Businesses: Rights and Responsibilities
Lord Hodgson of Astley Abbotts
That this House takes note of the case for maintaining the balance between rights and responsibilities in the corporate sector.
Lord Hodgson of Astley Abbotts (Con)
My Lords, I begin by reminding the House that most of my commercial career has been spent in the City of London. I therefore have had the chance to see the ebb and flow of corporate behaviour at first hand. My remaining and existing commercial links are, of course, declared in the register of your Lordship’s House.
The origins of this Motion were from a QSD that I tabled on 18 May last. I invite the House to note that date. I was concerned then that there was increasing public concern about the role of the corporate sector in our national life. Since then, there have been at least two epochal events—the decision of the people of this country to leave the European Union and the decision of the people of the United States to elect Donald Trump as their next President.
Some commentators referred to the debate on the EU referendum as a contest between Project Fear, from those who wanted to remain, and Project Rage, from those who wanted to leave. Certainly, Trump’s successful campaign had an element of rage within it. In my view, those who raged did so because they felt that the economic system had not worked successfully to their advantage, that their living standards had been static and that they had increasingly lost control of their lives. They are right in at least two senses. First, as most commentators would agree, the share of reward or profit going to capital has increased at the expense of the share going to labour, and within the share going to labour the division of that reduced amount has not been sufficiently fairly shared between the administrative managerial classes and the rest. Specifically, in this country, there has been rage about the emergence of what is fast becoming two nations, London and the south-east and the rest. It has led to a grumbling dissatisfaction with the established order, which has its most brutal expression in phrases such as, “We need to drain the swamp”.
Some of my business friends seem to take comfort from the fact that this appears to be aimed at the political class alone. I have said to them—and I say now—that if you follow the thread of that argument through, it is not long before business and commerce start being seen as part of the swamp, too. Nevertheless, I believe that the system that we enjoy in this country, which links liberal democracy, established personal rights and freedoms, with universal suffrage and capitalism, the right to buy and own property and to sell one’s labour freely, is the system most likely to provide the best outcomes for the greater proportion of our fellow citizens. Of course, it is not perfect, and I accept that there are those who argue for a different system—for example, with a return to a greater degree of public ownership, but that is an argument for another day. But our existing system will endure only if our fellow citizens feel empowered by it, which will not be achieved by political actions alone. It will require British commerce and industry to reflect very carefully on their powers and influence and how they are to be deployed in future, particularly given the upcoming fourth industrial revolution, which will transform our society with the introduction for the first time of artificial intelligence and robotics. It is to examine that balance and the challenge that it represents that I have tabled this debate today in your Lordships’ House, where there is a wealth of experience on all sides of the argument.
There are those absolutists who, despite the provisions of Section 172 of the Companies Act, say that the business of business is business and that a company’s only duty is to comply with the law and thereafter its only duty is to maximise profit for its owners and shareholders. At its most extreme, such people take the view that, if the Government or Inland Revenue cannot draft the regulations sufficiently tightly to avoid well-publicised schemes, the company is entitled to pay no tax at all. Whatever may have happened in the past, today, with much greater transparency and with information available around the world at the click of a mouse, that view does not hold water. Indeed, its widespread practice would undermine public confidence in the established order—and where will owners and shareholders be then?
On the balance, it is a truism that successful businesses are an essential part of our society, creating employment and providing substantial revenues to the Exchequer. To be able to operate successfully, they need certain conditions to be fulfilled. Those are their rights. They need an appropriate system of company law, enforced by an independent judiciary; an administration that operates, at local or national level, free from the taint of unfair influence; a Government to whom they can turn for support in their dealings with other Governments or their representatives; and a system of regulation that is not unduly burdensome and is reviewed from time to time to ensure its continuing effectiveness and relevance. Last but not least, they need a degree of constancy of approach, as many business decisions are by their very nature long term, and too frequent jerks of the tiller of the ship of state are not helpful.
In very great measure, this Government have provided that framework in a very sensible way. Inevitably, there will always be arguments about the level of regulation, but the fact that the Red Tape Challenge is now an established part of the Whitehall machinery provides at least an avenue for redress. Perhaps only in one sense have the Government fallen short—in constancy of approach. Many businessmen talk to me about the frequency of the turnover of Ministers in departments. Every Secretary of State is going to want to impose his or her mark on the department, which inevitably means shifts in direction and changes in priorities, which are not helpful to the creation of a good business climate.
So much for the rights of the corporate sector—what about its responsibilities? I am aware that the criticisms that I am about to make are likely to be met with the retort that only a minority is behaving irresponsibly. That may or may not be true, but the bad guys make the weather in public opinion. Given that the reputation of the corporate sector is at present fragile, the sector has to accept responsibility for the behaviour of its weakest links. First, there is the democratic deficit as regards shareholders, with the effective disfranchisement of private shareholders, who increasingly hold their shares through PEPs and ISAs, SIPPs and other collective investment vehicles. Such shareholdings cannot be in the name of the individual; they have to be in a nominee name. Furthermore, as settlement periods for Stock Exchange share dealing are shortened, stockbrokers increasingly require their clients to hold their shares in a nomineeship. The consequence is that notices, results of meetings or general announcements never reach the underlying shareholders, who become cut off from the company in which they have invested. You might have expected that companies would wish to maintain links with people who are, after all, their owners—but I am afraid not a bit of it. They appear to take very little or no interest at all. Instead, company managements tend to focus on the handful, often no more than 10 or so, of the institutional shareholders who together effectively control their destiny.
That takes me to my second point. The standard of stewardship by most financial institutions is remarkably low. Dealing with institutional shareholders, as I have done in my past life, can all too often be a deeply depressing experience. They have a limited understanding and interest and, in the case of tracker funds, no interest at all; an unwillingness to help to address important issues and challenges; and an unreadiness to get involved, except to complain when the company is not progressing as fast as the shareholder would wish.
The third aspect where the corporate sector has been found wanting is in addressing public concerns about the level of executive pay. This topic alone could take up a whole debate. I have been the chairman of a remuneration committee of a public company, and I know that setting executive pay is an exceptionally difficult and challenging thing to do—so I am not trying to underestimate the problems that it presents. But there is a widespread view that the sector is in denial about the problem. At the very least, it has put the problem into the drawer marked too difficult. The FT on 24 November had as a front-page headline, “Theresa May suffers backlash over flagship business reforms”. Having read the report, which I have here, I do not think that it is a very fair headline, but never mind that—it is the headline. The impression is that the corporate sector is being dragged kicking and screaming to make changes that address public concerns. How much better would it be if the sector was to get ahead of the curve and bring forward its own proposals?
I leave those areas where the corporate sector is directly responsible and turn to other areas where a clearer and better contribution to society could be made, such as employment practices. I assure the House that this is not going to be a rant about immigration. I recognise that selective immigration is an important part of maintaining a dynamic economy. Too often, however, the British corporate sector sees immigration as the default option. It can be easier and cheaper to recruit trained individuals from outside the UK instead of training up our own settled population.
I have two examples. I have a house on the border of Shropshire and Herefordshire, where a great deal of soft fruit is grown. It can be easier for a fruit grower to ask a gangmaster to provide 100 temporary workers to undertake fruit picking for a couple of months in the summer than to hire 100 British workers individually. The gangmaster takes responsibility for all the interviewing and associated paperwork before delivering and removing the workers on the agreed dates. But one consequence is that the local unemployed do not get a look-in.
My second example is not anecdotal. In a report permitting increased immigration of healthcare workers, Professor Sir David Metcalf, the chair of the Migration Advisory Committee, a government body, said:
“We have reluctantly made this recommendation. However, there is no good reason why the supply of nurses cannot be sourced domestically. There seems to be an automatic presumption that non-EEA skilled migration provides the health and care sector with a ‘Get out of Jail Free’ card”.
An authoritative cross-party committee of your Lordships’ House looking at the economic impact of immigration said:
“In the long run, the main economic effect of immigration is to enlarge the economy, with relatively small costs and benefits for the incomes of the resident population”.
These examples and this conclusion are unlikely to convince the wider British society that the corporate sector has its interests truly at heart.
As part of a serious effort to restore public trust and confidence, the sector might consider a much wider and better publicised effort to support initiatives in our civil society. These could take the form of direct action. For example, a running sore in our society is the ineffectiveness of our prison system, with two-thirds of our prison population reoffending within 12 months of release. Every study suggests that what a prisoner wants on release and what is most likely to stop him or her reoffending is a house and a job. How many UK businesses are making a really serious effort to employ ex-offenders? How many are ready to accept the inevitable setbacks and disappointments, secure in the knowledge that there will be individual successes and, more generally, that society will slowly recognise the contribution that business can make to our social cohesion?
If direct action does not fit the bill, businesses can do more to support charitable and voluntary endeavours in the communities in which they operate. This is not just about money, it is about providing skills and expertise to these groups—and it is by no means a one-way street. Those businesses that have adopted this approach find that their employees’ subsequent performance is enhanced by having had to work with volunteers—notoriously difficult to lead—while tackling extremely difficult socioeconomic problems.
Let me conclude: it is perhaps not too dramatic to say that we have a bit of a struggle going on for the soul of our liberal democratic system. The Prime Minister and the Government have led the way by raising some important issues and asking serious questions in the Green Paper released last week. But the struggle cannot be carried by politicians alone. All those who believe that our current broad approach is the best one will have to fight for it, explain its values and make the necessary changes so as to demonstrate its relevance and its worth to those who have felt increasingly disconnected and disempowered. In this struggle, the corporate sector has a critical role to play—standing fastidiously on one side saying that it is all down to the politicians is not an option if our system is to survive. I beg to move.
Lord Monks (Lab)
My Lords, I am grateful to the noble Lord, Lord Hodgson of Astley Abbotts, for so thoughtfully introducing and launching this very timely debate on corporate governance. I share his enthusiasm for this subject; if I do not agree with everything that he has said, it is not for the fact that we do not have a lot in common in many of the analyses that he has made.
In my view, the issue of corporate governance is at the heart of many of the weaknesses of the British economy, which continue to be a drag anchor on our performance in some important areas. Indeed, I would go as far as suggesting that, rather like some banks, capitalism itself—if it does not pay heed to some of the criticisms—is not too big to fail when it is set against the challenges that it faces. Our current economic model has features that pose a threat to our prosperity as a nation, whether we are in or out of the EU in the longer run.
We all know, at least theoretically, what we need to do. We need to concentrate much more on long-termism—long-term investments and boosting productivity through investment in the best possible equipment and best possible skills. We also want to see fair wages applied throughout the economy. But instead, the real focus of much of business is on short-term returns to shareholders—the noble Lord, Lord Hodgson, referred to that—and linking those returns to the remuneration packages of senior executives, which I understand takes an inordinate amount of time in some boardrooms to try to resolve. The results are a historically low rate of investment, with the UK among the OECD’s less impressive performers, a level of productivity that is embarrassingly poor compared to similar nations, and real wages which, for the many, have barely moved since the economic recession of 2008. At the same time, executive pay has rocketed and the gap between the top and bottom earners has widened, showing no sign of significant narrowing.
I welcome the fact that the Prime Minister recognised this when she launched her leadership campaign for the Conservative Party and said:
“I want to see changes in the way that big business is governed”.
She went on to criticise the make-up of boards, saying,
“we’re going to have not just consumers represented on company boards, but employees as well”.
I was sorry to see her subsequent retreat once the CBI had said boo to these ideas. Instead we have a rather weedy Green Paper on corporate governance, which complacently lauds the British model of corporate governance, claiming rather vaingloriously that it is “world leading”, giving us an “international competitive advantage”. In my view—and I think in the Prime Minister’s view when she gave that speech to launch her campaign—this particular phraseology in the Green Paper is wrong; the original remarks by the Prime Minister were right.
The Green Paper floats ways to develop the connection between the boardroom and the workforce, including the establishment of advisory panels and the appointment of designated non-executive directors to take responsibility for articulating stakeholder perspectives. This is rather paternalistic. It is not really good enough, although it will no doubt be too much for many employer interest groups, which predictably will already be drawing up their lobbying proposals to weaken still further the Government’s already waning interest in this important subject.
We are in danger of missing a great opportunity to reform directors’ duties, so that directors are required to promote the long-term success of their company. We are perhaps missing, too, the opportunity to go further and to recognise the interests of other stakeholders—not just the shareholders—in corporate governance and, in particular, the interests of the workforce, which often has the most at stake in any problems that a company runs into. The workforce is of course often lauded as a company’s greatest asset, but too often it is sacrificed on the altar of boosting short-term returns. It is also too often undertrained and underpaid.
Part of the answer to these problems—though not all the answer—would be elected worker representatives on the board. They would be a pressure point for long-term success and organic growth and would help to counter the emphasis on short-term financial engineering. In much of continental Europe, as many of your Lordships will recognise, worker representation is an accepted and valued part of how large companies operate, including, currently, in the continent’s most successful economies—Germany, Austria, the Netherlands, Sweden and Denmark. In those countries, worker representation on boards is a widely supported feature of company life. Even among company chairmen there is a high degree of support. I remember asking a Dutch CEO who had been a manager in Britain before taking a top job in the Netherlands what difference this worker representation made. He said that it probably made a marginal difference to some of the decisions his company took, but that it made a big difference to the way in which they were taken and the care that was taken to involve the workforce in the steps that were taken. When I was general secretary of the European Trade Union Confederation, I encountered similar experiences in Germany, where worker-directors take hard decisions without breaching any confidences. They make sure that these decisions are taken after considering all the alternatives. They are careful in what they do and treat people as human beings.
The evidence is clear that countries with high standards of worker participation—rights on boards, workplace representation and collective bargaining—score more highly across a range of measures such as R&D expenditure, the employment rates, educational and training levels and participation. They also have higher scores on economic success and a more equitable economic success, with narrower gaps between the top and the bottom than we have at present.
This correlation between success and worker involvement and participation is not just a coincidence but a direct result. I ask the business community to reflect upon these lessons from abroad. It is not just lessons from abroad; I noted that there has been some support expressed recently in this country for worker representation on boards. Legal & General and Aberdeen Asset Management both supported the kind of things that came from the union side of the debate on the issue of the Green Paper. FirstGroup, an important transport company, has a worker-director. I wish that others would put their short-term interest to one side and come to the same conclusion.
I hope that the Government will become less complacent as they consider the responses to the Green Paper and will return to the Prime Minister’s original ambition, that they will summon up some courage to face down the employer lobbyists who will be extremely busy trying to make sure that none of this happens, and that they summon up the energy to create a framework of corporate governance that works for everyone, not just the privileged few.
Baroness Bottomley of Nettlestone (Con)
My Lords, I am delighted to follow the noble Lord and speak in this important debate. He made some extraordinarily serious points. He will know that I have never regarded him or his colleagues as “embarrassing elderly relatives”. I have long thought that was one of the many comments uttered by a former Labour Prime Minister that was utterly reprehensible. Good employment practices and partnership with those who work in business is the only way to have a truly effective outcome.
Many models and developments in the public sector are equally applicable to the corporate sector. I am grateful to my noble friend for initiating this debate as I referred in my maiden speech to company law and the Companies Act 2006. My noble friend was then an opposition spokesman. He has strong views on not only company law but also charity. The parallels between the public, charitable and commercial sectors in terms of good governance are evident.
Recent events have given rise to concerns about corporate excess and the degree to which all feel engaged in the nation’s success. My noble friend referred to the McKinsey point—namely, that 10 years ago, 2% of the population felt that they would be worse off than their parents, but the figure is now 75% to 80%. There are real challenges around globalisation and people feeling that everyone benefits from it. The Governor of the Bank of England, in a particularly insightful and profound speech, addressed some of these issues only this week and called for,
“more inclusive growth where everyone has a stake in globalisation”.
The tragedy, however, would be if we were to turn our back on free trade. The International Chamber of Commerce, the UK advisory committee of which I have long served on, has pledged itself to reargue the case for free trade.
Over the last 20 years, trade has played a pivotal role in cutting world poverty by 40% and increasing global GDP by over 50%. In 2017, global growth is forecast to be under 3% for the sixth consecutive year, with foreign direct investment forecast to fall by 15%. Across the EU and US society, people are divided on the benefits of globalisation. However, we have to fight and get back to the basics of free trade and explain how trade tackles poverty, raises living standards and creates jobs. Above all, we have to rebuild trust between business and society.
Way back when Ted Heath, the former Prime Minister talked about the “unacceptable face of capitalism”, he referred to Tiny Rowland and Lonrho. However, the author of the recent biography of Ted Heath, Michael McManus, said that Ted Heath intended to refer to,
“an unacceptable facet of capitalism”,
rather than face of capitalism, but that his poor eyesight let him down while he was reading the speech. That rather changes the situation. However, as my noble friend said, “bad guys make the weather.” Recently, we have had Mike Ashley at Sports Direct and Philip Green’s apparent systematic plundering of BHS. We are seeing the work of the Select Committee on corporate governance and now we have the Green Paper. Therefore, this is an opportunity for us to look at this issue again. However, I do not want us to forget our basic principles because the primary architect of UK modern corporate governance was the late Sir Adrian Cadbury. His review in 1992 Financial Aspects of Corporate Governance, in the wake, then, of more bad weather, with Robert Maxwell’s £440 million pension fund raid and the Polly Peck abuses, was the groundwork of the principles and practices that have stood us in extraordinarily good stead. Adrian Cadbury defined corporate governance as being,
“concerned with holding the balance between economic and social goals between individual and communal goals. The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society”.
That was written in 1992. For me, those are still the basic principles. Sir Adrian set out the code of best practice under the stewardship of the Financial Reporting Council. We have been extraordinarily well served by the FRC and we should think long and hard before moving away from that model, which above all instils the “comply or explain” principle. We do not like rules-based quotas. We find our flexibility in the UK system of “comply or explain” to be so much more effective and has stood the test of time.
Are executives subject to sufficient independent challenges? Are they promoting the long-term success of business? Is there a proper balance between shareholders, employees and society? I remember when I was invited to join the first board that I joined, which was a two-tier Dutch listed board, the chairman said, “We are very worried Mrs Bottomley that you will bring that adversarial approach to corporate governance that the Brits have. We are very consensus seeking”. I think a bit of adversarial challenge, scrutiny and vigilance on a board is pretty important. However, for a long time I had to be careful how I phrased my questions.
During my time as Health Secretary, I invited Sir Adrian to meet the key regional health authority chairmen to talk about unitary boards and the appropriate relationship between the chairman and the chief executive, how the committee should work and how the composition should work. It was hugely important. We have seen how in health trusts and universities and all parts of the public realm much greater care is given to how those boards are constituted and what people bring to the party. I see the noble Baroness, Lady Prosser, a long-standing friend of mine, who did excellent work on the board of the Royal Mail. That was an excellent board with different people from different constituencies working in a common purpose. The old boys’ club of boards, where individuals all had a huge amount in common has given way to a real belief in diversity and difference, leading to creativity and avoiding “group think” in a way that is extraordinarily impressive. We have had the Greenbury report, the Hampel report, the Turnbull report, the Smith report and the Higgs report, which framed the role and responsibilities of the non-executive; brought in the senior independent director, who everybody thought would be a troublemaker to start with but has been a force for good between the role of the chief executive and the chairman; and introduced avoiding moving from being chief executive to chair; having a proper independent audit and board evaluation. Many concepts were resisted initially but are now implemented across our more enlightened businesses. How different from the US, where over half the Fortune 500 businesses have a combined CEO and chair.
Far be it from me to sound complacent, but I feel strongly that the FRC and our structure of corporate governance—albeit there are areas where I would like to see more movement—has stood us in good stead and has been extraordinarily effective. Sir Christopher Hogg, another former chairman of the FRC, once said, “A cosy board is not a good board. A board should have some tension in it”, and Sir Derek Higgs talked about the “critical friend”. These are not groups of chums but professional people with a job to be done. There is a lot of misunderstanding about the composition of boards, because they have changed beyond all belief. We have gone from 11% female membership boards to 27%, all done on a voluntary principle—there has been quite a lot of naming and shaming in quite a constructive way; all credit to Cranfield School of Management, the 30% Club and the work of the noble Lord, Lord Davies of Abersoch, and others. Now we have Sir John Parker saying that British boards should look to have at least one ethnic minority member in the foreseeable future, and that FTSE 250 boards should move along behind that.
Executive pay and remuneration is certainly a controversial and difficult subject. When I was responsible for virtually 1 million employees—although I think all the hard work was done by my noble friend Lord Freeman at that time—recruitment, retention and motivation did not mean excessive pay but we said, “We want to pay people fairly but we’re on a very limited budget. How can we make sure people don’t leave?”. I do not think that in the corporate world such a frugal approach is generally taken to executive pay. Of course, transparency has not helped, because everyone now knows what their peers are paid, which tends to ratchet up remuneration. No one says explicitly that they want their remuneration to be in the bottom quartile. I am afraid that perversely, it has a ratcheting-up effect. However, I will give the example of InterContinental Hotels Group, which is based in the UK and operates in 100 countries. Starwood is a very similar, US-based competitor. The chief executive of Starwood is paid over 10 times the remuneration of the executive in the UK. There are no simple answers to any of these points, but it is fair to point it out.
In short—she says, moving quickly—I welcome my noble friend’s debate. We want to take this opportunity, as set out in the Green Paper, to look again at executive pay and at the connection between directors, employees and customers that the noble Lord discussed. We should also look at the extent to which features should be applied to privately held companies, which is complex. However, our corporate governance arrangements and principles are widely regarded as a global gold standard. There is no room for complacency and eternal vigilance is necessary. The public may have voted for Brexit but they did not vote to be poorer. We need a prosperous, flourishing business sector if we are to provide for the well-being, the welfare and the infrastructure that our people require.
Baroness Bowles of Berkhamsted (LD)
My Lords, I declare my interests in the register, in particular as a director of the London Stock Exchange plc. I too thank the noble Lord, Lord Hodgson of Astley Abbotts, for securing this debate. I have much in common with his thoughts and those of previous speakers.
We tend to look at the responsibilities of companies and corporate governance when there is a crisis or failure. The financial crisis made us look at banks, and we found that it was difficult if not impossible for regulators and prosecutors to bring charges against those at the top, and so the senior managers regime and reckless misconduct was invented. As the noble Baroness, Lady Bottomley, said, there have been scandals with other types of companies, and each time new rules are made: after Coloroll and Polly Peck to have more financial reporting and align executive incentives with those of shareholders; after Maxwell to protect pension funds, although we now seem to be having problems with BHS; and we had measures to stop corporate tax avoidance, health and safety rules, environmental rules, and so on. Alas, all too often the rules come after the event.
The UK’s principles-based regulation is often claimed as a strength, that principles can be relaxed for proportionality and strengthened if the principle rather than the letter is breached. I have severe doubt as to whether the latter, strengthened, is ever the case, because it comes back to the high hurdles to prove deliberate intent, and we always bow to calls for legal certainty.
Rights and responsibilities are spoken of as going together, but that is far from comprehensive in company law. We have lost connection with the origins of limited liability. Nowadays it is presented as a bargain between a company and creditors, but I suggest, not without historical justification, that the bargain is between company and society, where individuals—through the rights of incorporation and limited liability—do not to have to face ruin or fear of ruin for failure on the basis that it releases a more entrepreneurial spirit which, in today’s parlance, creates jobs and growth. In other words, it was for the general benefit of society.
However, that cannot be the end of the bargain with society. It was not originally. I will not go through the history, because conveniently, Andrew Haldane of the Bank of England gave a speech in May 2015 entitled “Who owns a company?”, which did some of that. He traced the path through early incorporation to limited liability, in which the concept of protecting the public good was no stranger. One can take the view that a large part of looking after the public good is taken up by government—and that was used in the company law review process to argue against giving directors pluralist duties. However, as we have experienced, both piecemeal laws and overarching rights of action have repeatedly been found wanting, and public trust is lost.
Surely this is where principle applies. Like others looking at the issues, I concluded that directors should be given a duty of care, or, to put it another way, a duty to protect the common good. That would have a good home in the first part of Section 172 of the Companies Act 2006, ranking alongside and equal with the shareholder interest. Experience has shown that egregious events can and do take place, which fly under the radar of board surveillance and for which there is no accountability. It simply was not on the agenda. Indeed, “not on the agenda” is not only a problem but is also the defence of directors, even where there may be lines to prosecute.
This brings us to the matter of who at present can hold the directors of a company to account. The answer is, basically, the company. The duties of directors specified in Sections 171 to 177 of the Companies Act 2006 are owed by the director to the company. There is no general line of action for third parties or the state. It is therefore hard to see the board taking action against itself for collective ignorance.
Individual shareholders can apply to the court to make a derivative claim, now codified in Sections 260 to 269 in Part 11 of the Companies Act, but in the recent fourth edition of the textbook Company Law by Professor Brenda Hannigan, the conclusion is expressed that,
“the mere introduction of the statutory derivative claim has not dramatically increased the risk of litigation to Directors, nor indeed significantly enhanced the protection of shareholders”.
It seems that the law is still marked “Could do better”, and so we should.
Of course, shareholders have the ultimate sanction of selling their shares or collectively sacking the board, but the truth is that financial metrics, share value and dividends remain the primary driver. With bonuses and incentives linking executive performance to pay, those financial metrics are amplified, with the end result that profit is paramount when looked at from every direction.
So would putting protection of the common good into Section 172 do anything? I believe that it would, because the “primacy of shareholders” is a theme that permeates board discussions and professional advice to boards from lawyers, auditors and others. As many commentators note, it became more explicit and hardwired as a result of the 2006 Act, which has made matters worse, not better.
With a “protecting the common good” addition, some wider due diligence would be required which would at times influence advice, discussion and, critically, the agenda. In other words, it is fundamental to culture. It is not a matter of a plurality of masters; it is a question of balance: promote the company; protect the common good—responsibility in return for society, giving the right to incorporation and limited liability.
Protecting the common good could also be incorporated into the strategic report under Section 414A. Both there and elsewhere, regulators should be able to penalise successive inadequate reports, not just non-reporting, giving more attention, among other things, to the other stakeholders—the “also-rans” in Section 172. There would be a strong synergy between a duty to protect the common good and having a director to represent the public interest. Indeed, without a common-good duty, such a director may well struggle to have effect against shareholder primacy, both in argument and in law.
It does matter who is round the boardroom table when the substantive discussion takes place and the decision is taken. This bears on worker representation too and is at the heart of the need for diversity on boards and executive committees. It also extends into the benefits of other company formations, such as mutuals. Many very fine and commercial directors, essential to driving a company’s business, do not have the same awareness and antennae as those who have been involved in other walks of life, and therefore they do not challenge in the same way. Other and more diverse voices are still needed.
Besides the change to duty and what I consider to be its influence on culture, there need to be better enforcement possibilities, at least for the state. I have already mentioned the derivative actions, but the general law provision that we have, both criminal and civil—not to act so as to cause harm to others—requires proof of intentional wrongdoing. Ignorance is bliss, as the saying goes. We cannot go on filling in after the event, missing those who should have been held responsible at the time. That is society’s risk against company reward, and it feeds into the discontent about executive pay that no manner of linking to financial metrics can abate.
So alongside revisions on executive pay and better stewardship, in order to cope with egregious events it is high time to have an investigation into how to provide better state, investor and third-party enforcement action against directors and top executives for a failure of duty. These things would be incremental changes to what we have and would not be a case of throwing out the baby with the bath-water. However, I think that quite a lot can be put under question 14 of the Green Paper under “Anything else”.
Baroness Couttie (Con)
My Lords, I too add my thanks to my noble friend Lord Hodgson of Astley Abbotts for bringing this debate to the Chamber this afternoon. The subject is of course many faceted but, in the interests of time, I shall focus in the main on just one aspect of it.
In over 30 years of being in business and in nearly 30 years of senior management roles, I have become a fervent believer that for business to flourish government should impose only the minimum amount of regulation and restriction. This allows business to be innovative and agile, which is key to long-term success. However, this position is credible only if businesses play by the rules.
I have seen business from many perspectives, having founded, built up and sold two small businesses and having been the managing director of a subsidiary of a publicly quoted company and a director at Citigroup. During that time I have witnessed corporate behaviour of the worst kind. The disgraceful types of behaviour of some of the companies highlighted this afternoon by my noble friend Lady Bottomley and the noble Baroness, Lady Bowles, have generated a great deal of publicity but are just some examples of corporate malpractice.
There are also many incidents of large organisations mistreating small businesses and sole traders that go way beyond the late payment of invoices, which is so often discussed, very serious though that is; yet these incidents go unreported. I applaud Theresa May’s focus on the excesses of the corporate sector and welcome the opportunity to contribute to this debate.
Large corporations are in a privileged position, as they have the financial resources to take and defend legal action in a way that small businesses and sole traders simply cannot. A small number of institutions take advantage of this by breaching legally binding agreements to avoid paying what they owe on the basis that small companies do not have the financing behind them to take legal action all the way to court. This biases the negotiations heavily in favour of large businesses and forces smaller ones to agree to unacceptably low settlements, which are often tied to confidentiality clauses.
In my experience, this behaviour is becoming increasingly prevalent, particularly among privately owned companies that are not subject to the same scrutiny as publicly quoted companies and do not have such a high profile. It seems that their employees deem it clever business to avoid paying what they owe and, what is more, some benefit from an increased bonus taken from the money saved. Many of these companies are involved with conspicuous charitable giving and consequently have an aura of corporate responsibility that is simply not deserved.
I have witnessed many incidents of corporate giants abusing their position and taking advantage of smaller operators, a couple of which are close to home. Many years ago I was a victim. I had my own small business. A director at my largest client left and was replaced by someone who decided to slash my contractually agreed fees for work that I had already undertaken, despite no implication that the work had not been completed to the highest standard. Despite a clear legal right to the fees, I was left with the option of either accepting a small sum or costly and lengthy legal action. I felt compelled to take the small sum. My experience is not uncommon and I am aware of far too many similar stories.
My husband has also recently found himself on the receiving end of just such corporate immorality, having worked on a transaction for two years without remuneration. He was relying on a legal agreement which would compensate him when the transaction closed. The organisation in question is now refusing to pay. It is offering him a mere fraction of what he is owed and is assuming that he does not have the resources to litigate, particularly as he has not been paid for so long.
I fully accept that there are occasions when there are good reasons for a corporation withholding payment—for example, when the goods or services have not been of an acceptable standard—but the incidents I am referring to do not fall into this category. They are merely attempts to avoid payments that are due. It is high time that this practice was stopped and I am determined to make every effort to ensure that no one else finds themselves in this situation.
If we are to deal properly with corporate responsibility, we need to create a legal framework that levels the playing field between big and small businesses without unreasonably restricting responsible organisations, and there are examples from other countries that may be useful to look at. In France, certain types of dispute, including large ones, are not taken to court. A judge is provided with a summary of the case from each side and all the documentation to support it, such as contracts, emails and expert reports. He then meets with one lawyer from each side to ask any questions he may have, before pronouncing judgment. This format saves considerable cost and is relatively quick. It is similar to our magistrates system, but the cases are far larger and are held in front of a judge rather than a magistrate.
I also believe that large organisations should be under the same financial imperative not to behave unreasonably. One mechanism to achieve this would be for judges, if they believe an organisation has behaved vexatiously, to award damages for hardship brought on the firm bringing the case and impose penal fines which could be used to fund the courts.
These changes would also help in the area of patents. Too many times one hears of small businesses, or more often sole traders, who take a product to a large company and have it turned down, only to find that about a year later a very similar product appears on the market. These sole traders cannot possibly afford any form of redress under the current system.
There are many noble Lords in this Chamber who will have further ideas, which I would urge them to put forward as we move towards what I hope will be regulations to curb these excesses. I ask the Minister to look at this issue so that the Davids of the business world can truly stand up to the Goliaths.
Viscount Eccles (Con)
My Lords, I think I may find it very difficult to follow my noble friend Lady Couttie because in my long experience of business I have not come across quite the range and frequency of bad behaviour that she has—I have been involved in small companies. My noble friend Lord Hodgson’s theme, with which he ended his introductory remarks, is the struggle to maintain liberal values and make sure that they work. In pursuing that endeavour, it may be right to think about what might be wrong with our liberal values, not necessarily from everybody’s point of view but from that of a lot of people.
If I may be pardoned, I will start with a story, to follow on from the noble Baroness, Lady Bowles. The boss of Polly Peck, riding very high at the time, came to see me and suggested that my organisation, the Commonwealth Development Corporation, should sell all its citrus interests—grapefruit and oranges in Swaziland—to Polly Peck. I said to my colleagues, “If you don’t mind, I will deal with this, because this chap, with his liquid brown eyes, is far too clever for me. And if he’s far too clever for me, it would be very risky to let any of you go to see him”. So I went to his office, in Grosvenor Square I think it was. The carpets needed mowing and the mirrors were clearly all double, and there were great big pictures of tigers doing unspeakable things to each other. So I went back to the office and said, “Having seen what I’ve seen, we cannot do business with Polly Peck”—and we did not.
In declaring some sort of interest I point out that I, like many others, have been a rolling stone. I have been the chairman of three companies that would probably be described as FTSE 250 companies. None of them now exists. One went by way of a large construction company into Norwegian ownership and into liquidation. Another went to an American company, and the third went to a Japanese company. I have also been the chairman of a small company, which I am happy to tell noble Lords still exists and sends five or six containers of iron castings across the channel every week. I have also been the leading non-executive director of a large public company, which again does not exist anymore. However, many of your Lordships will be familiar with Aga cookers, and that was part of that company. Aga is still going strong, and is owned by an American company.
When, many years ago, I used to bicycle across the wilderness between Stockton and Middlesbrough, we used to say that the foggy atmosphere had a burnt cheese smell to it. That was because ICI Billingham was there, on the left hand side. I never would have imagined that the ICI would disappear—that would never have come into our thoughts.
My first experience of corporate governance came in 1968, when I became the chief executive of a company. Among other things, we were in the nuclear power station business. This company, in fact, installed more graphite cores in gas-cooled reactors than any other company ever has or ever will. I think it must have carried quite a lot of responsibilities. It did not seem too burdensome, but I am sure there were responsibilities. As to rights, I do not remember even thinking about them—it would not have occurred to me that I had any rights. What would they have to do with doing a good job on behalf of my customers?
Of course, this was all before Maxwell and the bouncing cheque, and long before Cadbury, the famous Quaker family firm, now gone via Kraft to some company called Mondelez. I still like and buy fruit and nut bars, and they are priced at £2.05 or £2.10, depending where you go—except that almost always, in either Tesco or Sainsbury’s, you can get them for £1.50. As a consumer, I wonder, “If they can sell them to me for £1.50, why did they ever put them on the shelf at £2.05 or £2.10?”.
All this leads me to think back and wonder about the predilection we have for the long term. It does not seem to me at all easy to think long term if you have had the experiences I have over a long life. Chief executives are not in a good position to think about the long term: they do not last very long. Executive directors also find it difficult to think about the long term: many of them do not last very long either.
It may be that in pursuing our liberal values, we miss a few important points. Where have we come since 1968 towards this Green Paper, which has been described by the noble Lord, Lord Monks, as weedy? I entirely agree, but probably for rather different reasons. All through that period, we have been slowly applying our liberal values. Cadbury, Greenbury and the 2006 Act all concentrated on social and economic values.
Now we are in a time of upsets, and perhaps we are going into a time of authenticity—Boris leading. We are also in a time of extreme growth of knowledge and an ability to do all sorts of things, as the previous debate showed, which we do not have the resources to do. Although we have been informed by liberal values, we have two problems. One is that we are not very good at making choices or explaining why we make them. Secondly, there is increasing recognition that those liberal values do not deliver for everyone. Once again, we are trying to do things for everybody, but does everybody think that they are going to succeed?
I live in the north-east, and I used to supply a lot of equipment to the Durham coalfield. The coal in the Durham coalfield and under the North Sea is coking coal of the finest quality. Those miners were some of the most amazing people you could possibly meet: the way they looked after each other—and you, when you went down the pits—was incredible. Their communities were amazing.
Come the day when there was a 40,000 tonne bulk carrier and 80 foot seams of coking coal in Australia, nobody could keep the Durham coalfield open, no matter how hard they worked, how hard they tried or how good their equipment was. Their seams were, if they were lucky, four foot thick. In some of those pits centred in Sunderland, they had to go three miles out under the North Sea. It did not matter what you did, you could not compete. That coking coal was coming to the Redcar blast furnace, which has now closed. I am not sure what we really think about the Green Paper and tightening the screw on corporate governance one more turn, but I tell you that the people in that part of England were knocked out by conditions over which they had no control. They think that we try to do our best, but they also think that we do not succeed.
Lord Taylor of Warwick (Non-Afl)
My Lords, I too thank the noble Lord, Lord Hodgson of Astley Abbotts, for securing this timely debate today. There are many important issues presently concerning the corporate sector, but I believe that, first and foremost, there is a biblical foundation. As we see in the Gospels, Christ spent much of his time ministering in the marketplace. Of the 12 disciples that Jesus called forth, most were businessmen, not synagogue ministers. Six were fishermen operating established businesses in Galilee: in particular, Peter, James and John.
Matthew was an Inland Revenue man, a tax collector with an office in bustling Capernaum. I suspect he would have had a view about corporate tax avoidance. Another apostle, Luke, had a thriving medical practice. One can imagine how scathing Dr Luke would have been about a drug company increasing the price of an anti-epilepsy medicine by 2,600 % overnight.
Jesus himself was raised in the family carpentry and furnishing business, which supported a family of at least nine people. Of the 50 parables told, 34 of them can be described as having a business, finance or workplace content by way of illustration. Furthermore, many of those who supported the Apostles in the book of Acts were business people. For example Priscilla and Aguila operated a tent-making business with Paul; and there was Lydia, a distinguished dealer in the finest purple cloth.
It is also significant that Jesus in Matthew 3 v 12 said,
“I must be about my father’s business”.
He was very much in the business of people, creating both prophets and profits. As business is about people, I wish to focus on diversity in the corporate sector. Diversity itself is obviously a wide subject encompassing race, gender, sexuality, age, disability and religious diversity, but because of time constraints, I will focus on race, while of course accepting that other kinds of diversity are no less important.
Whatever one’s view on immigration or Europe might be, Britain has changed and will continue to do so. If this change is embraced by the corporate sector, not just endured, Britain itself will then, and only then, be all the stronger.
The Motion refers to “balance”. The balancing scales of justice is probably the oldest symbol we have embodying fairness and truth. Unfortunately, that balance and fairness does not presently exist when it comes to diversity in the corporate sector. Of the UK’s population of 63 million, 14% is black and ethnic minority. More than half of the BME communities live in three main cities—London, Manchester and Birmingham. Those three cities are at the heart of business and corporate Britain. In her first speech as Prime Minister in July, Theresa May had to admit, quoting figures from the Equality and Human Rights Commission, that people are treated differently in Britain depending on their race. For example, the employment rate for ethnic minorities is 10 percentage points lower than the national average and people from ethnic minority households are almost twice as likely to live in relative poverty compared with the mainstream population.
Although gender diversity in the corporate sector has improved, the lack of ethnic diversity in UK boardrooms persists. In 2015, 6.6% of the FTSE 100 companies’ board members were from ethnic minorities, but in 2016 this had increased only by a meagre 0.1% to 6.7%. The latest annual survey of 10,000 top business leaders shows that the number of ethnic minority CEOs is falling and the number of all-white boards is increasing. Today there are just four non-white CEOs in the FTSE 100. Some 98% of all FTSE 100 chairs are white and 95% of the FTSE 100 chief financial officers are white. I ask your Lordships: is that acceptable? These facts show that we are nowhere near achieving a balance in diversity inclusion in the corporate sector.
We are all the products of our experiences and I was just reflecting on mine, which has had its high and lows. Some years ago I was invited to be a speaker at the Institute of Directors on the subject of diversity. I walked into the entrance hall in Pall Mall and said to the concierge doorman, “Lord Taylor of Warwick”. He said, “Ah yeah, we’re expecting Lord Taylor. You the driver, mate?” I replied, “No, I am Lord Taylor”. There was a famous hit song called “A Whiter Shade of Pale” by Procol Harum. Maybe they had this gentleman in mind when they wrote it, because he turned from white to very, very pale. I would like to think that nowadays that misunderstanding would not occur.
I have had the privilege of serving on a number of company boards, particularly in the sports, media and entertainment sectors, but I have lost count of the number of occasions when I have addressed business conferences and seminars where the only black people in the room were myself and the waiters. My wife, Lady Laura, is American and she noticed when she came to this country the big difference between America and the UK. America seems to have embraced diversity when it comes to boards, but we have not.
As a result of Brexit, the corporate sector will need to export more to other countries outside the European Union. Whereas there are 27 other nations in the Union, there are 52 nations in the Commonwealth. In many ways, Britain has closer ties to the Commonwealth than to Europe. These ties include the Queen, the English language and the Christian faith. Our local enterprise partnerships need to develop stronger working links with the Commonwealth diaspora groups in this country. I am talking about the religious leaders and businesses concerns. We need to harness our diaspora as a vehicle for employment, exports and economic growth, to benefit everyone. Our diaspora communities can bring huge benefits to the boardroom and senior management, through their family connections to, and cultural understanding of, emerging markets around the world as we seek to export more to a wider group of countries.
In 2011 the noble Lord, Lord Davies of Abersoch, was commissioned by the then coalition Government to produce a report concerning gender diversity in boardrooms. He made various recommendations, the most ambitious of which was a target of 25% of places on FTSE 100 boards to be filled by women. But while the glass ceiling for women is starting to show cracks, the ceiling for ethnic minorities in this country seems to be more concrete than glass. In 2013 the Companies Act 2006 was amended to require companies to include a breakdown of the number of females on their boards, in senior management and in the company as a whole. It is time to do so for ethnic minorities as well.
I also look forward to the publication of the report being prepared by the noble Baroness, Lady McGregor-Smith, in partnership with the business department, on ethnic minorities in company board rooms. I was privileged enough to be consulted during the preparation of that report. I was delighted that my recommendation was accepted that the ethnic minority business sector should be harnessed to increase our export trade post-Brexit.
The media and creative industries are very influential sectors of society. It is a great pity that black actors such as Idris Elba and David Harewood had to go to America to establish themselves in the TV and film industry. While television is using more black and Asian presenters, Directors UK claims that the number of BME directors working in UK TV is “critically low”.
A few years ago, I was a television producer at BBC White City. It got to the stage when I asked whether it was called White City because everyone else above kitchen level was white. As for newspapers, there is not a single ethnic minority editor of a national newspaper in this country. A City University survey in March this year found that British journalism as a whole is 94% white.
For 10 years, I was vice-president of the BBFC, the British Board of Film Classification. Although it treated me extremely well, it was a very white organisation when I first joined. I encouraged it to place job opportunities not only in the mainstream newspapers but in ethnic minority newspapers like The Voice and New Nation.
In sport, around 30% of players in the football league are from BME backgrounds, mostly black, but there are hardly any people of colour in football boardrooms. Of the 92 managers in the Football League divisions, just six are non-white and none is in the Premier League. That is not acceptable.
When my parents came to Britain in the 1950s, there were signs in windows stating “No Blacks, No Irish, No Dogs”. I authored a book by this title some 20 years ago. It was interesting to see the same quotation repeated in a new film about racism in 1940s Britain, called “A United Kingdom”. We have clearly come a long way since then, but for BME minorities in corporate Britain there are still many barriers to break.
Lord Tugendhat (Con)
My Lords, thanks to my noble friend Lord Hodgson, we have had a wide-ranging debate covering perhaps almost all aspects of the subject, and it is difficult at this stage to come up with anything new. However, I want to make one very obvious point at the outset. All of us who have had experience of the corporate sector know that the first responsibility of a company is to earn profits for its shareholders, because if it fails to do that it will not continue to exist. However much good it may do in other respects, if it is unable to make a profit it will go out of business.
That said, a company’s responsibilities of course go very much wider. Business is now the predominant economic and social force in our society, so it needs to think wider than pure self-interest. This is not just a matter of goodwill; it is a matter of safeguarding a business’s own interests and preserving its stake in the economy. Clearly, there are differences between the ways in which large FTSE 100 and 250 discharge their responsibilities and those in which small publicly owned and private companies do so. Most of what I have to say applies to the larger companies, which is where my own experience lies.
My first point, which applies to companies in all sectors of the economy, is the importance of paying their full share of tax. Of course, companies, like private individuals, should take advantage of whatever concessions the Government have to offer. Private individuals should take advantage of ISAs and other tax-free or tax-exempt opportunities and, where they exist, businesses should do the same, but aggressive tax avoidance and aggressive minimisation of tax continue to bring business into disrepute. I welcome the Government’s clampdown in this area and their efforts to deter the accountancy profession from leading people down that primrose path.
So far as they are able, companies should also do what they can to support the social aims to which the country is committed. By that, I am of course thinking in terms of gender and ethnic equality, creating opportunities for those disadvantaged by ethnicity, gender, or economic or educational circumstances. Under the last heading, perhaps there should be attention paid to the plight of undereducated males—those who would have filled the jobs in factories and elsewhere that are now disappearing at such a rapid rate. We hear a great deal about the problems of ethnic minorities and of women but the problems of the undereducated and underqualified male are something of which society needs to take account. Of course, these are people of varied ethnicity.
Another obvious area in which the corporate sector has a responsibility is in the maintenance and improvement of the environment in the areas in which it operates. This is a matter not just of cleaning up afterwards, as it were, where the law applies obligations, but also of improving the amenities and quality of life within the areas in which companies have their plants and activities. This is perhaps particularly true when those activities cause a certain amount of environmental and social disruption. I would argue, too, that the company’s responsibilities to the community go beyond those of the company itself. It is important that companies encourage their staff and provide ways for them to contribute their skills and time to the social good. The noble Baroness, Lady Bowles, mentioned the social good in her speech. In the NHS—of which I have some experience—and on school boards, in universities, where my noble friend Lady Couttie and I have co-operated in the past, and elsewhere there is a desperate need for more people in the prime of life, who have current skills and are at the cutting edge of the technologies and business practices. By no means as many companies as I would like provide the time, opportunity and encouragement to their staff to undertake activities of that kind. Of course, another area in which it would be helpful to have people who are still active in business to offer their services is the arts.
Companies are often very generous with their financial contributions but, as my noble friend Lady Couttie pointed out, that can also be a form of advertising or even camouflage. Much more important is that people who earn very large sums of money and are prosperous should contribute more to these things themselves. They should themselves be willing to undertake more responsibilities in them.
Finally, I will touch briefly, as others have, on board and top executive pay. Of course, that was the subject of a recent Green Paper. The extent to which board pay has outstripped the rewards of all other sections of the community, let alone the performance of the corporate sector itself, has now become a national scandal. The publication of the Green Paper and the Prime Minister’s recent remarks reflect that. Why can relatively modest achievement in business now be so much better rewarded than high achievements in other walks of life? I am not here referring to chief executives with particular qualities. There are chief executives who make a tangible difference. There are chief executives who are brought in from abroad on very high salaries. Indeed, the Government tend to appoint them. The Governor of the Bank of England is one example; rather less successful was the lady who was doing the child sex abuse inquiry. Often, as in the case of the Governor of the Bank of England, they give very good value for money.
However, it is not people like that whom I am referring to but the directors who are doing the mundane tasks in the executive suite, fulfilling the usual functions, who have no particular world-class attributes that would lead them to be poached from one country to another. It is at that level where we have seen some of the most astonishing increases in pay. Why should that be? The reason, I think, is quite simple. Unlike in most other occupations, boardrooms set their own pay. Of course, I know about remuneration committees. I, too, have sat on a number of them and have had the benefit of the advice of the remuneration consultants. But ultimately boards are responsible for setting their own remuneration. The way in which this is now increasingly done in our society, through devices such as stock options, LTIPs and all the rest of it, has led to a situation in which people who have had some success, but nothing spectacular, in the business world earn far more than people who have made much greater contributions in other walks of life.
I will have an opportunity to return to this subject when we debate the Green Paper and, I hope, again when legislation is introduced. But I cannot resist ending by saying that some of the ideas in the Green Paper are derived from a Bill which Lord Gavron—now, sadly, dead—introduced with my support and that of the noble Lord, Lord Taverne, three years ago, I think. I did not notice any reference in the Green Paper to our Bill but it paved the way for some of what the Government are doing. I hope that that means that when the Government introduce legislation, they will be able to maintain that form of tripartite co-operation.
Lord Stevenson of Balmacara (Lab)
My Lords, I congratulate the noble Lord, Lord Hodgson of Astley Abbotts, on securing this interesting debate. I have often found myself in opposition to him on various Bills and committees over the years but I have noticed a rather worrying tendency to agree more and more with what he says—I hope that is reciprocated—but I am sure it is because we are both squash players and accountants and there are probably other things that bind us together. I will not delay the House further with my ruminations on that point. I thank other noble Lords for their contributions, which have informed the debate.
We are talking about the businesses that make up the United Kingdom and fuel our economy, employ our talent and drive our innovation. Of course, the UK is home to a huge range of outstanding businesses, with strengths in sectors ranging from automotive and aerospace to digital and biotech and our excellent cultural and creative industries. We should not be ashamed of having a strong and vibrant economic sector and good business and industry. We have more manufacturing than people ever give credit to. Of course, as has already been pointed out, the UK private sector provides employment and therefore livelihoods for over 26 million people. It is something that we must cherish.
I would claim that changes to create a more stable monetary policy and the introduction of a vigorous competition policy under the previous Labour Government made the UK one of the best places to start and run a business. Of course, we on this side want that to continue. Several noble Lords have drawn attention to a list of scandals we have had to endure over the past few years, including: the conduct of the banks in the financial crash, for which justice still has not arrived; the continuing saga of companies practising tax avoidance, to which many noble Lords referred; and Sports Direct and BHS. All is not as good as it might be in this area.
The noble Lord, Lord Hodgson, suggested that political decisions taken in recent elections had their origins in feelings that the economic system had failed people. That probably has a significant grain of truth in it. He drew the conclusion that companies and businesses needed to have a rethink, otherwise even more confidence would be lost, and we would all be the worse for that. I think he also said that it would not be sufficient to stand aside and blame politicians, as many people do. But we have to bear in mind that businesses in all sectors have to make profits, as the noble Lord, Lord Tugendhat, has just said. However, they have wider responsibilities and we need to focus on the latter part of that equation, as trailed in the Motion.
The list that the noble Lord, Lord Hodgson, came up with included ownership and the question of why shareholders were no longer owners, in a real sense, of the businesses, having been divorced by the way in which shareholdings were held. Several noble Lords referred to how pay has now got out of all proportion in the sector. I think it was described as “in denial”, while the noble Lord, Lord Tugendhat, called it a national scandal. We need something done in that area. Attention was also drawn to employment practices. There were questions about why we did not have more employer engagement, particularly at board level. Good things can also happen with businesses, such as their involvement with charitable work, but perhaps they need to do more in engaging with the community.
I would have added environmental concerns to that list, which others have raised, the question of diversity, which was picked up by the noble Lord, Lord Taylor, and human rights in their broader sense, particularly for those extractive industries and others which operate abroad. It is fair to point out that some of the issues in the list I have just given are raised in a statutory instrument that we will discuss in Grand Committee on Monday.
My noble friend Lord Monks posed a much deeper question than simply whether we could do more to list things that businesses could be involved in. He raised the question of whether capitalism itself was in crisis, and not in fact too big to fail. There was a lot of weight in his argument, which we must consider carefully. It is obviously right that we could change employment practices. We could adjust pay and do something about diversity, but we would not necessarily have attacked some of the basic issues that are causing the problems in the long run. In that context it is interesting that the noble Baroness, Lady Bottomley, raised in her excellent speech a lot of the work that has been done recently in the corporate world, with reports from Cadbury through to Higgs and so on. My conclusion is not that that is a bad thing; it is good, but the fact that so many reports have had to be produced suggests that we ought to pay attention to the flag-waving there.
What is to be done? I am sure the Minister, when he comes to respond, will trail again the recently published Green Paper on these issues. He nods, and I am sure we will listen to this again. I will therefore give him a shot across the bows first, so that he can anticipate the response we will give. As I think we have gone on record as saying, this Green Paper is not a strong one. It does not tackle some of the basic issues raised by my noble friend Lord Monks and others. Our economy is hit by short-termism which saps investment, penalises employees and obscures the idea that rewards should be given for long-term performance. We have failed to solve the productivity gap with comparable and competitor nations. It is a continuing problem and we seem to have no way in which we can resolve it. Executive pay, as we have talked about, is out of control. What has happened to the Prime Minister’s promise to publish plans to have not just consumers represented on boards, but workers as well? She said that this was,
“because we are the party of workers”.
Well, that had to be watered down quickly.
As we heard from the noble Baroness, Lady Couttie, small businesses get such a raw deal in this world of great commerce and success. The late payment arrangements are ridiculous. The power of larger companies to exercise duties on small companies, because they do not have the resources to fight back, for payment if they are to stay on suppliers’ lists, along with the ability to change the terms contracted for and, as she said, to cut pay and unmake agreements that have been arranged are just ridiculous. The new small business commissioner does not have the powers to intervene in these matters; that office should have those powers. Just as with the Groceries Code Adjudicator, a good idea has been lost because it has not been given the authority to carry out its required duties.
The basic assumption by the Government in the Green Paper is that the existing corporate governance code is satisfactory. There is a suggestion that it might be extended from the present listed companies to large privately held companies. But the test will be: if these proposals had been in place, would the scandals we have been talking about have been avoided, such as the BHS and Sports Direct scandals and others? It is worth pointing out that BHS was not covered by the code in any case, so it would not have had much effect, but Sports Direct was, yet there was a crisis involving that company.
The code needs to be strengthened. It cannot be used as a gold standard because enforcing it does not get us to where we want to be. I hope that when the long-awaited industrial strategy comes forward it will address at a much more serious level some of the issues that we have been reflecting on today. It is a real opportunity, and we hope it will not be missed. It needs to take on and reform the Companies Act. It needs to sort out the problem about shareholders being divorced from ownership. It needs to strengthen the role and function of trade unions because they make a worthwhile contribution in British industry. It needs to look at trying to set all company boards the responsibility for long-term duties for growth. It must ban short-term actions on pay and rewards and trading activities that destroy businesses as much as they destroy others. It needs to take a firm hand on diversity, not just at board level but at senior executive level. It needs to think again about whether there should be a public interest test for takeovers from overseas—the second Cadbury problem was raised by the noble Viscount, Lord Eccles. It needs to tackle training and make sure that we have a workforce that will take us forward into the 21st century and beyond, and it must, for the last time, nail the problem of why we have low productivity. The best idea was the suggestion made by the noble Lord, Lord Tugendhat—that we pick up the Gavron Bill, which would solve a lot of the problems.
Lord Henley (Con)
My Lords, I follow other noble Lords in thanking my noble friend Lord Hodgson of Astley Abbotts for bringing forward this timely debate. It comes only a week or so after the launch of the Green Paper which has been much referred to by noble Lords, and which I will refer to in due course. I brought that Green Paper to this House on behalf of my right honourable friend only a week after my third return to the Front Bench. As my noble friend said, it was very timely; and in a debate that has covered such a wide range of subjects, it is something that we can focus on. I will return to it later.
The debate has covered a wide range of subjects. We have heard much about the Companies Act and other matters. Regarding the Companies Act, I remember doing my Bar exam some 40 years ago, and for some strange reason at that stage, if one was an Hon law graduate one was exempted from the paper on company law. I cannot remember which Companies Act it was at that stage. It was probably the Companies Act 1948, and we have gone on a long way since then. I certainly note what the noble Baroness, Lady Bowles, said about the need to amend Section 172, and no doubt that is something that can be fed into the consultation on the Green Paper in due course.
I welcome my noble friend’s Motion on rights and responsibilities in the business world. It is important to look at exactly what the rights and responsibilities are. We believe that rights are legal, social and ethical principles of freedom or entitlement about what is allowed of people or owed to them. Rights come in many forms in the economy; for example, human rights, employment and labour rights, consumer rights and intellectual property rights. Having mentioned human rights, I suppose I ought to mention one brief interest in that, having returned to the Front Bench, I have recently, sadly, left the Joint Committee on Human Rights, which at the moment is engaged in a report on human rights in the business world. I see my colleague on that committee, the noble Baroness, Lady Prosser, nodding in agreement. I am sure she will continue the work that others are engaged in on that.
The Government obviously have a role to set the framework by which individuals’ rights are realised and protected and in which businesses must operate. We have a strong legal framework in the UK of which we can be proud. It enshrines and protects the rights of everyone. It is also the corporate responsibility of businesses to respect that framework. Despite what has been said about BHS and Sports Direct—we could also go back, as my noble friend Lord Eccles said, to Polly Peck, and we all remember Maxwell and a whole range of scandals in the past—it is the corporate responsibility of businesses to respect those rights, and I believe that the vast majority do so. Some obviously do a great deal more. Where those few businesses fall short, they are rightly held to account. The Motion focuses on the role of the Government in striking that correct balance between rights and responsibilities in our economy. The UK has an international reputation for being one of the best places to do business, and a place where business is done the best. We want to keep it that way.
Noble Lords will require no reminder of just how important it is that business is conducted in a responsible way. There are more than 3 million businesses in the United Kingdom, from small start-ups to large, established businesses. On that point, my noble friend Lady Couttie talked about the treatment of little businesses by big business, and looked for protection for, if I remember her words correctly, the babies against the Goliaths—a rather mixed metaphor, but I got what she was getting at, particularly on payment practices. Obviously there is much that government can do, but government can also do much in that world by example. For instance, English public sector buyers are now required to pay within a 30-day period, and we will certainly continue to do that.
Those 3 million business also have a presence across the globe. Whether large or small, they are a critical component of our society. They are not separate in some way from the rest of society, and the decisions that management takes will have impacts on the lives of their customers, their employees, their suppliers and contractors, and on wider society too. Many leading businesses are at the vanguard of understanding their role in society. I think all members of the House would recognise that, at present, the overall reputation of business—this is obviously true of politicians and others as well—is not as high as it ought to be. There is a feeling that big business in particular is not conducted with an eye on its responsibilities to wider society.
However, the Government are taking action on a number of fronts. We have a Minister, Margot James, with a specific responsibility for the responsible business agenda. Here, I will just touch on a point that my noble friend Lord Hodgson made at the beginning about the over-rapid change of Ministers and Secretaries of State in the department. There has been this complaint about over-rapid change in all my years, in all departments. As always, it is not something that I can answer, but I will certainly refer it to higher authorities. I am sure that on this occasion my right honourable friend the Prime Minister will take note.
In addition, last Monday, the advisory panel into mission-led business published its final report, calling on all businesses to be explicit about the role they play in society. Just last week, as I mentioned earlier and as other noble Lords stated, we published the Green Paper on corporate governance, which I will come to in slightly more detail later on. I will also come on to the Green Paper we will soon be publishing on industrial strategy, which the noble Lord, Lord Stevenson, mentioned earlier. All those initiatives are part of one single overarching belief that we must strengthen business’s sense of responsibility to society.
My noble friends Lord Eccles and Lord Tugendhat talked about the need for corporate responsibility, which means businesses having regard to the impact that they have on society, going beyond just complying with the law. It has certainly been useful to hear both my noble friends on that subject. They will be fully aware that UK company law requires directors of all UK companies to promote not only the success of the companies for the benefit of their members as a whole but, in doing so, to have regard to a number of factors including the long-term consequences, the interests of their employees, the relationships with stakeholders and the impact on the community and the environment. The Government’s role in this context is to encourage those businesses that lead in good practice and to encourage others to follow suit.
I turn to the matter of diversity in business management, particularly at senior levels, which was touched on by my noble friend Lady Bottomley and the noble Lord, Lord Taylor of Warwick, both coming at it from different points of view. We are encouraging business-led moves towards a more diverse and inclusive culture in the top management of our businesses, encouraging them to set a lead for others to follow. Boardrooms should mirror wider society, and businesses should make the most of all the talent not only in their own diverse workforces but throughout the country and in wider society. We are following up the success in increasing the representation of women on the boards of our biggest companies by working with business to ensure that more talented women achieve senior executive roles. We welcome the report from the review led by Sir Philip Hampton, chairman of GlaxoSmithKline, and Dame Helen Alexander, chair of UBM, which is now pressing ahead with proposals to drive up the representation of women at senior levels.
On the remarks by the noble Lord, Lord Taylor of Warwick, last month we welcomed the report of Sir John Parker’s review and his recommendations to address the very worrying low levels, which the noble Lord referred to, of representation of black and minority ethnic directors in UK boardrooms. Diversity at the top of our business is also about trust; it shows workforces that their boards are representative of them and of wider society, and that the routes to the top are open to them. People want to believe that if they work hard then they too can get there, whatever their background.
I turn to the Green Paper that I presented to this House when I repeated the Statement made by my right honourable friend when he presented it to another place only last week. I think the word used by the noble Lord, Lord Monks, to describe it was “weedy” while the noble Lord, Lord Stevenson of Balmacara, described it as “not strong”. I have to stress that this is very much a Green Paper. A Green Paper is what it says: a paper that invites discussion. We will welcome the thoughts of noble Lords and indeed all others during the consultation that is ahead of us. This is not a White Paper that we are putting before the two Houses; as I said, it is a Green Paper. It invites views from everyone in a number of areas.
First, I make it clear that the Green Paper asks for opinions on how we can improve shareholder influence on such matters as executive pay—on which the noble Lord, Lord Monks, and my noble friends Lady Bottomley and Lord Tugendhat all had strong views—including whether shareholder voting rights might be enhanced, which my noble friend Lord Hodgson stressed. It also addresses the question whether the link between executive pay and long-term company performance can be strengthened and made clearer. It also asks whether more can be done to improve the connection between the boards of directors of companies and their employees. As I expected, the noble Lords, Lord Monks and Lord Stevenson, came back on this. They seemed to think it was an abandonment of my right honourable friend’s commitment to workers on boards.
My right honourable friend, in her July speech, said that she was committed to increasing the representation of employees and consumers in the boardroom. The Government’s policy is set out in the Green Paper and includes options to strengthen representation of employees and others in boardrooms. That includes, as the noble Lord said, the option of creating worker advisory panels or designating independent directors to speak for employees. Again, this is a matter for discussion and I stress that it was a Green Paper laid before both Houses that invites comments from noble Lords. I am sure that the views of the noble Lord, Lord Monks, will be taken into account.
It also seeks views on whether some of the features of the corporate governance regime covering quoted companies should be extended to our largest privately held companies. Again, the Green Paper will include views on those points. In asking these questions, we want to improve further the ability of UK businesses to take management decisions informed by a wide range of views, and which better support long-term company performance and sustainability.
I shall say a word or two about the industrial strategy mentioned by the noble Lord, Lord Stevenson, who set out quite a long and detailed list of what he thought ought to be in the strategy. I did not manage to take it all down but no doubt I will look at it again when I read his speech tomorrow, and no doubt others will take it into account. We are working on that industrial strategy, driving us towards an economy that works and is fair for all. We have had economic successes in recent years. We have had an open, dynamic and competitive economy since the financial crisis, with a record number of people in work, more businesses than ever, some world-class sectors, a strong science and research base, and growth.
However, we obviously face challenges. That growth has not been even across the United Kingdom, as noble Lords have stressed. Not everyone has benefited, and prospects and opportunities for people and businesses vary too much. We want to make sure we can deliver high wages, high skills and high productivity, and we want to create the right conditions for competitive business across the United Kingdom.
As the Prime Minister has said of that industrial strategy in her speech to the CBI conference, it means the Government,
“stepping up to a new, active role that backs British business and ensures more people in all corners of the country share in the benefits of your success”.
We aim to develop a modern, ambitious, long-term industrial strategy. We want to do this working with businesses, people and organisations right across the country, so we are preparing a wide-ranging discussion paper to invite views to inform our approach. I cannot give a date but we expect to publish that some time next year, just as we got the other one out this year. I look forward to debates on that in due course with the noble Lord and others.
I end by thanking my noble friend for his timely Motion, and all noble Lords for their contributions on these issues. We share all the concerns expressed about the importance of getting right the balance of rights and responsibilities within the business sphere. I commend the Motion to the House.
Lord Hodgson of Astley Abbotts
My Lords, when I opened the debate, I said that your Lordships’ House had a wealth of experience and some very interesting contributions would be made. I have certainly not been disappointed by that, so I thank all noble Lords who have participated—and, in particular, I thank my noble friend on the Front Bench for his sympathetic and extensive reply.
The convention allows me about one minute, so I shall pick out a couple of points. My noble friend Lady Bottomley emphasised the importance of “comply or explain” as a means of maintaining flexibility in our corporate governance structure. That is very important —and, in passing, I congratulate her once again on a very distinguished maiden speech in that Second Reading debate. The noble Baroness, Lady Bowles of Berkhamsted, reminded us that the availability of limited liability as a means by which to safeguard yourself personally imposes additional responsibilities and duties on you. My noble friend Lord Eccles, in a characteristically thought-provoking speech, reminded the House that this is about people and that what we are discussing is not theoretical—it impacts on real people’s lives.
Last, but not least, the noble Lord, Lord Monks, said that he thinks that employee participation would make decisions more long term. I have to say to him that in the cases where I have helped employee buy-outs, where a substantial portion of the shares go to employees, they are pretty quick to want to sell and cash in when time comes. But that is an issue he and I could discuss at greater length over a cup of tea—or something stronger.
I am sorry not to be able to mention the other speeches, all of which I thought were very valuable. I thank all those who spoke and I am sure that all noble Lords agree that this issue will run and run.