Lord Harrison
To ask Her Majesty’s Government what steps they are taking to improve corporate governance and accountability with respect to social and environmental issues.
Lord Harrison
My Lords, the UK corporate governance framework is built on the principle that shareholders exercise oversight of company boards. The publication last year of the UK stewardship code marked a recognition that this ownership role needed to be taken more seriously by the institutional investment community. Indeed, I believe the code should include oversight of environmental, social and governance issues, not simply because it is the right thing to do or because these issues have a material impact on company returns, but also because it translates into a competitive advantage for business. Sadly, shareholder scrutiny does not always work, as in the case of the BP oil spill due to lax safety standards. Two months before that disaster, a shareholder resolution on tar sands—a similar method of oil extraction to deep-water drilling—which was put forward to increase disclosure of the risk involved, was rejected by 90 per cent of shareholders. As the noble Lord, Lord Freud, commented in a recent debate,
“some pressure on the BP board by its shareholders in relation to environmental issues, might have been especially valuable to the company”.—[Official Report, 15/3/11; col. GC 28.]
I later asked a question of the noble Lord, Lord Freud, along similar lines. He indicated that the Government had no ideas for new regulations in the current climate but they are open to creative ways of improving the quality of disclosure. So I ask the Minister: are the Government continuing to explore non-regulatory ways to encourage better reporting by pension funds, and what assessment, if any, have the Government made of the adequacy of the reporting at present? We need to improve matters.
The UK stewardship code encourages fund managers to disclose their voting records and the Government have confirmed that it is important that all institutional investors disclose their voting. Voting and engagement on social and environmental issues is an important part of an investor’s toolkit for managing risk that could affect savers and yet, after years of voluntary codes, only 64 per cent of fund managers and 21 per cent of pension schemes publicly disclose their voting standards. The Government have reserve powers to make voting disclosure mandatory. Are they thinking about it and under what circumstances might they contemplate it? Are they open to ideas of improving the quality of pension funds’ disclosures on the management of environmental and social risks? Perhaps the Minister could tell us.
Another, besetting problem is the short-term approach to these matters. As Paul Abberley, CEO of Aviva Investors, recently put it:
“If you are investing in a company with a long-term time horizon, it very much matters to know about sustainability issues, but if you are taking a time horizon of an average holding of six weeks, you might take the view that there may be a time bomb ticking but it is unlikely to go off in my holding period”.
I am very pleased that Vince Cable, the Secretary of State, has announced a review of economic short-termism and published a call for evidence on a long-term focus for corporate Britain. In addition, he has appointed Professor John Kay to oversee that with questions such as how best to ensure that the timescales over which companies and fund managers operate match the interests of clients and beneficiaries. Equally, how do you establish the most effective means of boosting transparency for clients, underlying beneficiaries and companies themselves?
Another worry is the misinterpretation of the fiduciary duty. The FairPensions report, Protecting Our Best Interests: Rediscovering Fiduciary Obligation—I am pleased to acknowledge the help from FairPensions for this debate—was published in March 2011 and received a good hearing from Ministers Ed Davey and Steve Webb. I wonder whether the Government will respond to this, to encompass and clarify. Howard Pearce of the Environment Agency pension fund argues that,
“all pension funds will need to adopt a climate change-proofed financial investment strategy in the future to enable them to fulfil their fiduciary duties”.
However, fiduciary duties should demand an enlightened approach to social and environmental issues, but we all know that too often they are invoked to justify the reverse. Pension fund members are told that their fund cannot be concerned with stopping climate change because it has a fiduciary duty to maximise returns. On closer analysis, that seems daft.
I am a great supporter of narrative reporting. I think it is an improvement on what we have had before in company reports. Nevertheless, we have problems relating to unreliable information. Many investors say that the lack of verification makes it difficult for them to rely on narrative reports, which can be misleading or present a rose-tinted view of the world. The OFR included an enhanced audit, requiring a higher standard of verification than is currently the regime. Sometimes it is up against incomplete information. Many companies focus on peripheral corporate citizenship activities undertaken during the year, such as volunteering—I am wholly in favour of volunteering—rather than on key social and environmental risks to their core business such as water, security and scarcity. No official guidance has been published on what constitutes an adequate report. Perhaps the Minister can comment on that.
A third problem is inadequate enforcement. The regulator has judged that two-thirds of annual reports fall short of legal requirements in relation to principal risk, yet in 2008-09 it did not take enforcement action against a single company. The regulator is not resourced to take active enforcement action and generally responds only to complaints from investors and NGOs. In the light of that, I ask the Minister whether the Government can confirm that they still intend to bring forward proposals specifically to drive up the quality of social and environmental reporting, as indicated in the coalition agreement. Do the Government accept that better reporting will achieve their objective only if investors have confidence in it? Do they therefore agree that any new reporting regime must contain improved mechanisms for guaranteeing the reliability of information, whether through enhanced audit or more robust enforcement? I declare an interest as the vice-chairman of the All-Party Group on Corporate Governance.
In conclusion, I ask the Minister whether she can put the matter in this frame. Sometimes we worry about the introduction of legislation but, to my mind, and in my assessment of it, we have to create a view that consideration for environmental and social and corporate governance is not a chore but a cheerleader for a better approach to what a company is doing. It can enhance its competitiveness within the market if it complies not only in a tick-box way, but with verve, inspiration and interest. I ask the Minister whether, when they think about it deeply, her Government are capable of leading the charge of encouraging companies to take this more positive attitude, which I think will carry with it the appropriate approach to something which is very important to investors, to shareholders and to pension fund holders for the future. I am very grateful to all those who are to contribute to this debate. I look forward to the Minister's reply.
Baroness Northover
I remind noble Lords that this is a time-limited debate. When the clock shows “3”, noble Lords will have had their time.
Baroness Bottomley of Nettlestone
My Lords, the House is grateful to the noble Lord for identifying a subject that is of such concern that we all wish that this had been an all-day debate rather than just an hour's debate. I share his view that, for all the stakeholders in the debate, the institutional community is not sufficiently well engaged currently and the stewardship code offers a serious opportunity.
The fact is that we in the UK should be proud that UK companies have been at the forefront of the process. A large majority of major UK firms publish high-quality social and environmental information on an annual basis. Many produce stand-alone reports dealing with financial and social performance. Frankly, many of them are too large, too lengthy, too detailed and sometimes irrelevant. Those of us who have been Ministers for a certain time know that the way to silence Ministers is to bombard them with paper, and a corporate report lasting 500 pages is a way of befuddling rather than informing.
Companies see the importance of good corporate ethics and strategy and of reporting properly and fully about the full nature of their activities. I agree with the noble Lord that volunteering is not the same as human rights, female empowerment and avoiding child labour. We already go further in non-financial disclosures than most other EU members. I am concerned about further stringent regulations that might impose a significant administrative burden on firms without a corresponding gain in transparency.
I declare an interest as I am on the UK advisory committee of the International Chamber of Commerce. We have drawn attention to the fact that allowing a certain degree of discretion in non-financial reporting enhances transparency by allowing companies to focus on issues of more relevance and materiality to their business operations. By contrast, the tick-box approach, which I think many of us would like to avoid, would produce a sea of data and information, at considerable cost to UK plcs, that would be impenetrable to all but the most persistent reader. I think the CBI has similar views.
It is understandable that there is a desire for greater clarity. Since the Companies Act 2006, on which I made my maiden speech in this House, we have seen great development. My honourable friend’s department, BIS, has consulted on narrative reporting. We are fortunate to have her as our Minister because she had a significant commercial business career and was also chair of the National Consumer Council, so she can balance all the interests involved. Perhaps she will let us know what the Government are doing to improve the quality of narrative reports to ensure improved disclosures on the environmental and social impact of corporate activities.
Above all, I want to emphasise that the ability of global business to be a force for good, for female empowerment, for sustainability and for anticorruption in many parts of the world, should not be underestimated. As we look for modifications, we should remember the opportunities that are there.
Lord Haskel
My Lords, my noble friend Lord Harrison outlined the benefits of good corporate governance and reporting. Do they increase profits, the rate of return or shareholder value? I do not think that anybody knows. Therefore, strong forces oppose these activities and see them as a waste of money that distracts management from dealing with competition. Because one cannot show them as assets on balance sheets, they have no effect on shareholder value. These issues change with fashion. They are unpredictable and have little impact on the short-term horizon of many managers.
A good metaphor for these conflicting views is the way in which we manage our forests. The Minister may find the subject of forests painful, but the metaphor is not mine: it came from Mark Goyder, the founder of Tomorrow’s Company. We can cut down trees and harvest wood for an immediate cash benefit; then we are left with barren land. Alternatively, we can nurture the forest, plant for the future, take out the dead wood and let new plants and wildlife thrive in the forest, and thereby open up new horizons. Many of us would like to know which companies are good at forestry so that we can deal with them, work in them or invest our savings or pension funds in them.
Many of us like to drink Fairtrade tea and coffee because we know that everybody in the value chain has had a square deal, or we may look for the Carbon Trust Standard mark that tells us that an organisation has tackled its emissions. Branding enables us to make this choice. Helpfully, as my noble friend reminded us, Tomorrow's Company has produced a stewardship code that incorporates many things that we are debating this evening. Will the Government support and facilitate a branding exercise to enable us to recognise the good companies that play such an important social and environmental role in our economy?
Lord Newby
I thank the noble Lord, Lord Harrison, for introducing the debate. I declare an interest as an adviser to companies on issues of corporate governance and responsibility. There is no doubt that the past decade has seen a sea change in attitudes to social and environmental accountancy, with both voluntary codes such as that of the Global Reporting Initiative, which has been widely taken up across the world, and statutory provisions such as the Companies Act 2006, which has already been referred to and which has required companies in the UK for the first time to report on their social and environmental impacts.
The previous Government planned to go slightly further and introduce a full operating and financial review, before Gordon Brown got cold feet at the last minute. The principal difference between an OFR and what we have under the Companies Act is the requirement for some sort of audit. While I agree with the noble Baroness, Lady Bottomley, about wanting to avoid a pure tick-box approach, at present the quality of reporting on social and environmental issues is extremely mixed. Only 9 per cent of companies that Deloitte surveyed reported on their carbon emissions in line with Defra guidelines. Reporting by companies of community investment is both extremely difficult and patchy. Requiring an audit would improve standards. Under the Climate Change Act, the Government have the potential to make carbon reporting by companies mandatory. Does the Minister think that the time has come for that provision to be brought into effect?
Of course, reporting by companies is only part of accountability. The other part, referred to by a number of noble Lords, is the accountability of those who invest in companies. For many years, investors have been remarkably uninterested in social and environmental performance. This is beginning to change because people can see, not least in relation to climate change, that how companies relate to the environment will have a material effect on their long-term sustainability, particularly in some of the extractive industries. It will also be logical for pension funds, because of the long-term implication of companies’ environmental and social impacts, to take account of those factors in their investment decisions. However, as we have already heard, there are serious concerns about whether they can do that legally, given their fiduciary duties. Do the Government believe that a review of that issue is now appropriate?
Baroness Young of Hornsey
My Lords, I, too, thank the noble Lord, Lord Harrison, for securing this debate. I will declare my interests. I work with various organisations concerned with ethical and sustainable fashion, including Made-By, the Centre for Sustainable Fashion and Cotton Made in Africa. I am also a patron of Anti-Slavery International.
Many of us balk at the idea of introducing more legislation and complex regulation, especially when some businesses are taking the initiative. For example, the Responsible Sourcing Network has created a pledge for US and European companies publicly to state their opposition to the use of forced child labour in the harvesting of Uzbeki cotton and to refuse to use it in their products. There must also be firm action from the EU, and from the Governments and importers in those countries that trade with Uzbekistan.
Self-regulation and voluntary measures on their own are not always enough to secure the necessary support for the people and environments that are most vulnerable to exploitation. Reacting to stakeholder demands for greater transparency and responsibility, Governments in Europe and the US are legislating on corporate governance and accountability. In 2008, Denmark adopted an amendment to the Danish Financial Statements Act requiring large businesses and listed and state-owned companies to account in their annual reports for their work on CSR. Spain has made a similar move with the Sustainable Economy Act, which came into force in March 2011.
Where do we need to be? We should aim high. Sir Geoffrey Chandler, founder of Amnesty International’s business group and a former director of Shell and of the National Economic Development Office, argued that all businesses should be required to ensure that their operations and supply chains comply with the Universal Declaration of Human Rights. An important step towards this aspiration would be to include a requirement in the combined code of corporate governance that businesses should report annually on the measures that they are putting in place to achieve this, to uphold the rule of law and to ensure environmental sustainability in their international operations.
Professor John Ruggie, UN special rapporteur on business and human rights, argued for measures to advance corporate legal responsibility through countries establishing extraterritorial jurisdiction over corporations for violations of international laws and conventions. What plans for action do the Government have to improve the quality of social and environmental reporting, and how might they move towards the high aspirations articulated by Sir Geoffrey Chandler and Professor Ruggie?
Lord Patten
My Lords, I want to make three points before the clock strikes three. First of all, I strongly believe in the corporate, social and environmental agenda. I equally strongly believe in the enterprise economy in this country. It is extremely important that our growth agenda succeeds at a time of fragile economic recovery. Therefore I believe it is extremely important that across the piece, in the areas of environmental responsibility and corporate social responsibility, there is no more unnecessary loading of unnecessary regulation on the shoulders of businesses, which are trying to create jobs and employment opportunity. It is extremely important to counterbalance the quite proper pleas for better reporting, greater clarity and all the rest that we have seen. Along with our growth agenda, we also have, as a coalition, a happiness agenda. I know that the Minister wants to make me happy, and I hope that she will indeed make this Back-Bench Peer happy in her wind-up speech by saying that we are not going to have any more unnecessary regulation in this area of corporate social responsibility and environmental social responsibility between now and 2015.
Secondly, there are of course some successful companies that have made very good money by selling themselves quite properly as ethical producers. Body Shop and Lush are examples from the cosmetics world, while Ben & Jerry’s and Innocent are producers in the worlds of ice creams, fruit drinks and vegetables. By comparison, most companies make cars, build buildings or supply services and try to be good corporate citizens, just as most individuals try to be good individual citizens. They are generally now, I think, very responsible in these areas. The noble Lord, Lord Harrison, who has a good track record for introducing interesting debates of this sort, said in his very interesting speech that he wanted more companies to take the view that this was an important issue. In my experience, in declaring my own financial and corporate interests, I think most companies do indeed take this very seriously and have already taken the view that this is something that they should do. In other words, it has entered into their corporate DNA. Just as belatedly, in the slipstream we are seeing the need to have more women and greater diversity on the boards of our companies getting into the DNA. It is lagging a bit and still has some way to go, but with the enactment of the Bribery Act last Friday, we are going to see ethical training and ethical codes also coming along and getting into the DNA of companies. That is a very considerable agenda indeed and I think that the direction of travel is right.
Lastly, investors and institutions have been criticised for perhaps not being active enough, particularly those that hold shares for a short period. I welcome very much the Government’s encouragement for greater employee share ownership. I think that is a very good thing, and as the Government and others try to explain why participating in a capitalist economy is a good thing, at the same time they should stress financial benefits and their promotion and the opportunities for people with shares newly given to take an active interest in the social and environmental agenda of the companies of which, after all, as employees, they are now part-owners.
Baroness Sherlock
My Lords, the Minister may struggle to make us all equally happy, but I hope to find some common ground at least. I add my voice to those who look at the reasons why environmental and social reporting should be something that we promote. For a start, it would help to increase public trust in business and in those who regulate it, which we could do with as much of as possible. Nevertheless, reporting requirements are mainly there to make sure that stakeholders can make informed judgments about companies. If we overly limit that to too narrow financial information, we fail to take seriously the indirect, unintended or non-financial costs—or indeed benefits—of corporate activity. The consequences are very serious. In economic terms, it fails to account for externalities and in practice can distort a market. In social terms, it fails to take account of the full range of stakeholders who have a legitimate interest in the company's activities because they—we—are affected by them.
Is the noble Lord, Lord Patten, right in saying that no more regulation is needed? I fear not. If we look at the environment, it seems very clear that voluntary reporting simply cannot deliver results on the scale and at the pace that is necessary to meet the reduction in emissions that British law already requires. In my view, carbon reporting should therefore be mandatory, at least for large companies. In terms of social accounting, we have heard ample evidence that current narrative reporting requirements are not being followed. A recent report from the Corporate Responsibility Coalition summarised the problems pretty well as follows:
“vague corporate obligations … insufficient auditor involvement and … weak enforcement”.
Apart from that, it is going swimmingly.
There is good practice out there. I discovered recently that the first plc in Britain to produce an audited social report was not a corporate giant but Traidcraft, a medium-sized company founded in Durham in 1979 to fight poverty through trade. I am sure that my noble friend Lord Haskel has enjoyed some of its chocolate bars and tea. In 1993, Traidcraft published an audited social report, and I hope that the Minister has had the opportunity to look at its social accounts. I found them fascinating. They told me more about the impact of that company not just on its customers, members and supporters but on its supply chain right the way through to its staff and the lives of the very farmers out in developing countries. That is a true social report. I encourage the Minister to comment on it and to share some of the methodology with larger companies. There is so much more that companies could do. If they will not, they must be required to, I regret. At the very least, we should see full monitoring and compliance with the current requirements. However, we also need some guidance on what should be reported on, and we need an audit standard and, crucially, a timetable for when disclosure of social data will be verified. If data cannot be verified, it simply undermines their legitimacy at all. We may, in fact, discourage people from doing this rather than encourage them.
Lord German
My Lords, I declare my interest as a trustee of a pension fund, and I want to speak exclusively about the investment in pension funds. It is there, of course, where people are investing their money day in, day out, month in, month out, preparing for the world in which they want to live when they retire. That is why social and environmental issues are going to be extremely important for them. However, the chain of command, as it were, between the investment itself—from the pension fund investors right through to the people who manage the money on their behalf—is very long indeed. It is very difficult to see transparency through that route. That is why I think it is important that these issues should be discussed and understood right throughout that long chain.
Since 2000, pension funds have had to state the extent to which they take into account social, environmental and ethical considerations. However, much of the reporting has been very much a tick box, where people would tick a small box or put in a straight statement, which would not give enough information to the person whose money was going into that investment fund. We believe that, from the disclosure of information, you get more empowerment and that the person who is putting their funding in is getting more empowerment for their money. We have had years of voluntary codes, yet only 64 per cent of fund managers and 21 per cent of pension schemes publicly disclose their voting records so that the investors in that company can see them. Obviously, investors have a right to know and understand, but disclosure is only the first step to empowerment in the part-ownership that they have in the company.
The Government have reserve powers, which they have taken, to make voting disclosure mandatory if voluntary disclosure does not generate sufficient improvement. Of course, the coalition agreement contains a commitment to,
“reinstate an Operating and Financial Review to ensure that directors' social and environmental duties have to be covered in company reporting and investigate further ways of improving corporate accountability and transparency”.
I know that the Government have consulted on this and are intending to launch a further consultation in July; but could the Minister tell us where the direction of travel is on this particular part of the coalition agreement and where it is likely to end up?
There are three key problems that I think we need to address in this whole area of pension funds. The first one is unreliable information; that is, the lack of verification, making it difficult for investors to rely on reports that look through rose-tinted spectacles. Secondly, there is the problem of incomplete information, with many companies focusing on corporate citizenship activities, such as volunteering, rather than on key social and environmental risks to their core business. Could the Minister tell us, in winding up, whether she intends to bring forward proposals specifically to drive up the quality of social and environmental reporting, as indicated in the coalition agreement?
Lord Moynihan
My Lords, I thank the noble Lord, Lord Harrison, for securing this debate. I declare an interest as a director of the US-based Rowan Group of companies and chair of its health, safety and environment committee.
I agree with my noble friend Lord Patten that the vast majority of companies see a clear alignment between social and environmental issues and their overall business strategy. However, some companies have a gap between their board’s aspirations with regard to social and environmental issues and the way they are enabled and enacted within their own organisations. I hope that tonight’s debate will enable government to work afresh with companies to close the gap between companies’ stated social and environmental policies and the actions and investments they make to pursue those objectives, particularly where the objectives may lack a clear financial return on investment or drive long-term rather than short-term benefits.
As my noble friend Lord Newby said, Deloitte, in its impressive analysis of sustainability and business today, concluded that while many companies promote the sustainability concept of the triple bottom line—pursuing performance in economic, social and environmental spheres—most companies primarily invest in environmental initiatives out of the three. I believe we live in a generation where there is an imperative for companies to consider broadening their efforts in the communities in which they operate as well as in the physical environment. In this context, I support the proposal for companies to drive for competitive advantage by helping them establish or maintain a voluntary social licence to operate in their target communities and markets; that is, to gain the support of the people who live and work in those communities and markets.
These objectives and principles can be embedded in the corporate governance criteria followed by all companies and, of course, in their reporting policies, not least where social and environmental issues are usually considered alongside safety within the remit of HSE committees. I agree with the noble Lord, Lord Harrison, that social, environmental and safety issues should all meet the legal and voluntary requirements to be fully and appropriately covered in annual reports and, I would add, in internal reporting to employees and, as the noble Lord, Lord German, has just said, to the investment community as well.
From my experience the energy sector, human safety and environmental protection, regulatory oversight of licensing, energy exploration and production require reforms and a new priority within corporate governance, even beyond those significant improvements already made by the sector and this Government. This is an area where co-operation and dialogue with government should be preferred to further primary legislation at this time.
Lord Whitty
My Lords, I congratulate the coalition on rectifying what I thought was part of a very bad mistake by the previous Government whereby, even though the noble Baroness’s department was all lined up to introduce operational and financial review provisions that would have required companies to report on social and environmental objectives, the carpet was pulled from under them by the Treasury, as the noble Lord, Lord Newby, said. I am glad that the intention is there; now let us see the reality.
I am going to dwell largely on carbon reporting, and I declare an interest as a member of the Environment Agency’s board. In that capacity, I chair the Environment Agency’s pension scheme, whose chief officer my noble friend Lord Harrison has already quoted, which attempts to ensure that our investments help to induce some more effective environmental and social reporting.
Clear environmental reporting, particularly on greenhouse gases, has a major effect not only on transparency but also on internal management behaviour and external investors’ priorities. Without clear, effective and audited reporting, we will not meet the changes that are required in company behaviour in order to meet the climate change objectives that were laid down with all-party support in the Climate Change Act.
The Climate Change Act provides enabling powers in this respect. It is also important to recognise that, as far as the institutions, particularly pension funds, are concerned, there is no conflict between a proper interpretation of fiduciary responsibility, an interest in climate-change proofing the activities, objectives and balance of activities of companies and investors of funds. Indeed, all such large bodies should include within their objectives a climate-change proofing strategy, but that is not the case.
As others have said, only just over half of large companies have any reporting of climate change objectives and, of those, only 22 per cent have any reporting that relates to the Defra guidelines. As the noble Lord, Lord Newby, said, only 9 per cent of larger companies fully comply, according to the Deloitte survey. That does not indicate—and I am afraid I have to differ with the noble Lord, Lord Patten—that there has been a change in the DNA of corporations, or at least in that of their auditors and accountants. As the noble Lord, Lord Moynihan, said, it may be that the good intentions of the board are not being reflected through the technical reporting responsibilities. However, without those indicators internally and externally, we cannot achieve the climate change objectives that we need, so they are a vital tool for those objectives.
I hope that the Minister will be able to say tonight that the wind is moving in the right direction on this and that we will see some action. I look forward to her response.
Lord Stoneham of Droxford
My Lords, I want to address two issues in the context of this debate. I believe that there is too much emphasis on short-termism in companies and there is often a danger of arrogance, particularly in dominant market positions.
Too many companies are pressed by the short-term-profit instincts of the stock market and investment banks and cannot think long term. I worked for a local newspaper company with strong family ownership traditions. It believed in investing long term for the next generation and for its local communities. We worried constantly about the dangers of overgearing in a very cyclical industry. It was taken over in 1999 by an executive team committed to a business model of borrowing, cutting costs and assuming that the boom would go on for ever. Ten years later, that company came to the brink of bankruptcy, and shareholder value today is 2.5 per cent of what it was in 2007. It simply never thought long term.
Successful companies can get introverted and arrogant. They can become oblivious to their communities and markets, particularly if they are too dominant in their markets. I believe the high-paying bankers got remote and out of touch with reality for those reasons. Even Tesco seriously contemplated unacceptable tax-avoidance schemes despite its prime dependence on British consumers, and News International, which I worked for at the time of the current phone-tapping scandal, but not as a journalist, perhaps will find that it became too arrogant with its success and out of touch in its pursuit of competitive advantage. Some of its executives lacked a hinterland that would have warned them against the consequences of their actions. It is frightening that a risk taken nine years earlier can finally catch up with that company.
We need counters to short-termism and arrogance. Principal shareholders are now largely pension funds, which should be primarily interested in the long term. Wider social responsibilities need instilling in directors to keep them in touch with their communities and markets. The key for the Government—and I am pleased that the coalition is reviewing this—is to clarify the requirements for company reporting, to improve identification of risks and to force directors to address their social and environmental concerns and risks. Greater concern for social and corporate responsibility should help counter company arrogance and complacency, and we should encourage the accountability of pension fund managers to their savers, so social and environmental risk is at the forefront of their responsibility as shareholders.
Lord Young of Norwood Green
My Lords, I also wish to congratulate the noble Lord, Lord Harrison, for introducing this debate on such an important issue.
I declare an interest as vice-chair of the Ethical Trading Initiative, which is a tripartite organisation whereby companies, trade unions and NGOs work together to improve the lives of workers throughout supply chains, which in today’s world are truly global. Companies that sign up to The ETI Base Code, which is based on the ILO conventions, agree that,
“Employment is freely chosen … There is no forced, bonded or involuntary … labour …. Freedom of association and the right to collective bargaining are respected … Working conditions are safe … Child labour shall not be used … Living wages are paid … Working hours are not excessive … No discrimination is practised … Regular employment is provided … No harsh or inhumane treatment is allowed”.
Needless to say, all these companies are on a journey, but there is a real pledge and commitment in their reporting to try to live up to these principles enshrined in the base code.
In this brief contribution I will touch only on the issues of transparency and accountability, which seem to me the key themes that have run through this debate. Let me quote from a speech that Ed Miliband made on responsibility. He said:
“On pay, companies should publish the ratio of the pay of its top earner compared to its average employee. If it can be justified by performance, they should have nothing to fear. We need shareholders to better exercise their responsibilities to scrutinise top pay. And we also need to recognise—as many great companies do—that firms are accountable to their workers as well as their shareholders. Some companies already understand that having an employee on the committee that decides top pay is the right thing to do. We should debate whether this requirement should be extended to all firms. And of course the same should be true in the public sector. So we need responsibility at the top of society, but we also need it at the bottom”.
On the need to avoid the short-termism that has been referred to during this debate, Ed Miliband said:
“It is worth recalling that JP Morgan founded his financial company on the idea that the ratio of pay between the highest and lowest paid employee should be no more than 20 to 1”.
Interestingly, the noble Lord, Lord Patten of Barnes—not to be confused with the noble Lord, Lord Patten, who spoke in this debate—recommended something similar in a contribution he made on Andrew Marr’s breakfast show. The new chair of the BBC Trust suggested that he was interested in the “very good ideas” contained in the Hutton report on public sector pay, which suggest not a ratio but certainly something like this 20 times approach. The Hutton report said that that pay multiples should be published and any increase in the figure should be explained publicly.
I want to end on this question of whether exhortation, as opposed to a bit more regulation, is the right way forward. We can see from this debate that there is still a long way to go on the quality of reporting from many companies. How important is this? We should focus our minds on the fact that, in October 2012, another 9 million people will start to be enrolled into pension schemes, in which their savings clearly will be at an investment risk because they will be members of defined contribution schemes. There is a real importance in ensuring that companies are not short term in their approach and that they genuinely recognise their environmental and social responsibilities.
I look forward to hearing the response of the noble Minister.
The Parliamentary Under-Secretary of State, Department for Business, Innovation and Skills (Baroness Wilcox)
My Lords, I should like to thank the noble Lord, Lord Harrison, for raising this important and timely question on what steps the Government are taking to improve corporate governance and accountability on social and environmental issues, a subject that I have some knowledge of, because I wrote the first corporate and social responsibility document for Cadbury Schweppes, and, well you see where it got them. I am therefore going to try to answer as many questions as possible as I go through, because this really has been a most engaging debate. I am amazed that we have managed to get through so many speeches in such a short time with so many questions, and my noble friend is already telling me to get a move on, so I shall.
As my noble friend Lady Bottomley stressed, strong corporate governance must be at the heart of successful capital markets which work both for companies needing to raise capital and investors looking for solid and sustainable returns. It is essential for the long-term health of our British economy. It is equally clear that accountability and transparency are the bedrock of a vibrant corporate sector. They build trust and, as the noble Lord, Lord Harrison, said, underpin business decision-making and long-term performance. Britain has been a pioneer in developing high standards of corporate governance but we are far from complacent. A few weeks ago my right honourable friend the Secretary of State for Business announced that he had asked Professor John Kay to lead the review of the effect of British equity markets on the competitiveness of British business. This will address issues of vital importance to the long-term performance and governance of British quoted companies. I am delighted to note the support of the noble Lord, Lord Harrison, for the Secretary of State’s thinking on this.
My noble friend Lord Patten asked whether the Government will introduce further regulation. As we said in the call for evidence, on a long-term focus for corporate Britain the best solutions are those which are owned and driven by market participants and investors in companies. Therefore, we want to work with the companies and the City to develop business-led solutions.
My noble friend Lord Newby asked whether the Government should review fiduciary duties. The Kay review will consider whether government policies directly relevant to institutional shareholders and fund managers promote time horizons and effective collective engagement. If that is not clear, we will write. I am not sure whether I answered that correctly. We recognise the importance of social environmental issues to the long-term success of businesses. All directors have a general duty to have regard to the impact of the company’s operations on the community and the environment. That is reflected in the way in which they report to their shareholders, notably in the business review part of the company’s annual report.
The purpose of the business review is to help shareholders assess how the directors have complied with this duty. Quoted companies must provide information in the business review about environmental, social and community issues to the extent necessary for an understanding of the company’s business. Some companies already make high-quality disclosures but the standards are not applied consistently, as we have heard. Getting this right is crucial if we want to achieve balanced and sustainable economic growth. In the growth review, we gave a clear commitment to simplify the reporting framework. The work we have been doing on narrative reporting is important. Our aim is to give shareholders the information that they need to make well informed decisions without adding to the regulatory burden.
The noble Baroness, Lady Sherlock, spoke of introducing a higher audit requirement. In July, the Government will consult fully on these matters. They will of course need to avoid placing additional regulatory requirements on business unless there is clear evidence that they will help to improve the quality and relevance of the disclosures. We aspire to make reports less complex and cluttered. We will enable quoted companies to provide clear and relevant information to investors about strategy, performance and risk, using a more concise report with supporting information on the company’s website.
The noble Lord, Lord Harrison, asked what constitutes adequate reporting and assurance of the information contained therein. I thank the noble Lord for that question. An adequate report meets the needs of investors and, as such, investors should engage with companies to determine specific standards of assurance.
My noble friend Lord Patten asked whether the Government will introduce more regulation in narrative reporting. We want to ensure that we have the right framework, which would be a win for everyone. Boards should face less complexity and shareholders and other readers should be able to access information more easily. That means removing any duplicate requirements, improving guidance and making it easier for companies to adapt to national and international developments. Our consultation, which will run from July to October, will consult on proposals to address these aims and we look forward to receiving the views of many noble Lords who are here tonight.
The noble Lord, Lord Haskel, asked whether the Government will support a branding exercise. The Government support a range of industry-led awards in this area, which have proved to be very effective. They will continue to support these and I would encourage the noble Lord to help us in this.
The noble Baroness, Lady Young, asked whether the Government will bring forward proposals specifically to drive up the quality of social environmental reporting as indicated in the coalition agreement. The answer is yes. The Government’s consultation will address the issue of how social and environmental reporting can be better integrated into the narrative reporting framework to drive up the quality of the disclosures of this information.
In answer to the question asked by the noble Baroness, Lady Sherlock, no decision has been taken yet on whether to regulate. The consultation is aimed at understanding whether regulation is necessarily the best way to ensure consistency in reporting. My noble friend Lord Newby and the noble Lord, Lord Whitty, asked whether the time has come to review the reporting of environmental emissions. The Government have launched a consultation to consider options including a voluntary alternative to promote more widespread and consistent reporting of greenhouse gas emissions by companies in their annual reports. This was an open consultation with no preferred option. It closed today and it will report in the autumn.
We must keep an eye on the European and international agendas. Commissioner Barnier published his Green Paper on corporate governance in April and the Government will respond to it, ensuring that Britain continues to play a key role in shaping European thinking. My right honourable friend the Secretary of State for Business will be taking forward our thinking in the international arena this summer.
The noble Lord, Lord Harrison, asked whether proposals will be brought forward specifically to drive up the quality of social and environmental reporting as indicated in the coalition agreement. The answer is yes. The Government’s consultation will address how social and environmental reporting can be better integrated into the narrative reporting framework to drive up the quality of disclosures of this information.
Better governance is allied with stronger corporate responsibility, an issue we take very seriously. It is not just about businesses not doing harm; it is about them helping to build a better society. We are committed to helping businesses succeed so that they create the jobs, the wealth and the opportunity that our country needs. We want to encourage enterprise and make it easier for small firms to grow. Our commitment to business and the commitment we are asking for in return from all businesses, large and small, is set out in Every Business Commits. This responsibility deal between businesses and the Government asks them to show that they are serious about meeting their social responsibilities by, among other things, protecting the environment and supporting communities.
Finally, I should like to mention the recent review by the noble Lord, Lord Davies, Women on Boards, which highlighted the low numbers of women reaching senior positions in our companies. The report set out a body of evidence that showed that diverse boards are in a better position to make good decisions. A company and its shareholders profit from this. As a result of the report, things are already changing. The Financial Times reports that in the first two months of this year, 35 per cent of new FTSE 100 board appointments were women. If there is not enough change in the next few years then the Government will consider what further action they will take. However, the key recommendations of the noble Lord, Lord Davies, are for companies themselves. These are aimed at the larger companies, the FTSE 100 or 350. However, I would hope that all companies will think about the report and about how they can benefit from its findings.
The noble Lord, Lord Harrison, asked some detailed, important and pertinent questions about pensions as did the noble Lord, Lord German. My answer to them both is, as I have no doubt the noble Lord, Lord Harrison, knows, pensions are the responsibility of the Department for Work and Pensions and I will liaise with colleagues in DWP and write to both noble Lords to ensure I provide a coherent and joined-up answer.
As we work through these issues our conclusions will be informed by the principles underpinning our thinking on how to renew the corporate governance framework; a commitment to rebuilding trust; a determination to empower shareholders and a focus on protecting long-term values. We are not in the business of weighing companies and investors down with more regulation and higher costs but we are going to shine our spotlight on corporate governance to improve accountability and transparency and secure long-term, sustainable economic growth for United Kingdom companies. I wonder whether the noble Lord, Lord Harrison, would like to have a final thought. There is no reply but I am sure that if he wishes to—
Baroness Northover
I am more than happy to allow the noble Lord, Lord Harrison, to speak, given that we have a minute.
Lord Harrison
Perhaps before the Minister sits down, I could thank her for her thoughtful reply. I look forward to some of the developments from the Government. I would like to extend my thanks to all Members who have participated in what was a very interesting and fascinating debate. I hope that we can return to it as matters develop. Once again, I thank everyone.