votes on executive pay should be on the principles of forward-looking pay strategy, not on the details of individual packages

11. The introduction of binding votes represents a substantial shift, and will alter the significance of casting a vote on pay packages. The shareholders’ role is to oversee boards and hold them to account, not to micro-manage them. The Bill should therefore ensure that shareholders are able to engage with the proposals they are being asked to vote on effectively, but not take over management functions from the board. A principles-based approach would enable shareholders to approve the pay framework they desire while retaining flexibility for firms to attract and retain the best talent.

Votes should respect the democratic principle

12. As a matter of democratic principle, it is important that the views of the majority of shareholders should carry the day in determining strategy. This principle should apply to executive pay as it does to all other issues of company strategy. Requiring a higher threshold to set pay policy than the election of directors – or even to agree a takeover – is disproportionate.

13. Moving beyond a straight majority would leave companies vulnerable to being held to ransom by a minority of activist shareholders, either on pay strategy or through using the threat of veto on pay to leverage change in other areas of the business strategy. The Bill must therefore ensure that binding votes are contingent upon a simple, straight majority vote.

14. Communication with shareholders in the event of a significant minority vote is a priority for firms, and a large proportion have strategies in place already. This communication is a matter of good corporate governance, and a legislative approach would not be appropriate.

Binding votes on exit payments would prevent firms from removing underperformers quickly

15. The imposition of a binding vote on exit payments would be deeply impractical. It would require firms to call an EGM, a costly process which takes time, when the interests of the company and its owners lie in moving an individual on swiftly and bringing in their replacement. We believe that the only practical way to deal with exit payments is through establishing transparent pay policy, improved disclosure and an advisory vote at the next AGM.

Reforms must take account of the wider corporate governance framework

16. The UK is widely seen as a leader on corporate governance. Fundamental to the success of the UK governance model is the clarity of role between shareholders and Boards. This clarity ensures that Boards are accountable to shareholders for their actions, but remain free to get on with the day-to-day running of the business, while shareholders have the power to make their views known and to assert them through the annual election of all board members and through advisory votes on pay. Many of these reforms are bedding down, and we have seen shareholders asserting their views in the first half of this year. Further reforms should not unbalance the current arrangements to the detriment of both firms and their owners.

The role of remuneration committees should be strengthened by companies and investors

17. The remuneration committee (RemCo) plays a vital role in the governance of executive pay, working as it does as a pivot between the executive management team and owners. It brings a detailed understanding of company strategy and matches it with independence gained from the non-executive status of the majority of its members.

18. Given the essential role that RemCos play, the challenge is to look at how their role can be strengthened. This can be done through their accountability to shareholders and their independence from management. Tools to hold RemCos to account are already available – through annual elections – and would be increased through the addition of votes on future pay policy and on implementation.

19. The cross-overs of individuals between different firms’ boards are small and extremely rare when it comes to RemCos. Only 20 current FTSE 100 executive directors sit on the RemCos of 18 other FTSE 100 firms, and in none of these cases is the arrangement reciprocal. The key is for firms to take a lead in ensuring they have a suitable balance of skills and experience on their RemCo. Firms must do more to ensure they have sufficient diversity on their RemCo to foster robust and challenging discussions, but tokenistic legislative measures – such as the banning of sitting executives from serving on other companies, or mandating employee representatives on the committee – would not further this diversity, or the quality of discussion.

Tribunal reform is a key priority for business

20. A core of employment rights creates a floor to the labour market. This helps to support constructive and stable employment relationships, benefitting employers and employees. However, on top of this core there is an increasing body of additional rights which has grown significantly in recent years.

21. More than two-thirds of the UK’s labour laws have been created or significantly added to since 1997. This has led to 67% of firms citing employment regulation as a threat to the competitiveness of our labour market .

22. However, the biggest confidence killer for firms – particularly SMEs – is the tribunal system which enforces these regulations. The daily experience of the system is that it is overly-legalistic, costly, slow and inconsistent. Action to address these failings is essential if we are to bolster hiring intentions in a challenging economic environment.

Changes are needed to help employers and employees reach mutually agreed settlement

23. Disputes between employer and employee are best resolved before it escalates outside of the workplace. The earlier a dispute is resolved, the quicker both parties can move on. Where continued employment is not possible, a swift and equitable resolution is preferable to having to go through the lengthy and costly tribunal process. A settlement agreement gives employers certainty and employees compensation which they believe is fair.

24. However, there is a legal obstacle which prevents this type of agreement being used more widely. A decision by the Employment Appeal Tribunal in Mezzotero -v- BNP Paribas (March 2004) means that employers cannot resolve workplace disputes by settlement agreement without first initiating a formal dispute. If an employer initiates a discussion on the possibility of settlement before dismissal then they run the risk of this conversation being used as evidence of constructive dismissal.

25. It would be much easier to reach an agreement to settle a dispute privately if this hurdle was removed and settlement could be discussed before parties were entrenched in a formal dispute. Steps including publishing a template agreement could also help smaller firms to use agreements which have been used predominantly by larger firms. For this reason we support the changes proposed by the Secretary of State on 11 June 2012.

Early conciliation will help parties to resolve disputes earlier

26. Employers strongly support ACAS’s role as an independent conciliator in workplace disputes. Where it has not been possible to negotiate a private settlement, ACAS assistance can be the difference between resolving a dispute quickly and spending at least the next 12 months bogged down negotiating the employment tribunal system.

27. In addition to reducing the number of claims that require a tribunal by facilitating settlement, early conciliation has the potential to further reduce the number of claims. In the evaluation of ACAS pre-claim conciliation (PCC), more than seven in ten participants said that it helped them to understand how the law applied to their claim, and made them aware of its strengths and weaknesses. This will help parties to make a better informed decision about the relative merits of private settlement or pursuing an employment tribunal claim, further reducing the number of employment tribunal claims. Although reducing the number of claims in this way is not the primary purpose of ACAS intervention, it is an additional benefit which in weeding out weak claims will make a significant contribution to a better functioning system.

Imposing financial penalties makes no contribution to better dispute resolution

28. The Bill includes proposals to impose financial penalties at judicial discretion on employers that lose at tribunal as a means of reducing the cost of the system. This is entirely inappropriate as tribunals are a form of grievance resolution, not a criminal court. The government has stated that it is not its intention to move towards a general costs-recovery policy because tribunal is not intended to be a ‘loser pays’ system. Yet the proposal for financial penalties creates a system where if the employer loses then they will pay. This would create further imbalance within the system and is wholly inappropriate. Furthermore, the threat of even higher costs at tribunal will increase the pressure on firms to settle even where they are advised that they are likely to win.

A new approach is needed to resolving workplace disputes

29. The employment tribunal system is the single biggest confidence killer for those looking to take on staff. However, changes so far only tweak the system. Much more radical change is required. The problem lies in the fact that tribunals have been turned into court rooms and inconsistencies from region to region and judge to judge are facilitated by a lack of transparency and accountability.

30. Oversight of the tribunal system should be the sole responsibility of the Department for Business, Innovation and Skills (BIS). The legal culture of the Ministry of Justice means that it is incapable of overseeing an informal system along the lines of that recommended by Lord Donovan when employment tribunals were set up. Returning sole responsibility to BIS would bring about an important change of culture for tribunals which would be focussed on effective dispute resolution rather than rigid legal process. It would also open the way to more radical reforms designed to speed the system and cut costs for users and the taxpayer.

Competition reforms should underpin growth

31. The proposed competition reforms are an opportunity to put in place a fast-acting regime that delivers timely outcomes for business, critical for restructuring and creating new jobs. The reforms should look to deliver predictable outcomes, so companies can invest with a high degree of certainty, and have a proportionate approach, where market interventions match the scale of the perceived problem.

The Competition & Markets Authority should have a clear focus on competition

32. The UK has one of the most highly regarded competition regimes in the world, being robust and free from political interference. Outcomes based on clearly-drafted competition law are more predictable than subjective tests and underpin business confidence and investment. The CBI supports the objective of eliminating duplication and overlap between the Office of Fair Trading (OFT) and the Competition Commission (CC) by establishing the CMA: speedier and more efficient processes will reduce costs to business. However, the Bill proposes that in certain cases the CMA will be able to consider the public interest in addition to effects on competition, which could blur what should be the CMA’s clear focus on competition. Business will be concerned that this does not mark a retrograde step and believes public interest tests should remain a decision for the Secretary of State.

Voluntary notification for mergers needs to be maintained not undermined

33. Mergers and acquisitions are an important way for companies to achieve growth and for assets to be re-allocated more efficiently across the economy. It is important that pro-competitive mergers are not subject to unnecessary and costly delays.

34. The Government has rightly recognised that a major strength of the UK regime is that notification of a merger is voluntary, allowing companies to react swiftly to a business opportunity. It has identified the costs to business of switching to mandatory notification as between £67m-£237m. However, the proposals in the Bill substantially undermine the voluntary regime by enabling the CMA to freeze a merger and even undo it, coupled with swingeing penalties.

35. We believe these proposals reflect excessive concern about problematic completed mergers. Recently there has been on average two cases a year, representing less than 0.2% of mergers, so the proposed solution is disproportionate and amounts to over-regulation.

36. Although parties can be advised their merger is not problematic they will be unlikely to take the greatly increased risk of proceeding if the completed merger can then be undone. The effect will be an excessive number of notifications, which will incur significant merger fees, and result in unnecessary costs and delay. The result could effectively be the introduction of mandatory notification by the back door at a substantial additional cost to business. This proposal will assuredly not contribute to growth and investment and should be dropped.

The Bill’s proposal to remove dishonesty from the cartel offence is unworkable

37. The proposal to remove dishonesty from the cartel offence risks criminalising a wide range of standard commercial transactions, in areas such as distribution, mergers and banking. The proposed defence of publishing details of the transaction in the London Gazette is considered unworkable by business and likely to create a chilling effect on normal business activity.

38. Although certain restrictive agreements are permissible under competition law, employees will be placed in an uncertain position and will seek publication to protect themselves from possible prosecution. This could create a conflict with their employer who will have a legitimate interest in maintaining confidentiality.

39. Instead of the OFT having to establish dishonesty, this proposal transfers the burden to business. Companies will now have an additional administrative task of publishing their commercial agreements in the required form. This is not a task which needs to be performed by business in any other EU country.

40. If dishonesty is to be replaced then there needs to be another test which clearly marks out conduct that is subject to prosecution. The onus should be on the competition authority to prove the offence, not on business to show that it has a defence.

41. The offence should not be one of strict liability and should require a high degree of criminal intent so that only the worst forms of cartel are criminalised. As an alternative to dishonesty, we believe an intention to deceive merits further consideration.

The Bill misses an opportunity to de-regulate small mergers

42. We believe there should be a simple measure based on turnover which would allow small companies to merge and restructure without the threat of costly intervention by the CMA. Small companies do not have the financial and management resources to justify responding to an in-depth CMA review which would cost £50,000 - £100,000 or more, in addition to the proposed minimum £40,000 fee.

43. The risk alone of an in-depth review, with a smaller risk of a Phase 2 review, can lead to small and defensible mergers being abandoned at an early stage.

44. On its own reports, the OFT has reviewed mergers where the turnover of the acquired company was around £100,000. We are also aware of a merger of two small companies, where the target had a turnover of £500,000 and with the OFT narrowly defining the share of supply, there were legal fees of over £100,000 in dealing with the OFT investigation.

The government should seek innovative means to stem the growth of regulatory burdens

45. Businesses recognise that regulations play an essential role in the proper functioning of markets and the economy. Among other things, regulations serve to tackle market failure and information asymmetries as well as ensure standards of quality and safety of professionals and products.

46. However, regulations do not come without costs for business or government. Regulations place on businesses not only the policy costs of meeting the rules, but also the administrative cost of bureaucratic processes to ensure and demonstrate compliance. Further costs can come from familiarisation and legal advice as well as uncertainty and ‘over-compliance’. In the field of employment law alone, the burden of employment regulation is now £12bn higher per year than it was in 1998 – which equates to nearly 1% of GDP, or more than 400,000 jobs at median earnings.

47. While the removal of some regulations in the bill is a welcome step, these are relatively minor issues and there is much further to go. If ministers wish to achieve their stated aim of leaving office with fewer regulations than they started with, they must be more ambitious.

Sunset clauses are a welcome addition to the regulatory apparatus

48. An essential part of the regulatory process is the review and assessment of existing regulations. However, the National Audit Office found in 2009 that post implementation reviews had only been undertaken for half of the regulations where policy makers had committed to do so. There are therefore many regulations on the statute books where no assessment has been made of their effectiveness or necessity, but where businesses are still required to comply with them.

49. Sunset clauses, which set an expiry for regulations, unless the government takes action to keep them in force, will help address this lack of review. Despite the commitment made by the Prime Minister in 2010 to include sunset clauses, it is not clear how many have been implemented. The CBI recognises that this is, in part, due to the legal difficulties the Bill is addressing and we welcome the clarification of the law.

50. We hope to see much more extensive use of the powers, and in future, sunset clauses should be the default option on all regulations, unless ministers are able to demonstrate good reason for not using them.

The extension of the primary authority scheme will bring greater consistency for companies across the UK

51. The primary authority scheme has provided greater clarity and consistency to local authority inspections. The CBI welcomes the government’s proposals to extend the scheme to trade association members, which will enable to small businesses and franchises to have access to consistent guidance on compliance and regulation through trade bodies.

52. However, the government should move to extend the coverage of the scheme to other areas of regulations, such as age-restricted sales and fire safety as soon practical.

However, a more ambitious approach is required if the rising tide of business regulation is to be stemmed

53. Despite the government’s positive words on deregulation and positive changes to the structures within Whitehall, businesses continue to see the regulatory burden grow. Since the introduction of the one-in, one-out (OIOO) scheme in 2011, the annual burden of regulation has increased by £20 million. This does not include the many European regulations that affect businesses or the impact of increases in fees and charges that fall outside the scope of OIOO or other regulatory scrutiny. The regulations reviewed by the Regulatory Policy Committee (RPC) in 2011 have increased the net annual burden of regulations on business by £165 million; this does not include the 22% of impact assessments where costs were not calculated.

54. The situation could be improved through concrete measures to improve the quality and completion of Impact Assessments to aid transparency. But a more radical approach is required to ensure that regulating is not a ‘cost-free’ option for policy-makers, and to ensure that more emphasis is placed on considering alternative options before reaching for regulatory levers.

The Green Investment Bank can be an important enabler for investment in green infrastructure

55. While creating a stable, transparent and predictable low-carbon policy framework should be the government’s priority, this will not address all the risks associated with delivering low-carbon infrastructure at the pace and scale required. Targeted intervention may be required to mitigate further specific risks that the market cannot currently hold. The CBI believes that a Green Investment Bank (GIB) could be the vehicle for such necessary interventions, with the twin objectives of de-risking specific elements of a project and directly channelling a wider pool of cheaper capital towards low-carbon infrastructure.

56. Establishing the Green Investment Bank through legislation is a welcome development. As argued in our 2011 report, Risky Business, making it a politically durable and independent institution will help to ensure confidence in its effectiveness. However, if the GIB is to have a truly transformational effect, it needs to operate at scale. To have the desired outcome, it must be big enough to help unlock the £7.5bn-£10bn private investment needed each year, and should therefore have the powers to raise funds from the capital markets. While the CBI accepts the government’s decision to postpone the GIB’s borrowing powers to avoid any adverse impact on its debt and deficit reduction targets, if investors are to have confidence in this important institution, it should look to issue debt as soon as is fiscally possible.

June 2012

Prepared 20th June 2012