Businesses: Rights and Responsibilities

Baroness Bottomley of Nettlestone Excerpts

Thursday 8th December 2016 Lords Chamber

[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.