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I should very much like to see the following two detailed points being taken up in Committee. I very much hope that the noble Lord, Lord Gavron, will come to the conclusion that if the top salary is a certain multiplesay, 50 timesof the low salary, there should be an extraordinary general meeting of shareholders. It seems to me that that should be the right next stepthat it is not only in the annual report
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That brings up the question that has already been touched on. Most of the shareholders represent pension trusts; pension trusts hold the majority of the shares; and the directors of the pension trust, non-executive or executive, have often got the same interest in being highly rewarded as the chief executive whom they are examining. That is another problem that must be examined and thought through. To give more power to shareholders when the multiple between the lowest and the highest gets up to a high figure is at the heart of what should happen next. The Bill is a first, challenging step. It should not just be a figurative act. It should lead to very definite further action in the matter that is being discussed today.
Lord Haskel: My Lords, I, too, thank my noble friend for and congratulate him on introducing the Bill. I thank him for all his hard work in taking a Bill through your Lordships House. I congratulate him on his timely and important initiative.
I support the Bill, and I would not be surprised if Richard Lambert, the director-general of the CBI, also supported it. At a dinner on 2 April, he spoke about how business and industry must work hard to regain public support and that a part of this task was the need to curb excess. The figures quoted by other noble Lords and the ratios given by my noble friend are surely signs of this excess. The noble Lord, Lord Tugendhat, listed the excessive abuses by directors of companies for their private gain. Much of this abuse is cynically carried out in the name of shareholder value.
Noble Lords will remember that when we debated the Companies Act 2006, we were very concerned about this and about the narrow definition of shareholder value. We were anxious that directors should be obliged to act equitably between all company stakeholders. Indeed, directors are encouraged to report on this in the business review required in Section 417. There is absolutely nothing to stop companies voluntarily putting this ratio in their annual report; indeed, the Companies Act 2006 encourages it. I am sure that some noble Lords will point this out and perhaps, with a few words about unnecessary red tape, will conclude that the Bill is unnecessary. In normal times, they could be right, but these are not normal times. These are times of crisis, and crises demand change. As Mr Lambert reminded us, part of this crisis is excess, and part of that excess is excessive pay.
Quite rightly, my noble friend in his Bill wants to be part of this change. This change is all around us. The Government themselves are speaking of a new era of caring capitalism, as are the Opposition. What common economic and business values were subscribed to by the world leaders at the G20 conference in London? They were fairness and integritythe fairness looked for by my noble friend Lord Puttnams dad.
What does this mean? It means that business has to move away from a code of conduct towards a code of ethics. It means moving from the strict letter of the law
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It may well be that the Minister and opponents of this Bill are concerned that all this talk about proportionality and fairness may inhibit the freewheeling market that brings us the innovation, the enterprise, the new products and services and the technological advances which expand our economy and raise our standard of living. I can put noble Lords minds to rest. Of course, you can always cherry-pick to prove that freewheeling capitalism has created economic value which benefits us all. But as we have seen the rise in the ratio of pay, so we have seen a rise in the creation of paper wealth, the kind of wealth that my noble friend Lord Gavron spoke of. It is wealth created by playing the markets, instead of a real rise in wealth by solving the worlds problems.
Research over the past 15 years demonstrates that innovation and progress are not just a matter of pay. The noble Lord, Lord Taverne, gave us the details. He explained that it is also a matter of the culture of work and of having good and serviceable institutions in place, which enable peoples aspirations, expectations and discretion to be used. My noble friend Lord Giddens told us that these things are carefully studied. Since the mid-1990s, we have witnessed in Britain the paradox of a rising pay ratio matched by declining employee discretion to be innovativeto take financial risks, yes, but to be truly innovative, no.
That brings me to corporate governance, which will have to be improved. My noble friends Bill helps with this by getting away from some of the box-ticking on pay. The Bill is an institutional reminder that workers and shareholders can put questions relating to the salary of directors on to the agenda, not only at shareholders meetings but at workplace meetings. There should be a signpost in the companys annual report, which is perhaps symbolic, but nevertheless is an indicator of fairness within the company.
I support the Bill, because the time is right. It reflects the current mood of the public and of business to curb excess. The direction is right, because it points towards a more caring and innovative economythe kind of economy that the Government are speaking about and that reflects Labours values. The Bill is modest and proportionate. It is a small step towards the fairness subscribed to by the G20. It improves corporate governance. My noble friends Bill is the direction in which we have to travel.
Lord Goodhart: My Lords, I am very pleased that the noble Lord, Lord Gavron, has introduced this Bill and I welcome the support given to it by the noble Lord, Lord Tugendhat, and my noble friend Lord Taverne. I am glad that successful arm-twisting has produced a surprising number of Members of your Lordships House, including myself, who have turned up on a glorious Friday morning. I agree with the noble Lord, Lord Haskel, that the matters covered by the Bill are one aspect of the wider subject of corporate governance, and I want to talk about that as a whole rather than just about the aspect of it covered by the Bill.
The failures of corporate governance are at the root of many of the financial problems we face. One of the few good things about this crisis is that it will encourage a rethink of corporate governance as a whole. A lot of work is being done on this already by, for example, the Harvard Law School, which has a very effective corporate governance programme, some of the products of which I read in an e-mail that I received yesterday.
Corporations are of course at the centre of the economy. A vital element of corporate governance is the concept of the duty of those who manage the corporation. Those who run it should be recognised as owing duties to three main groups. The first is the shareholders. The managers have a duty to run their business efficiently and to protect the interest in it of the shareholders. Some businesses may be high risk; that is perfectly legitimate, provided that the shareholders are aware of and accept this. The second group to whom a duty is owed is the employees. There is a duty to pay them fairly, to provide good working conditions and to keep them in employment as far as reasonably possible. The third group is the customers. The duty is to provide goods or services which meet the standards promised by the corporation or required by law, and to abstain from cartels or monopolies which force up prices and reduce competition. There are other groups to which corporate duties are owed, such as creditors who must be paid, or the general public, who may be threatened by, for example, pollution.
The evil at which this Bill is directed is the overpayment of directors and senior staff. This arises because, as many noble Lords have said, the fixing of salaries and bonuses is usually in the hands of people who have little or no interest in limiting them. This damages the first group, the shareholders, including pension funds and insurance companies, because money is being removed which should go into dividends or reinvestment. In some cases the overpayment of directors and staff, particularly if the bonus system encourages risk-taking, may inflict damage which not only hits the shareholders but leads to cuts in employment.
Other breaches of duty have also played an important part. For example, the granting of mortgages by banks to those who cannot afford them is a breach of the duty to the customers by persuading them to take on obligations that they cannot meet. It is also a breach of duty to the shareholders by endangering their assets. It is a breach of duty to the depositors of a bank, who are creditors, by putting their repayments at risk. As the noble Lord, Lord Tugendhat, said,
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This Bill, if enacted, would be a fairly small but distinct step in the right direction. It is a step towards transparency, which is part of the answer, but we need much more than transparency. We need a full study of corporate governance. Royal Commissions are out of favour but we need, if not a Royal Commission, at least a high-powered committee to report to Parliament on how we can improve corporate governance in the United Kingdom and prevent future repeats of the events at Northern Rock or the Royal Bank of Scotland. We also need a Government who are willing to accept that report.
Lord Kalms: My Lords, the Bill of the noble Lord, Lord Gavron, deeply intrigued me, as we both come from a very similar commercial background. You might say that we were a couple of old-time entrepreneurs. We were both beneficiaries of a buoyant market economy and created substantial commercial and profitable businesses, which, without being immodest, were I believe of high reputation. In due course, we both retired, having created substantial shareholders and personal reward.
Throughout that time, however, as much as one might be aware that a market economy has flaws, as indeed do all human endeavours, you could talk about and practise ethical values and social responsibilities without being looked upon as a wild idealist or a stranger from another planet. There were many traditional restraints that ensured a high quality of management philosophy enjoined with a prime and meaningful responsibility towards employees, customers and shareholders.
There were also at that time, and it cannot be denied, the discernible roots of untrammelled ambitions and unbridled greed. It was perhaps to our discredit that we concentrated more on the shareholder benefits and profitability of the market economy and less upon the smouldering and unlimited ambitions of some in our own markets and particularly in some of the new overseas markets.
Noble Lords know the rest of that story, given the explosion, or, rather, the implosion, of the past two years. It was sudden, but it did not happen overnight. We saw it grow like a cancer over many years. For those of us out of the game it was distasteful, but it was undeniably profitable to the then players. We were inexcusably innocent; we had perhaps some vague sense that sufficient regulation and values were in place to prevent serious abuseregulation that for me was never a serious concern in my time, which I flatter myself to think was because we never went near to breaching any standards. In fact in my own 50-odd years of being in businesswhen I retired it was a large company with more than 35,000 employeesthe
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I turn now to the Bill presented by the noble Lord, Lord Gavron. It contains an interesting concept, albeit I have two reservations. The first is that the information it would produce could be confusing, because, regrettably, different companies cannot be collated on a like-for-like basis. The danger is clear, given the variations in the ratio because of the totally different nature of businesses where they operate from different countries, the different industries in which they trade, where the companies make their profits and, not unreasonably, a different basis of cost and reward. This makes comparison invidious and it therefore has less meaning. After a time, this type of information could easily be brushed aside with well constructed rejection by an articulate chairman. Nevertheless, I do not reject the direction of the Bill.
However, the second reason for my reservation is in fact more fundamental. It is quite clear that the wild abuses of the market economy have to be dealt with in a thorough, complete and overall programme. What we must not fall for is tampering with the present construction. We have seen greed and irresponsible management at an unprecedented levelin many cases, in my opinion, well into the level of criminality. We must not approach that history with a sticking plaster any more than we should approach it with a sledgehammer. The market economy is flawed but it is the best system known to man to enable him to exploit his talents and his natural ambition to grow for himself, his family and those who hitch their wagon to his star. The positive side of the market economy needs to be identified and protected. Thus, we need to debate as soon as possible how we are going to run the business community in the years to come. Of course, regulation will play a major part, and no doubt there will be endless debate about the quality and depth of that regulation.
As an amusing aside, it occurred to me that many of the excesses of the market could have been stopped if we had given the department of trading standards unlimited fining powers. That might have quickly identified the companies which were selling products not fit for purpose and which caused us all such deep pain. I make that point because it indicates that regulation does exist but it is often contradictory and without sufficient powerful enforcement. Indeed, the best brains often preferred to be where the bucks were, and that was not the regulation side of business. That must be addressed.
However, the one area that we have to consider concerns not regulation but the level above regulation. It is about motivation and restoring the ethnical values of management. It is easy to dismiss that argument as ephemeral ambition but, in truth, there are many societies and industries that still value ethical behaviour, which needs to sit alongside a powerfully constructed duty of care by managementan all-embracing, all-inclusive, watertight duty of care to society. I think that the noble Lord, Lord Goodhart, was moving in
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In this Chamber, I need not camouflage or try to disguise the culprits. In many cases, they were the heads of industry, and none more so than the banking industry. There were companies where getting to the board automatically meant trouseringexcuse that horrible expression but it is true£100 million or more, and sometimes a lot more. If the head of a company is greedy, it feeds the ambitions of greed throughout the body corporate.
Great wealth can be created by perfectly honourable means. It can be created by genius or sweat and tears, and we should not begrudge Bill Gates his super-fortune. However, it cannot be created by sharp practice, selling inferior products or exploitation, and it is here that the ethical values have to be sharpened and defined.
The time has come for us to debate in depth and discuss in the late hours the methodology of future control, and I hope that ethics will be a constructive part of that debate. I would go further, such as the idea put forward by the noble Lord, Lord Gavron, of exposing disparity of salary. I would introduce an ethical audit, which would not be merely the ticking of boxes. One can be sure that we can be more sophisticated in our demands. Such an audit would make every director, both executive and non-executive, and every decision-maker at every level aware that in our society we must both set ethical standards and accept social responsibilities. The penalty for failure would be uncomfortable, embarrassing and expensive. These ingredients have been woefully lackingsometimes totally lackingover the past few years. However, we should be aware that there are those who define ethics as an unquantifiable methodology.
Perhaps I may be allowed one further anecdote. Some years ago, I offered a leading London university, with a strong economic speciality, funds to set up a chair in ethics. Alas, this was quickly rejected. The explanation was that there is no role for ethics in economics. Economics, it was explained, is a science. I wonder whether those concerned feel in any way responsible for todays débâcle.
It is not appropriate in this debate to apportion specific blame. After all, we are referring to a flaw in the constitution of mans motivation. Nevertheless, there is a finger pointing at government for being so subsumed with enthusiasm as to have neglected its natural role of responsibility, which is to be self-critical, to sense the extremes that can invade and destroy society and to sense when it has failed to take action rather than encourage.
So, when we get round to the new plan A, we must study all the permutations and all the possibilities. If that means that the market economy is not a free ride for greed, nor a substitute for unlimited exploitation, we will have started to construct a far better model.
He has been confronted in the debate from many parts of the House with problems that the Bill does not attempt to deal with. They range from the problem of the ambitions of university students to general problems of regulation and corporate governance, which lie behind what has been discussed in the Bill. I hope that your Lordships can come back to the very modest proposal for transparency in a particular matterthat is, to provide figures which are, as noble Lords have suggested, astonishing and still not very well known. When I came to write on company law reform in 2003, I was amazed to find figures relating to the advance of remuneration. They included all the benefits acquired by top corporate executives, which, as the noble Lord, Lord Taverne, mentioned, have been expanding at a massive rate. Since about 2000, they have taken off and have created a massive gap with other benefits, both in the world of companies and generally in society, and that has contributed to the inequality which has increased in our society with the disadvantages that noble Lords have mentioned. This modest disclosure of figures could, as the noble Lord, Lord Kalms, has suggested, be misrepresented by people. Figures can always be misrepresented. That is no criticism of the Bill. Many points which have been made on this Bill, and on another this morning, are matters for Committee stage, when the Bill gets there, as I am sure it will.
The rent, as most researchers in the United States describe it, taken from corporate assets by top executives has increased at the alarming rates mentioned by the noble Lord, Lord Giddens. When I first began teaching and researching corporate matters at the University of Cambridge, I was very glad to continue it at the London School of Economics where I felt released from what I called the old-fashioned vision of company law which was all about the relationships of shareholders, creditors and managers and all sorts of theories based on those facets. As the noble Lord, Lord Haskel, has mentioned, the discussions on the Companies Bill 2006 and subsequent discussions raised the issue of a wider set of stakeholders who had to be taken into account. We made some progress.
Noble Lords will remember that in Section 172 we managed, after a rather massive and long-winded set of researches set up by a government committee, to have the interests of directors described as promoting the success of the company primarily for the benefit of the shareholders as a whole; as having regard, among other matters, to the interests of the companys employees and to relations with suppliers, customers and others; and as having regard to the impact of the company's operations on the community as a whole. My noble friend Lord Gavrons Bill addresses that latter part of directors duties because, of course, there is a relationship between the community as a whole and top remuneration, including incentive schemes and other additions to salary which are very important to top directors. The gap between them and the lowest paid among those who are contracted to a company one way or another, as employees or as other forms of contract labour, as noble Lords have pointed out, would need to be defined further in Committee.
This remarkable rise in top executive pay has been a feature of the emergence of financial capitalism in its present form and, of course, it was part of the picture which gave way to weakness, to put it mildly, in the relationship of the risk of executives and companies in the financial services sector. The Bill will not cure all those matters and various speeches which have been made about corporate governance are no criticism of the Bill. It is not meant to solve all the problems of regulation, corporate governance and the like. It may well be that further amendment of the Companies Act is required as regards the best corporate governance picture that the law should put before those concerned with our corporations.
In the light of those factors, to require that companies produce the figures of top payments to top directors and executives and to produce the wage structure of the corporate enterprise, at any rate as regards the lowest paid 10 per cent, is not a very extreme measure. It would be a step in the right direction, as many noble Lords have said. It would have the effect of promoting a realisation that fairness is an important factor in our society and in our social fabric. It would also enhance those standards and qualities of which many noble Lords have already spoken and to which I give my general agreement. In that sense, it is a Bill based on an ethical structure, which the noble Lord, Lord Kalms, is interested in and which I also hope receives his support. I hope that the Bill will continue to Committee stage, that the Government will look on it with favour and that they will give some time to its progress.
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