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Unfortunately, in a short speech, I cannot give the detailed figures, which is a pity because they are devastating. Overall, the picture is clear: of 21 countries in the developed world, those with the lowest inequalities are Japan and the Scandinavian countries, and they come out top on pretty well every score in terms of health, social problems and the degree of trust between citizens. Countries with the greatest inequalities, led by the United States and Portugal and followed by the UK, come out worst. It can be argued that more equal societies, such as Japan and Scandinavian countries, are more homogeneous and this explains their social success. But, the authors of The Spirit Level and others have analysed the differences not only between countries but between various states within one country—for example, in the United States. This confirms the pattern between countries. The political scientist, Robert Putnam, has reached similar conclusions about inequality and dysfunctionality. In North Dakota, for example, where inequalities are relatively low, people who say they trust each other outnumber by over four to one those in Mississippi, where inequalities are high.

The case is very strong indeed that great inequalities make society as a whole less contented and more dysfunctional. That is what this Bill is about; it should, to some extent help. It does not seek to legislate for limits on pay. That would be oppressive, anti-libertarian, counter-productive and impractical. It seeks to shame into a greater sense of responsibility those ineffective corporate remuneration committees, to which the noble Lord, Lord Gavron, referred, which are composed of other senior executives who stand to gain from hiking up the general level of executive pay. These committees have done a great disservice to British industry and our society as a whole. They should be exposed, and this Bill is a perfectly reasonable and practical measure. Who on earth can really argue against it? I hope, therefore, that the Government will give it their full support.

11.47 am

Lord Joffe: My Lords, I join other Peers in congratulating my noble friend Lord Gavron on introducing this topical debate and on his excellent speech in support of his Bill.

It is clear from what has already been said that the remuneration packages of executive directors in the corporate world are astonishingly high. Deloitte’s 2008 directors’ remuneration report on the FTSE 250 companies shows that fixed annual salaries, plus pensions, of executive directors other than chief executives ranged from £293,000 to £935,000. Most people would think that those salaries were more than sufficient to generate maximum commitment by directors to produce

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outstanding results, but they would be far off the mark. To these salaries are normally added annual and longer-term bonuses, which for on-target performance typically range from 85 per cent to 270 per cent of basic salary, depending on the size of the company. These bonuses push up the average total remuneration of executive directors to between £561,000 and £3.4 million. For chief executives, the range is £963,000 to £5.3 million and, for superior performance, from £1.5 million to an incredible £10.9 million.

Pity the Prime Minister who receives a modest £194,000 for running the whole country, Cabinet Ministers with their £142,000, the Cabinet Secretary and the head of the Civil Service with £235,000 and university vice-chancellors with an average £194,000, although one was recently awarded £500,000, which caused an outcry. A similar outcry arose in relation to chief executives of NHS hospitals, when one was awarded a remuneration package of £210,000, although the average was only £110,000. Chief executives of local authorities receive on average a little less than that.

What then is the explanation for the vast gap between corporate directors and individuals with equal or even heavier responsibilities in other fields? Are corporate directors cleverer or more accomplished at their jobs? Do they work harder, do they carry more responsibility and are their jobs more difficult? The answer to all these questions is self-evident: it must be no. There is one obvious difference that explains these extravagant rewards, which is that, unlike the Prime Minister and others to whose salaries reference has been made, corporate directors fix their own salaries.

It is argued by those in the corporate sector that their remuneration packages are market driven and that, unless they are paid these extravagant amounts, they will be tempted to go elsewhere. But where would they go? Who would want to employ them? Would most of our companies really be harmed if some of them did depart?

It is a myth that there is a genuine market that drives corporate salaries. In practice, directors have created a false market. The higher they pitch their salaries, the more their counterparts in other companies increase their packages, and so the process goes on and the packages get higher. The policy director of the Work Foundation said:

“It is an incredible closed shop and those are the dynamics operating in top directors pay. The increases are based on the myth of market forces, but this is actually the antithesis of market forces”.

The noble Lord, Lord Taverne, referred to the extraordinary increase in salaries of corporate directors. I found a smaller figure, which was only a 50 per cent increase, in the five years ending 2007-08, with the corresponding increase in average earnings of only about 20 per cent.

In the current economic crisis, one might have expected that directors would be volunteering to reduce their salaries in the same way that some of their employees are being urged to agree to reductions in their earnings to save their jobs. Although some, to their credit, have volunteered to waive bonuses, this has been very much the exception. It is surprising how little regret has been expressed by directors at their own mistakes, particularly when due to their poor

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decisions they lay off staff. Indeed, far from there being a consideration of reductions in their remuneration, the views expressed in some of the remuneration reports are that even higher salaries are needed to compensate directors because of the great skills needed to recover from the setbacks created by the current economic crisis.

Obviously, like everyone else, corporate directors are entitled to be fairly remunerated, but how can their excessive remuneration be controlled? The theory is that the remuneration committees with independent non-executive directors will exercise control over remuneration, but the question is how independent these non-executives are. As a chairman of a remuneration committee, according to Deloitte, one can earn an annual fee of £120,000. That is an attractive role for not a great deal of work. Innovatively, the very directors whose remuneration they have to determine appoint them. I recall being told many years ago by a board member of a major UK company that the chairman of the remuneration committee went to see the chairman of the company to advise him of the bonus that the committee had agreed to recommend for the year. The company chairman glowered at him and said that it was not enough. The remuneration committee chairman scuttled back to his committee to reconsider and had no difficulty in upping the bonus to the level considered reasonable by the company chairman.

I do not suggest that this is what happens regularly, although the manner in which the board of the Royal Bank of Scotland whistled through the inflated pension arrangements for Sir Fred Goodwin does little to create confidence in the effectiveness of remuneration committees. Further, as has been pointed out, it is difficult to overlook the fact that most of the independent directors are directors of other companies and part of the same director market.

Apart from remuneration committees, the other forms of control of executive directors’ remuneration are said to be shareholders’ rights to vote down recommendations on remuneration at AGMs. However, the main shareholders are the pension funds and other investment funds whose investment managers, being normally extremely well paid, do not have an impressive record in opposing recommendations on remuneration. The small shareholders can protest loudly but can seldom succeed in opposing extravagant pay awards.

Accordingly, it really is necessary for government to take steps to curtail excessive remuneration. But that is easier said than done. While the Government have every right to lay down conditions curtailing excessive remuneration in companies that they are helping, in the same way as President Obama has done in the USA, it would be extremely difficult and probably harmful to seek to impose arbitrary maximum salaries on earnings.

Against that background, the Bill introduced by my noble friend Lord Gavron is an important step in the right direction. A great deal more has to be done by government, but transparency on director rewards, which will emerge from the Bill, will act as some brake on corporate greed, put pressure on remuneration committees and provide the information for further action by government and pressure by shareholders. I enthusiastically support the Bill.

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In conclusion, I draw attention to the danger of using public pressure to reduce directors’ bonuses, which could lead to the wrong position. Care needs to be taken that existing bonuses are not consolidated with basic salaries, as the result of that would be the worst of all worlds.

11.58 am

Lord Puttnam: My Lords, may I begin by apologising for my late arrival? I was given to understand that the Bill would be read at noon. I shall compensate by keeping my remarks short.

Different people arrived in this House in different ways. In different ways, many of us have a great deal to thank our ancestors for. In my case, it is my father. He was the model on which I have tried to base my life. He used a particular word every day, and on many days he used it frequently. It is a word that we do not hear very much nowadays: “fair”. My father, not unlike many of his generation, was able to reduce most extremely complicated issues to the notion of what was fair. Of course today, “fair” is all of a piece with “transparent”.

The Bill suggests that greater fairness and transparency should find their way into corporate reports. To me, this debate—and this historic House has seen many debates over the years—falls into the same category as the great debates of the 1870s on the employment of mill girls. We look back on that now and cannot imagine that we ever needed to debate whether young girls under the age of 14 should work a 12-hour day. Yet at the time, to challenge it was seen as revolutionary and extraordinary—an event that might, indeed, endanger the future economic capacity of the country.

We are today discussing something that will happen. The issue is when. Do we have the courage and perspicacity to bring it forward now? Do we wait another five years, or 20 years, when people will find it difficult to understand why on earth we did not bring it in when it was first suggested in 2009? After all, these are not complicated issues.

I picked an interesting fact out of the US Economic Policy Institute report. In 1965, US CEOs in major companies earned 24 times more than the average US worker. In 2007, they made 275 times more. That would not pass my dad’s test of fairness, and I very much doubt that it would pass the test of anyone seriously thinking about it in the House this afternoon. Do we want to drift endlessly in that direction, or do we wish to say, “Enough”? Things have got out of kilter. If it requires a level of embarrassment for companies to look at and take note of the direction in which their own corporation is drifting, so be it. Again, I would argue that the time has come.

This may not be a popular remark on my own Benches, but I have been extremely impressed by many of David Cameron’s remarks about “caring Conservatism”, and how he hopes that his Government, if and when they come to power, will take a different approach to these matters from that which has been traditional. I cannot for one moment believe that part and parcel of caring Conservatism involves a situation in which corporations are able either to hide or encourage a consistent expansion of the gap between the highest and lowest paid and in which the gap can get worse. It

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would not seem to be of a piece with everything that Mr Cameron has said about his notions of a fairer society. The Bill in its present form may not be perfect, but I hope that its broad thrust, and what is intended here, will be taken seriously.

I should like to offer only one other piece of evidence. I declare an interest as president of UNICEF. Twice in the past two years, UNICEF has published a report card on the well-being of nations. We judge that by whether they are places in which young people will grow up and thrive. Britain’s position improved slightly: we were 26th, at the bottom of the previous report; two weeks ago we came 23rd out of 29. I suggest that that is not a placing that any of us can be proud of or would wish to have. Your Lordships will not be surprised to know that all the usual suspects at the top of the list—Norway, Sweden, Finland, Denmark, Holland—have significantly smaller gaps between their highest and lowest paid, because they understand the ramifications of a fairer, better and more equitable society. I very much hope that I will live long enough to see our society and this country follow their examples, rather than careen off towards the quite dizzying and absurd situation that the Americans have allowed to happen over the past dozen years.

12.03 pm

Lord Bradshaw: My Lords, I endorse what the noble Lord, Lord Puttnam, said about fairness. When I started my working life, I was motivated far more by what I could achieve than by how much I might earn. This situation has drifted. I fairly recently attended a sixth form meeting at a school and I was astounded by someone I spoke to who asked not what the job involved or what he could achieve or contribute but how much he could make. If people at the start of their careers are less interested in what they can give to society than in what they can take from it, then we have come to a pretty awful pass in how we conduct ourselves.

I ask the noble Lord, Lord Gavron, whether he is talking about the lowest level of employees or whether he considers the many contract staff and others who work for the company to be within the lowest 10 per cent. Many companies I know are employing people at pretty low wages. It is sometimes difficult to find out what they are paying or whether their employees are employed legally. In fact, many companies that depend on things like cleaning contracts and other service contracts are fishing around the very bottom of the market. What they pay people when they move production or services offshore is perhaps not within the scope of the Bill. However, many companies and company directors have made their large increases by treating those at the bottom very badly indeed.

I will not detain your Lordships for long, but I have an anecdote that the managing director of TNT told me when I was working at a university some years ago. He said that one of the things that motivated him most was that when he drove on the motorway and his company’s lorries passed him, he knew that the drivers were the best-paid drivers on the motorway. That reflected not only the fact that he was running a

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successful company but that the people in the company were participating in it. I know that these things are difficult, but they are extremely important.

On non-executive directors and remuneration committees, I remember a lot of propaganda by an organisation called Pro Neg, which was trying to recruit people to become non-executive directors. One of the golden rules was that you should not be a non-executive director unless you could afford to resign. You had to tell the company when it was stepping over the limits. If a non-executive director is dependent on that company or a closely associated one for money, I am afraid that they fail at the first test.

I wish the Bill well. I am glad that the noble Lord, Lord Gavron, has moved it, and I look forward to the Minister’s reply.

12.07 pm

Lord Giddens: My Lords, I also congratulate my noble friend Lord Gavron, and other noble Lords involved, on proposing the Bill. Like others who have spoken, I strongly endorse it.

When I knew that I was going to speak in this debate, I looked at the writings of the guru of all management gurus, Peter Drucker, to see what he said about this, writing in the mid-1970s. It is pretty interesting. He said that opinion surveys taken at that time showed that the public thought that an appropriate earnings ratio between what he called the “blue-collar worker in the factory” and the “big boss” would be about 1:10 or 1:12. He went on to look at the actual situation of average salaries of employees compared to executives in large businesses in the US. He found that it was about the same ratio. That is quite amazing when you think about what has happened since. He endorsed this as an appropriate ratio for an effective capitalist system because of the solidarity that it inherently produced.

As the noble Lord, Lord Taverne, has noted, this ratio has not changed very much in some industrial countries. My figure for Japan is slightly different from his, but it depends on how you calculate it. Most studies show that it is about 1:15 for large Japanese companies. In the United Kingdom, United States and some other countries today, the ratio, depending on how you measure it, is often 20 or 30 times that figure, which is an extraordinary change. The United Kingdom, United States and Australia show much steeper rises than elsewhere. It is easy to confirm these figures in a specific context. In the UK in 2007, top executives got average pay rises of 33 per cent while the typical worker got 3.7 per cent—a 10 times ratio just for a single year.

The spiralling inequalities at the top of the corporate and financial worlds could perhaps be justified if it could be shown that they produced superior economic performance. I have done a lot of work on this, looking at the academic studies that exist, and the result is really surprising—namely that the evidence is really weak; what evidence there is tends to show the opposite of the claim; and that those companies where executives are paid very high salaries tend to underperform compared with others. One of the biggest studies was done in Australia. It compared the 20 worst performing

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companies in a given year with the 20 best performing companies measured by returns on equity. The executives in the 20 worst performers were paid about two and a half times the salaries of executives in the best performing companies. Therefore, the evidence is very weak and surprisingly thin on the ground, and what evidence there is tends to suggest that very high levels of executive remuneration are actively dysfunctional in terms of business success.

Even this might not matter if there were not other downsides, but there are very serious downsides to the massive inequalities that we see in the financial sector and the wider sphere of business. I shall mention three points very briefly because others have referred to them. First, as my noble friend Lord Gavron pointed out, we know from many research studies that there is not a proper market for executive salaries at the top. The reasons for this have been explored in many studies, which go back 15 or so years and were largely ignored by policy makers, certainly until recently. As the noble Lord said, they show that the consultants who recommend executive pay are almost always chosen by the CEO. The CEO then packs the committee with his or her friends and colleagues. It is therefore not surprising that you get upward pressure on salaries, that “success” is rewarded and there are very few mechanisms for penalising failure. Secondly, many studies show that mechanisms such as golden parachutes and protected pension schemes mean that top executives are shielded from the risks they ask their employees to bear. The situation is the very opposite to that which Peter Drucker saw as so important for solidarity in business and the wider society. Thirdly, and more crucially, the structure of executive pay has helped to produce the short-termism, irresponsible risk-taking and indifference to systemic risk that are the origins of the current crisis.

The Bill has been described by its initiator as a naming-and-shaming exercise. We know that not all individuals accept that they can be shamed. I would rather see the Bill as one step along the way in creating greater accountability at the top level in business and as part of a much larger task of creating a new model of responsible capitalism.

12.13 pm

Lord Renton of Mount Harry: My Lords, I join others in congratulating the noble Lords, Lord Gavron and Lord Taverne, and my noble friend Lord Tugendhat on bringing this Bill forward. The one difference between those noble Lords and me is that I do not regard this as a very modest Bill. I think that it is a pretty bold Bill. I very much wonder what will happen next because this is only a step in a certain direction. As the noble Lord, Lord Gavron, said, it seems a modest step. However, how will it be taken forward when young people going to university are suddenly faced with the fact that reading economics in order to earn £1 million before they are 25 and £2 million before they are 30 is not the end of the world and that there are other, much better, things to work towards? The spirit of all that has been said today—I want to look forward rather than backwards—reminds me of the words of Omar Khayyam’s Rubaiyat, which says:

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“Indeed the idols I have loved so long have done my credit in men’s eye much wrongHave drown’d my honour in a shallow cup and sold my reputation for a song”.

The difference is that the reputation was sold not for a song but for a great deal. But are we not now looking at what happens next? What will young people going to university be inclined to do? If we replace making a lot of money with something else, what will their motive be? How do we locate ourselves when earning several million pounds a year by the time we are 30 is no longer the be all and end all? This subject will require a great deal of thought and examination over the years ahead, and I hope that it will be debated in the Committee stage, which I very much hope that we will have in the weeks ahead.

For some years I have been lucky enough to be on the council of Sussex University. I was on it for nine years and moved off it last July. Sussex University was founded in 1964 and aims to have 50 per cent of its students studying the sciences and 50 per cent the arts. Asa Briggs was the first important vice-chancellor there. He was very strong in the arts and a very good friend of mine. However, in the nine years during which I served on the council, I noticed that fewer and fewer students wanted to study science. They wanted to study the arts, which cover a large number of subjects including economics, because they thought that that would enable them to get a very good job, paying a lot of money, soon after leaving university. Indeed, some noble Lords may remember that about two or three years ago Sussex University had to merge its chemistry and biology departments into one, which caused a great deal of trouble, simply because we were not getting a sufficient number of students who wanted to study the sciences.

The other day I was talking to our new vice-chancellor, Professor Michael Farthing. He told me that he is already seeing a change at the university and that the interest shown by potential students in applying for some of the very high-level scientific degrees, which are well beyond my understanding, is much greater than it has been for many years. I strongly welcome that. En passant, I give the Government credit for, and applaud, the measures in the Budget which will help wind energy schemes. I also applaud the very strict carbon targets that they are setting: a 22 per cent cut in emissions by 2012 and a 34 per cent cut by 2020. Those will be very hard targets to meet. But if the next generation, or the next two generations, are to change their attitude towards money and are no longer to consider it everything, they must still deal with climate change to stop our planet disappearing. Surely that is a marvellous target for the next generation to be considering and working on rather than going into banks or insurance companies.

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