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12.54 pm

Lord Donoughue: My Lords, I, too, wish to speak in support of the excellent Bill introduced by my noble friend Lord Gavron, on which I congratulate him. I should declare—there was a time in the Labour Party when it was almost dangerous to admit it—that I worked in the City. I was a member of the old Stock Exchange, a partner in a leading stockbrokers and a director of a merchant bank. That experience was once not very common on this side of the House, but I am delighted to see more noble Lords with that background on our Front Bench. They have a much more distinguished record than I do.

Many of the excesses of greed in recent years in the City—I know that the Bill refers to more than the City, but the City is at the heart of it—were unthinkable when I was there before the big bang. In my firm, the ratio between rewards for senior partners and directors and the average ones for ordinary foot soldier employees was reasonable. It was a responsible ratio, probably in the high single figures, as in our Armed Forces, which my noble friend mentioned. Today, it can be obscenely in the hundreds.

Much of the job satisfaction that I and others felt related to the quality of working life, something that has virtually disappeared from the modern City. It related to team spirit in the firm, where staff often worked for their whole lifetime. My stockbroking firm had one of the nicest and straightest bunch of colleagues that I have worked with—of course, I have a fairly wide and disreputable record, having been in journalism and academia as well as politics, so perhaps the

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competition was not strong—and, 23 years after the firm was taken over and dissolved, we still meet regularly for dinner. That would be unthinkable today where the only—certainly the main—motivation is money, and staff move regularly to the highest bidder.

The effect of such huge pay differentials is bad, as several speakers have convincingly demonstrated. Institutionally, in the firms themselves, it alienates the low paid more than it motivates the highest paid. Socially, it creates too big a gap between the privileged at the top and the foot soldiers doing excellent work at the lower level. It gives the wrong signal socially and nationally to those in the public and social sectors who do great social work for small rewards. It creates the wrong values and priorities, with the view that only money matters and fairness does not. It is not good for social cohesion, as the noble Lord, Lord Taverne, convincingly argued. In the banking and financial sectors, it creates a casino atmosphere, except that it is worse than a casino because they are gambling with other people’s money, not their own. It also entrenches short-termism. Executives earn huge sums in the short term and can retire after high-risk trading activities that enrich them in the short term but may bankrupt their firms in the longer term. I support the broad thrust of my noble friend’s approach.

I shall, briefly, ask the Government to consider other related corporate reforms that would produce what we want, which is more accountable and responsible behaviour from those at the top of our corporate sector. The reality today is that shareholders, the notional owners, can do little to hold senior directors and senior executives to account. This is true of individual shareholders, who are fragmented with no collective power, and of institutional shareholders, who do not wish to rock boats in case somebody else catches the habit and rocks their boat. Boards are virtually unaccountable to shareholders and in banking the top trading executives, especially the big traders, are virtually unaccountable to the boards.

It is historically interesting that 150 years ago, the greatest flaw of capitalism—there were others, but this was the greatest—was the excessive exploitation of unorganised workers by the owners. The Labour Party and the trade unions came to power to stop that, and succeeded. By the mid-20th century, most employers did not excessively exploit their employees and, by my observation, were very responsible in their social attitudes to them. Today, the flaw in capitalism is quite different. It is that shareholders and low-paid employees are exploited by their senior executives and directors. The latter run remuneration schemes that take an excessive share of the corporate cake—the croupier’s take, as my noble friend and others have referred to it—often regardless of management performance, and leave too little for shareholders and ordinary employees. The unacceptable and unaccountable power of boards and senior executives has made possible the excessive and growing differentials of pay in the corporate sector, which my noble friend Lord Gavron addresses.

In this context, I briefly suggest three extra reforms. The Government should consider legislation on the conduct of annual general meetings, especially in relation to remuneration, mentioned convincingly by the noble

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Lord, Lord Tugendhat. I suggest that AGM votes on remuneration committee reports be made binding; currently, they can be ignored. There should be separate AGM votes on bonuses. You will recall that Sir Fred Goodwin of the Royal Bank of Scotland only a year ago was granted a bonus of £2.9 million on top of a salary of £1.3 million, clearly as a reward for bringing the bank to its knees. Bonuses should also not be annual but should be granted over a longer period, when the value added by managerial contributions can be more fairly assessed and, again, they should be subject to binding AGM votes. Finally, share incentive schemes are usually paid within three years. That is too short. A longer period of five to seven years would be more appropriate to assess the value of the contribution, again subject to binding votes. Those additional suggestions would strengthen the excellent approach of my noble friend Lord Gavron in the Bill.

In concluding, I should stress that I support the free market economy. I do not want Governments to set individual pay. We went through that in the 1970s—some of us were painfully associated with it. It simply does not work. I do not want to stifle genuine commercial creativity. The free market that I support should be conducted responsibly. It is not a value-free economy. It is not a jungle where the top snouts in the trough take excessive rewards out of all proportion to their contributions or those of others, the poorly paid below them. Still supporting a free market, the Government can give a steer towards a better balance of rewards between those at the top and those at the bottom and towards making top executives and directors more accountable to the shareholders who, notionally, are the owners. Those steps would strengthen the market economy and make it more acceptable to the wider community, which is currently shocked by what has taken place. The Minister understands these issues better than me and better than most. I trust that he will ignore much of the negative wording in the winding-up speech that his officials have given him and give a sympathetic response to this debate.

1.05 pm

Lord De Mauley: My Lords, I thank the noble Lord, Lord Gavron, for the work he has put into producing this Bill and for raising the subject today. As my noble friend Lord Kalms said, he has a great deal of experience, among other things as head of substantial companies. I am sure that he will have discussed this with colleagues and former colleagues, and what he has to say is important.

We on these Benches—the tone of the speeches from each of my noble friends today has demonstrated this—share a mixture of anger and frustration at an incentive culture that has undoubtedly been a major contributor to the downfall of some of our major banks and financial institutions and has had such a severe knock-on effect on the wider economy. Like other noble Lords, I was proud to work in the City of London, which I was lucky enough to do from the late 1970s to the early 1990s, and it angers me to see what has now happened. We have strongly supported remuneration transparency both in the new Companies Act and in secondary legislation, not least the requirement

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for a remuneration report in companies’ accounts. We recognise and encourage the current corporate governance reviews, which look not so much at specific salaries as at the processes by which boards decide levels of remuneration.

The Financial Services Authority is consulting on a new code of practice on remuneration policies for the firms that it regulates. It will include calculation policies for bonus pools, non-financial performance grounds, assessing performance on longer-term criteria than purely on the current year, and so on. The noble Lord, Lord Donoughue, just referred to this. The various institutional shareholder organisations are also reviewing their codes. A key issue is whether the non-executive system works adequately and how it can be improved. Several noble Lords have spoken of this, including the noble Lords, Lord Haskel and Lord Goodhart, who both referred to corporate governance. The Financial Reporting Council has started consultation on the effectiveness of the combined code on corporate governance, which sets out standards of good practice on issues such as board composition and development, remuneration, accountability and audit, and relations with shareholders. All companies incorporated in the United Kingdom and listed on the Stock Exchange are required to disclose in their annual report and accounts how they have applied the combined code. We continue to support the combined code and we encourage shareholders to take a more active interest in their companies.

The financial community is doing its best to respond to the problems we are addressing today in a measured and timely way that compares favourably with the Government’s approach in their panicked management of the economy. The noble Lord, Lord Gavron, will therefore understand our reservations about this Bill. We are just a little wary of regulatory proposals that might damage the country’s reputation as a financial centre and discourage bright people with high potential from working here, thus helping to bring us out of the recession. My noble friend Lord Renton spoke about bright young people from a different perspective, and his point is well taken.

Unjustified extremes of inequality are unhealthy. The noble Lord, Lord Puttnam, emphasised the word “unfairness”. I mentioned a moment ago that we have some reservations about the Bill, and I will be specific. The Bill encourages a presumption that a high ratio, as calculated under the disclosure that it would require, is undesirable. The reality is that a sales or managing director who has saved his or her company, preserved jobs and enriched thousands of pensioners whose schemes hold the shares, may thoroughly deserve a substantial pay packet. My noble friend Lord Tugendhat acknowledged this.

One of several potential unintended consequences of the Bill is that the figure it would require companies to produce might draw attention to the fact that in some cases it would be cheaper to outsource the lowest 10 per cent of the workforce, for example to India. This would hardly be in the interests of those it was trying to help.

The Bill raises some technical issues, such as creating reporting and compliance red tape costs. While these may be modest for large firms, some smaller businesses

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nevertheless are publicly quoted and so, because the Bill includes them, would be subjected to additional time and cost burdens at a point when they are really struggling with much more immediate problems. The exact definition of pay promises some complexity and money for lawyers and, in particular—I should know because I qualified as one many years ago—for accountants.

As the noble Lord, Lord Bradshaw, pointed out, a company which outsources its most basic functions, such as the cleaning of premises, to a subcontractor would probably have a smaller gap between highest and lowest paid employees than another, otherwise identical one that does those jobs in-house, even though there may be no intrinsic difference in the fairness of the pay policies of the two companies. My noble friend Lord Kalms referred to the difficulties of comparing different companies. This is only one example of such problems of comparison.

It is perhaps worth mentioning that the prominence that the Bill would give to the ratio concerned, which it would require to appear on the first page of the first part of the annual report in bold type, would be greater than that given to all the other information in an annual report, such as information about profitability, solvency, taxes paid and so on. Even people less analytically critical than I am might raise an eyebrow at that.

We look forward to hearing from the Minister, who has a particularly interesting and important personal perspective which he can bring to this debate if he is prepared to do so. He was chairman of a company, for which I was proud to work, which falls fair and square into the provisions of this Bill. It employs people all around the world, many in countries where wages and salaries are among the lowest in the world—for example, Bangladesh. There must be an argument that the cost of living in such countries is lower than in some others. This Bill would cover the worldwide workforce. It will be interesting to see whether he thinks that it would be appropriate to highlight the comparison of the salary which he had to pay to retain the most valuable member of his staff in his highest financial centre against those of the lowest 10 per cent. He may of course do so.

The noble Lord, Lord Gavron, has raised an important matter and I thank him for that. Just because we have reservations does not mean that we should not all consider carefully the transparency of information of this kind and how to encourage shareholders to take a more active interest in their companies.

1.12 pm

The Minister of State, Department for Business, Enterprise and Regulatory Reform & Foreign and Commonwealth Office (Lord Davies of Abersoch): My Lords, on behalf of Her Majesty’s Government, I thank my noble friend Lord Gavron for explaining the background and the purpose of his Bill. In reply to my noble friend Lord Donoughue—the only career I think he has not done is estate agency—there is very little negative comment from my officials in what I am about to say. Over the past few months, unsurprisingly, in the US and Europe we have seen a good deal of

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debate about remuneration. There are some underlying principles on which everyone seems to agree. We should not pay for failure. We should pay for performance. We need to ensure that every employee is paid properly for their role. We must have equality, as the noble Lord, Lord Taverne, highlighted. We also need to ensure that there are the proper processes around remuneration at the board table and the proper processes between boards and the owners of the company where the company is publicly quoted.

We also need to ensure that remuneration is fully transparent. As my noble friend Lord Puttnam said, we must be fair. This does not mean that individuals should not get fully rewarded for high performance and adding real value to the business. We must not restrict the UK’s ability to attract and retain bright, high-quality people. We must also not create an anti-business and anti-success culture within the UK. Having sat on two major public company boards and on the remuneration committees, it is clear to me that there has been much improvement in some areas of their policies. But it is also clear from the recent examples in the corporate world that some areas need improvement. From my own experience, a high degree of independence and a huge amount of work go into running a remuneration committee.

In his question about my previous employer, the noble Lord, Lord De Mauley, made reference to the company we both worked for having business in 70 markets with different wage structures. That is quite a challenge when we come to the disclosures and the ratios mentioned in the Bill.

It is worth reminding the House of the action which the Government have taken over a number of years to improve the transparency of directors’ remuneration, the accountability to shareholders and, ultimately, the ability of shareholders to consider the link between pay and the performance of the directors. In 2002, the Government introduced the Directors’ Remuneration Report Regulations. This followed a decade of important contributions to the state of corporate governance in the UK: the Cadbury report in 1992, the Greenbury report in 1995 and the Hamper report in 1999. Following detailed consultation, the Government introduced regulations which required quoted companies to publish a report on directors’ remuneration as part of their annual reporting cycles and to offer shareholders a vote on it. I shall not repeat what quoted companies are required to publish in their annual accounts; suffice it to say that they are required to table a resolution at each AGM on the remuneration report.

Additionally, regulations made under the Companies Act 2006 have introduced a new provision which came into force for financial years beginning on or after 6 April this year that requires quoted companies to report on how pay and employment conditions of all employees were taken into account in determining directors’ pay. The Government will be paying close attention to the response to this new requirement and considering how companies use it to improve disclosure in this area.

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Given recent events, there is now a much wider, active debate on the following areas, some of which have been mentioned today. How can we stop shareholders driving short-term performance in corporates and showing little interest in long-term value? How should companies handle remuneration when there is a significant change, which I found personally, working in the corporate world through the introduction of hedge funds, where the owners of the company may be owning the shares for a very brief period of time? How should remuneration committees be staffed? What is the role of an AGM, given that most large shareholders, the owners of the company and the hedge funds very rarely attend? As significant numbers of companies have moved away from options to performance shares, what is the right process for dialogue between the board, the remuneration committee and the shareholders? Should there be more detail published on the top 50, or even the top 100, executives and the top 50 or 100 highest-paid employees, who are very often different? How do we get more transparency without discouraging talent from seeking to be on the boards of top-performing UK listed public companies? How do we get the right knowledge, experience, pragmatism and professionalism on to the remuneration committees?

Most boards have exercised a high degree of control; they have dealt with the issue of conflict of interest in a measured and professional way. Indeed, the debate has now moved into the wider issue of what is the right governance model, not just for banks but for other types of companies. What should chairmen, non-executives and others get paid? What is the right training and experience required for these individuals? Exactly what is the difference between a non-executive and an executive at the chairman level—something that I have personal experience of? How do we make sure that institutional shareholders in particular offer appropriate oversight, not only on a company’s remuneration policies but more generally? That is something that my noble friend Lord Myners has been heavily engaged in.

This debate needs to involve management boards, shareholders and a variety of associations, including the Association of British Insurers and the National Association of Pension Funds. The Government have commissioned an independent review under Sir David Walker looking at corporate governance in the financial services sector, but it is just as relevant for corporate UK. At the same time, the Financial Reporting Council, which oversees corporate governance in the UK, is also reviewing the combined code on corporate governance. These reviews will report in the autumn. The FSA, meanwhile, is consulting on a draft code of practice on remuneration policies for financial services.

The banking industry’s problems have revealed weaknesses in the balance between remuneration and shareholder value. Consequently, the whole area of disclosure and executive pay needs careful and considered evaluation, as the Government and the Financial Reporting Council recognise. To be clear: we have absolutely no problem with the principle of reporting as outlined in the Bill. Our signpost is that we will take up this cause. Our worry about the Bill is that it will distract from the wider issues that I have mentioned.

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The Bill is on a topical and important subject. I therefore thank my noble friend Lord Gavron for introducing it to this House, and other noble Lords for their contribution to what has been a fascinating discussion. I also congratulate my noble friend on achieving such a high-quality list of contributors.

1.22 pm

Lord Gavron: My Lords, before I go any further, I offer an overall apology to everyone called Jones. I was brought up, like the Minister, in Wales, where we always used “Mr Jones”, “Mrs Jones” or “Miss Jones” to indicate the person in the street—but always with great respect.

I thank everyone who has participated in this debate and all those who have attended. I have been astonished—although I suppose I should not have been—by the high quality of the contributions and by how much I have learnt today on a subject I thought I already knew everything about. I certainly did not know everything about it. There were many important contributions from the beginning. I know it is Friday, there is sunshine and the garden is beckoning, but I would like to try to acknowledge some of the penetrating points that were made.

I think the noble Lord, Lord Tugendhat, with his “Superman syndrome”, has introduced a new phrase to management-speak. Very high earnings have led to that complex, and I am glad that he drew attention to it.

The noble Lord, Lord Taverne, spoke eloquently and movingly about the disadvantages of inequality. My noble friend Lord Joffe coined the myth of the market in directors. My noble friend Lord Puttnam talked about his dad’s concept of fairness, which drew accord from all of us. The noble Lord, Lord Bradshaw, asked an extremely relevant question about subcontractors, which was referred to again by the Minister. Of course the Bill will not cover everything. The noble Lord’s point about subcontractors is a potential weakness in the Bill, which could be put right if its provisions are put into legislation at that stage.

My noble friend Lord Giddens made a telling point when he said that there is no correlation between high rewards and high performance. The noble Lord, Lord Renton, who has become, in his maturity, an entrepreneur—much to my delight and admiration—talked about money not being everything. He also talked about the possibility of a special general meeting to consider any salary or earnings over 50 times more.

My noble friend Lord Haskel, who was assigned as my mentor when I first came here and has kept a benevolent eye on me ever since, raised the concept of the signpost and was also the first person to mention ethics. The noble Lord, Lord Goodhart, who talked about the wider concepts of corporate governance, mentioned the word “duty”, which I think should be in capital letters in every company office.

The noble Lord, Lord Kalms, said that he did not agree with me totally, but actually, when I think about what he said, I believe that he did. He said that there are different sorts of businesses which cannot always be equally compared, and he is right. My noble friend Lord Wedderburn, who has already spoken eloquently on this subject, drove the nail a little further home.

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My noble friend Lord Donoughue started his speech with a very significant phrase—“team spirit”. I know that he has played in teams and possibly continues to do so. Team spirit is an extremely important factor in companies and should influence some people more than it does.

I have often admired the eloquence of the noble Lord, Lord De Mauley, even when he has a weak case. I find it difficult to disagree with anything he said. I agree totally that my proposed number should not be more prominent than the profits of the company. Having run a small plc, I do not agree that if my Bill became law, it would add any cost to small plcs, and having been a printer as well, I can tell the noble Lord that it is extremely cheap to operate.

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