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House of Lords

Wednesday, 9th October 2002.

The House met at half-past two of the clock: The CHAIRMAN OF COMMITTEES on the Woolsack.

Prayers—Read by the Lord Bishop of Portsmouth.

Directors' Remuneration

Lord Dormand of Easington asked Her Majesty's Government:

    Whether they will introduce legislation, and, if so, when, to prevent excessive payments being made to chief executives and chairmen of private companies.

The Parliamentary Under-Secretary of State, Department of Trade and Industry (Lord Sainsbury of Turville): My Lords, the Directors' Remuneration Report Regulations 2002 came into force on 1st August this year and apply to quoted companies with financial years ending on 31st December 2002 and after. The aim of the regulations is to bring transparency to the process of setting directors' pay; to make companies more accountable to shareholders in this area; and to provide for an improved linkage between performance and pay. There are no plans at present to introduce further legislation.

Lord Dormand of Easington: My Lords, that sounds promising and I hope that it leads to something in the not-too-distant future. However, is my noble friend aware of the widespread and deep concern that exists over the scandalous increases in expenses being made in pay and perks to some top executives and, in some cases, without justification because companies are losing money and their directors are being paid extra for it? Is he further aware that it is obviously completely inadequate to depend on shareholder votes—a matter which has been talked about for some time—and that clear and strong legislation is needed if the problem is to be dealt with? Finally, will the Government consider making it compulsory for a report on directors' remuneration to be included in companies' annual reports and for the award of large increases to be justified?

Lord Sainsbury of Turville: My Lords, I am aware of the concern that has been expressed about directors' payments. The purpose of the regulations that we have just introduced is that a report on directors' pay, which will go into considerable detail, will be part of the annual reporting cycle. It will cover the current details of individual directors' pay packages and include a justification for any compensation package given in the preceding year. It will also give details of the board's consideration of directors' pay, details of the company's policies on directors' remuneration, and a performance graph providing information on the company's performance in comparison with an appropriate share market index. Quoted companies

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will also be required to table a resolution at each AGM on the remuneration report. Therefore, I believe that we are doing many of the things that the noble Lord asks for. We should now await the impact of the regulations after 31st December, when they will come fully into effect.

Lord Mayhew of Twysden: My Lords, I declare an interest as a director of Western Provident Association. Does the noble Lord accept my view that, while compulsion will not and cannot operate here, there is an urgent need for a change of culture? Surely the key point is that, as distinct from profit-sharing schemes, the payment of disproportionate salaries, and especially creating an expectation of large bonuses, is thoroughly bad leadership of subordinates. Is that not the culture change that needs to be effected? After all, in the services people are expected to do their jobs well without receiving bonuses, and the services are reliably delivered.

Lord Sainsbury of Turville: My Lords, the purpose of the legislation that we have introduced is to bring about greater transparency and to put the responsibility for that fully on to the shareholders, whose money is involved. I believe that they also have the right and the responsibility to make clear what they expect of the leaders of the companies in which they have invested. I agree with the noble and learned Lord that in some cases there is a need for a change of culture. I believe that the stimulus for that should come from the shareholders of the companies whose money is involved.

Lord Barnett: My Lords, I declare an interest as a recipient of non-excessive pay in a company. My noble friend appeared to say that he has no intention of legislating to deal with this problem. I entirely agree with that. It would be absurd to try to legislate. How could he define in legislation the word "excessive"? However, does he accept that the main problem in this respect is remuneration committees? Some do an excellent job. Most will say that they are concerned with awarding the rate for the job—a little like footballers! But sometimes that argument is not acceptable and the issue may merit a debate or review. Will my noble friend consider that?

Lord Sainsbury of Turville: My Lords, obviously it is impossible to think of any pay being excessive for my noble friend. I believe that the difficulty in this matter lies in the problem that he has set out. What are the Government expected to do? Are they expected to lay down the pay for particular directors in particular circumstances? That would involve setting out not only the appropriate salary for every director's job in the country; it would also involve judging the performance of those directors and the circumstances of their company. I believe that that can only be done by remuneration committees and the shareholders of the company. I cannot see that it would make sense for the Government to intervene in that process.

Lord Razzall: My Lords, does the Minister agree that the fact that the noble Lord, Lord Dormand of

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Easington, has asked this identical question at least six times over the past year demonstrates the serious concern on this issue, not only in this House but in the country? Will he take this opportunity to confirm that the Government will consider the extremely interesting suggestion made by Sir Iain Vallance, the recently retired president of the CBI, that with regard to the issue of the election and re-election of directors at annual meetings we should move to a system of one person, one vote? In that way, on that issue and that issue alone, the vote of the noble Lord, Lord Dormand of Easington, in companies in which he is a shareholder will have equal weight to that of the Prudential.

Lord Sainsbury of Turville: My Lords, I am perfectly prepared to acknowledge that there is serious concern about the matter. I should point out that we have just introduced regulations, the purpose of which is to expose this issue more clearly to shareholders and to seek their views. The suggestion made by the noble Lord that everyone's vote should count for the same would introduce a major and a radical change to company law that would require a great deal of debate. Because it would be a radical change, it would also require a great deal of justification.

Baroness Howe of Idlicote: My Lords, when deciding pay increases, should remuneration committees—I declare an interest as I have been a member of boards and of remuneration committees—be encouraged to have due regard not just to the salary levels of their peers in similar organisations—a somewhat incestuous practice—but also to those of public servants with equally responsible and demanding jobs such as vice-chancellors of universities, heads of schools, High Court judges and so on?

Lord Sainsbury of Turville: My Lords, I hope that ministerial salaries would also be included. Speaking as someone who has none, it is an important comparison! Remuneration committees must do the job that they are asked to do. They are asked to give the remuneration, and only the necessary remuneration, to reward people properly in the commercial market in which they operate. They are asked to do that by shareholders. If there is an area of complaint it is the one that has been mentioned: that often the process appears to be incestuous and is talked up by the remuneration consultancy firms, which leads to a spiral. I believe that it is time that shareholders said that they do not want their money to be used in that way. It is for shareholders to make that clear because it is their money.

Credit Rating Agencies

2.44 p.m.

Lord Higgins asked Her Majesty's Government:

    What progress has been made in preventing the practice of credit rating agencies releasing personal financial information about an individual to family

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    members and others thought to have a financial connection with that individual; and what steps have been taken to ensure that individuals are not denied credit because of inaccurate or inadequate information provided by those agencies.

The Parliamentary Secretary, Lord Chancellor's Department (Baroness Scotland of Asthal): My Lords, the agencies are implementing procedures approved and monitored by the Information Commissioner to restrict the disclosure of such third party information. Of the two main agencies that are not yet compliant, I understand that one expects to be so by 2003. The other is keeping to a schedule agreed with the commissioner and will report progress to him later this month. The Data Protection Act requires information to be both accurate and adequate. The commissioner can take enforcement action if it is not.

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