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House of Lords

Thursday, 16 September 2004.

The House met at eleven of the clock: The CHAIRMAN OF COMMITTEES on the Woolsack.

Prayers—Read by the Lord Bishop of Newcastle.

Directors' Remuneration

Lord Smith of Clifton asked Her Majesty's Government:

Lord Davies of Oldham: My Lords, my right honourable friend the Secretary of State for Trade and Industry made a Written Statement to Parliament about directors' remuneration, performance contracts and severance on 25 February 2004, announcing that the Department of Trade and Industry would commission an external assessment of compliance with the Directors' Remuneration Report Regulations and changes in remuneration practices during the course of this year's AGM season. Deloitte & Touche has been appointed to this role and will submit its reports to the department this autumn.

Lord Lea of Crondall: My Lords—

Lord Smith of Clifton: My Lords, I thank the noble Lord for that reply, and I thank the noble Lord, Lord Lea, for not jumping the gun. The Guardian reported a 288 per cent increase in remuneration levels over the past 10 years compared with an increase in average earnings of 45 per cent. Top remuneration packages of such a magnitude are, frankly, looting investors. It is time that the Government did not outsource inquiries on such issues. I think that the senior partner in Deloitte is among the fat cats about whom we are talking, so I hope that the company declares an interest when it gives its assessment.

Failure continues to be rewarded. We have seen it this week in the cases of Jarvis directors and Sir Peter Davis at Sainsbury. It makes a mockery of good corporate governance. The Government cannot keep hiding behind assessments and so on. They should deal with this problem and amend the Companies Act, as the noble Lord, Lord Triesman, indicated in his reply to me on 25 February. Does the Minister not agree?

Lord Davies of Oldham: My Lords, I am glad that there was a question right at the end, although I very much enjoyed the diatribe. As the noble Lord indicated, there are statistics going back over a number of years, which is why the regulations were introduced two years ago. During the first year in which the regulations have been effective, shareholders have had
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the chance at annual general meetings to hold companies to account in these terms and considerable progress has been made. There will always be one or two instances that hit the headlines; the noble Lord referred to one of them. The regulations are effecting beneficial change. It is only right that we await Deloitte & Touche's report to obtain its analysis of how the system works and whether emendation is necessary.

Lord Lea of Crondall: My Lords, I was merely signalling earlier my intention to ask a helpful question, albeit in a somewhat unorthodox manner.

Some of us have doubts about the doctrine of shareholder democracy. There is a lot of evidence that remuneration committees operate, not against market forces, but in an oligopoly. Research shows that in many cases they operate the upper-quartile principle, which in layman's language means, "You scratch my back; I'll scratch yours". I suspect that that will apply to Deloitte & Touche's report also, but I hope that I am wrong. Will the Minister take on board that we need the unit to do some serious work about the operation of remuneration committees, having regard to the fact that the issue is increasingly becoming a national scandal and that it will be very hard to retain moral support for income restraint across the rest of the economy if it goes on like this?

Lord Davies of Oldham: My Lords, I recognise my noble friend's impatience, indicated by his eagerness to put his question. I have some sympathy with his statement and with that of the noble Lord, Lord Smith, that previous abuses have caused considerable public concern. I reiterate my response to the first Question: we await an analysis of the position. We are encouraged by what has occurred over the past 15 months. Greater openness is making issues more transparent to shareholders, and in some well publicised cases it has resulted in significant second thoughts by the board. I hear what my noble friend says. I am sure that, after many years of showing considerable patience, the noble Lord will be able to extend it for the short period until we have the benefit of the report. Then we will be able to look further at the situation.

Lord Marsh: My Lords, I would welcome elucidation on an aspect of the subject that has always puzzled me. If shareholders do not like the way that a company in which they have put their money is run, for whatever reason, why cannot they sell the shares and transfer their affections?

Lord Davies of Oldham: My Lords, that probably goes on. It has not gone unnoticed that one of the companies that is currently in the limelight because of its remuneration of directors has seen, for all sorts of reasons, a massive decline in its share price, which is a reflection of loss of confidence. Withdrawal from the fray is one condign action that shareholders can take but surely it would be better for the health of companies and the good of the economy if shareholders were
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empowered and had the information to take decisions that helped to change behaviour rather than just pulling the plug on the whole activity.

Baroness O'Cathain: My Lords—

Lord Wright of Richmond: My Lords—

The Minister of State, Foreign and Commonwealth Office (Baroness Symons of Vernham Dean): My Lords, we have not yet heard from the Conservative Benches.

Baroness O'Cathain: My Lords, is there any thinking that perhaps the make-up of the members of the remuneration committee should be looked at? Under the combined code, the audit committees now have to be made up of members who have financial competence in areas such as accountancy and banking, for example. There could be a case for suggesting to corporations that members of the remuneration committee should likewise be well versed in all the intricacies of remuneration. In that way, we might avoid the very prevalent trend of going for upper quartile for non-upper quartile performance.

Lord Davies of Oldham: My Lords, I recognise the noble Baroness's point about the complexities of remuneration. The report from Deloitte & Touche, which we await with some eagerness, will no doubt have significant things to say about the make-up of remuneration committees, their competence and, to reflect the point of my noble friend Lord Lea, whether they are sufficiently representative.

Disabled Residents: Unadopted Roads

Lord Beaumont of Whitley asked Her Majesty's Government:

Lord Davies of Oldham: My Lords, the provisions of the draft Disability Discrimination Bill would place public authorities under a duty not to discriminate against disabled people when exercising any of their functions and would require them to promote equality of opportunity. Local authorities have no mandatory duties in respect of unadopted roads, and the Bill's provisions would not change that position.

Lord Beaumont of Whitley: My Lords, I thank the noble Lord to a certain extent for that Answer. I know that he knows that there are about 40,000 unadopted roads in England, because we have discussed this before. Does he know that many of them, particularly in the north of England, are in such a state of disrepair
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and are so badly lit that disabled people cannot safely leave their houses? Does he not think that it is time that the national Government should fill this breach in our welfare provisions by taking over responsibility?

Lord Davies of Oldham: My Lords, when the noble Lord says that I know that there are 40,000 unadopted roads in the United Kingdom, I do so on the basis of 1972 statistics, which are the latest we have.

In response to the noble Lord's broader point, he will recognise that it is for frontagers on such roads to make up their mind whether the road is sufficiently secure for them to go about their business. If there are disabled people who have particular difficulties, they must get together with their neighbours to approach the local authority. But if local authorities took on every single unadopted road in this country, the cost would be £3 billion. That is a mighty large slice out of the transport budget.

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