Enterprise and Regulatory Reform Bill

Lord Gavron Excerpts

Wednesday 14th November 2012 Lords Chamber

[Lord Gavron]

My Lords, like the noble Lord, Lord Tugendhat, I address Clause 70(4) and proposed new Section 439A on directors’ pay. I am advised by colleagues in the House that I should state my qualifications for speaking on this subject. In 1964, I started my own firm and I retired from it, when it was a public company, after 29 years as chief executive and chairman. I also served as a non-executive director on three other plcs. I now manage investments, both private and charitable, as well as a publishing company which exports two-thirds of its turnover. I first raised the problem of directors’ pay with the last Government almost 15 years ago.

In my long business career I have made many mistakes. You could say that I am something of a connoisseur of mistakes. I believe the Government are about to make a mistake regarding directors’ pay in the Bill we are discussing today. They are not going in the wrong direction, but they are not going far enough in the right direction. Fifty years ago, High Court judges, Permanent Secretaries, generals, admirals, air marshals and the heads of our leading public companies were all paid, broadly speaking, about the same. Outstandingly able people were all fairly and properly rewarded. Today, while the others have remained roughly in line with each other, the directors of our public companies have soared ahead to the extent that they are paid up to 50 times as much as their former peers, some even more than that. Have they suddenly become 50 times more intelligent or 50 times more effective? No. The reasons they get so much more is that they are the only members of the above grouping who can, in terms of rewards, help themselves.

When Clive of India was criticised for the size of the fortune he had extracted from our then colony, he replied:

“I stand astonished at my own moderation”.

The directors of our public companies have not exercised moderation. They have helped themselves beyond all reason, beyond the bounds of fair play. There are about 4,000 people who are executive and non-executive directors of our largest public companies. They sit on each other’s remuneration committees and they are responsible for each other’s compensation packages. Unsurprisingly, they are not known for recommending decreases in earnings. There are exceptions. There are directors, both executive and non-executive, who try to exercise restraint. They have a difficult time. Most members of remuneration committees are non-executives who owe loyalty to those who appointed them to their well salaried positions and on whose earnings they are adjudicating. This is a structure which can lead to excess and, my goodness, it does.

The earnings packages are often complex and composed of many items. In the interest of transparency, we should require the auditors to give full and complete valuations in the annual report of all directors’ reward packages. I am delighted to know that the Minister intends to make that compulsory. When remuneration committees—I shall call them remcos—are criticised for their generosity to directors there is much talk of the international market for good people. That is largely fiction. Over the last decade the number of our chief executives who have been lured abroad amount to fewer than 1%. The Government deserve credit for trying to tackle the subject, albeit not fiercely enough. The Minister has consulted widely on this subject and has substantial business experience himself. He has written to me confirming his intentions to implement more of the policy that I and others would like to see in this Bill. He has sought advice from public company shareholders. The trouble is that these days shareholders are, or are represented by, large institutions, insurance companies and the like. Many of their directors are part of the problem.

We could describe the ultimate shareholder as the widow in Eastbourne, Hastings, Balham or Hebden Bridge. Her pension and her insurance premiums and a great deal more of her incomings and outgoings are affected by the decisions of these remcos. Before anyone challenges this on the basis that the aggregate of bonuses, and so on, is too small to affect the outcome to shareholders, let me remind noble Lords that Barclays Bank last year paid £700 million in dividends. However, they spent £2.2 billion on bonuses for their already very well paid directors and senior managers—more than three times as much. The ultimate beneficiary, our Eastbourne widow, was the loser. Together with noble Lords from other parties, including the noble Lord, Lord Tugendhat, I am preparing a Private Member’s Bill on directors’ pay. The Minister has indicated the Government’s interest in this proposed Bill, but that is for another day.

If your Lordships agree with me that the heads of our Armed Forces, our judges, our Permanent Secretaries and so on are in no way inferior to our company directors, you might subscribe to the view that directors should not be paid 50 times more. If your Lordships are of this mind then—like my noble friend Lord Stevenson as well as the noble Lord, Lord Tugendhat—I ask for your support for a stronger restraint in the proposed new Section 439A in the Enterprise and Regulatory Reform Bill in the form of a compulsory annual binding vote from the shareholders in the AGM or, if necessary an EGM, before any increases recommended by the remco can be put into effect. This vote on pay would replace the Bill’s requirement of a shareholders’ vote on policy. The change that we are asking for would be only a small step towards preventing the already great inequality in one part of our society from growing further. It is not enough but it is worth doing.

According to last Saturday’s Financial Times,

“a number of academic studies—covering companies in both the US and Europe—suggest that a big gap between what directors are paid and what other staff receive affects motivation negatively, and that there is a strong correlation between narrower pay dispersion within an organisation and improved performance.”

These research findings are themselves good enough reason for our Government to strengthen any legislation that will reduce the excessive disparity between the highest and lowest paid in our companies. This would strengthen not only our society, but also our economy. I urge your Lordships to support any effort to do so.