Enterprise and Regulatory Reform Bill

Lord Mitchell Excerpts

Thursday 31st January 2013 Grand Committee

Moved by

[Lord Mitchell]

58BA: Clause 70, page 65, line 24, at end insert—
“(2B) The regulations must require the inclusion of information regarding the ten highest paid and ten lowest paid employees in the company outside of the board and executive committee.”

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[Lord Mitchell]

My Lords, in addressing this section of the Bill, I should like to say a few words. I am very conscious of the fact that this is most definitely not a Second Reading debate, but I want to give a little perspective before I get to the main issue.

The amendment deals with directors’ remuneration, a subject which has had a lot of intense coverage in the media. Before we get to the nuts and bolts of the various amendments to which I have added my name, it might be useful if I set out some of the background to our thinking on this issue. I should say at the outset that we are very encouraged that shareholders, particularly pension funds and investment funds, are taking a much more proactive position on this issue. I know it is stating the blindingly obvious but it is the shareholders who own the company and it is they who risk their investment when they buy into a company, yet for too long they have been ignored.

I have to recount a ghastly story about Goldman Sachs that I read some time ago before the financial crash. The story goes that senior management in that company in the United States would look at their profits, decide how much reported profit they needed to keep Wall Street and the shareholders happy, and then divvy up the balance between themselves. I do not know whether that story is true but I am sure that some people take that approach: that is, senior executives act as if they own the company and believe that it is up to them to decide how the pie is sliced, but that is not the way things should be done. To its credit, this month Goldman Sachs responded to the outcry when it agreed not to delay bonus payments in this country in order to gain from the lowering of higher-rate income tax in April. I think that was a good result. Sadly, not all companies have followed the example set by Goldman Sachs. For example, I am told that Tullett Prebon intends to delay bonuses until April. It is on this company’s board that the BIS Minister, Michael Fallon, used to sit. That is not a good example of best practice.

As some noble Lords will know, my background is in IT. For all the faults of that industry, I think it is fair to say that instant gratification by way of monster remuneration is not the norm. By and large, it is about share ownership and share options. The late Steve Jobs was famously known for receiving an annual salary of $1 a year. We have spoken about Amazon today but the owner and founder of that company, Jeff Bezos, also receives a basic salary of less than $100,000—that is, less than a Member of Parliament. I know that in those companies, both those entrepreneurs were already wealthy men but for them it was never about raiding the kitty; it was about capital growth and the long term. Does that not send a positive message to their employees? Their priority is the customer, the product and the service. Get that right and the rest will follow.

It is with much dismay that I see the very opposite in many other sectors of the business spectrum. This very week, we read that RBS intends to divvy up £250 million by way of bonuses, plus a likely fine of £500 million to the US authorities—this is a separate issue—for the bank’s manipulation of the LIBOR market. This bank, where people have been lucky to avoid criminal prosecution for fixing markets, is one that we own and what is going on is simply wrong. This very day, we read about the very same actions being taken by Barclays, a bank whose record is less than perfect. These executives grab all they can when their company’s trading record is poor and where the shareholder value has remained at rock bottom. Being paid to fail does not sound right to me. In even more disturbing news this morning, the FSA has come out and criticised the mis-selling of complex interest swaps, which particularly hit SMEs that were, in many cases, ill equipped to evaluate their risk and were relying on the good name of the banks that sold them the product. I am not saying that what the FSA has done is disturbing; what it has done is really good, but the practice that was going on is disturbing.

When they come back, what do these well paid executives say? “It is a global employment market. If we don’t get top dollar, we will go somewhere else or to some company that will pay us”. You hear that all the time. The FT hints that RBS executives are threatening it. You can use any word you like to describe this kind of behaviour; my word is blackmail. It is what Premier League footballers do. My advice to anyone who is faced with this gun to their temple is to call their bluff. My experience in business is that no one is indispensable. Just below the great man—and now, increasingly, the great woman—you can bet your boots that there is someone who can step up to the plate.

My party wants fairness and balance. It is worth noting that if the minimum wage had been increased to reflect the average remuneration of FTSE 100 CEOs, the minimum wage would now be at £19 per hour. Instead we have this growing disparity, especially in London where so many leading companies are based and where, in 2011 alone, the top percentile received a 16.5% greater increase than the bottom percentile. Put simply, too many are being left behind and bringing this imbalance back into balance is exactly what my party’s one-nation philosophy is all about. That is the background but let me repeat: we have no problem with high pay. However, we have a problem when this pay is set by a cohort of good old boys who look after each other’s interests. The solution is to make pay transparent and to ensure that remuneration policies are set via the board, in consultation with independent experts and with the shareholders’ explicit approval.

The amendment which I am addressing first, Amendment 58BA, deals with the top 10 and bottom 10 earners in a company. This amendment aims for greater transparency on pay across the whole of the company, so that shareholders have more information when they come to make decisions on pay. It requires that the salaries of the top 10 highest earners in a company, outside the boardroom, are disclosed in a similar fashion. No doubt companies would choose to do this in an anonymous form, with lists of pay bands and the numbers of employees who fall into each band. This would be entirely acceptable and is good practice. Indeed, I have prepared such lists for companies that I have been involved in, where I have been chairman of a public company. It is also the practice in the United States. In some sectors, particularly the banking sector, very high earners exist outside the boardroom, which is why shareholders need these figures for context.

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[Viscount Younger of Leckie]

My Lords, noble Lords are very familiar with the arguments in favour of action on directors’ remuneration in quoted companies. In my opening remarks, I will be echoing many of the sentiments expressed by the noble Lord, Lord Mitchell, and particularly picking up on the transparency aspect, as expressed by the noble Baroness, Lady Turner.

Over the past decade, directors’ pay packages have risen on average by 13% per year, while the value of many of the companies they run has remained broadly static and workers’ wages have risen at a much slower rate. Business and investors recognise that this disconnect between pay and performance is damaging and not in the long-term interests of the economy. As Sir Roger Carr, president of the CBI has said:

“Now is the time to be more transparent, more responsible and more accountable”.

It is not government’s role to micromanage company pay, but there are actions that we can take to address what is a clear market failure.

Eighteen months ago, the Government initiated a broad, national debate on this issue. This has encouraged shareholders to become more engaged as owners of companies during the so-called shareholder spring. In 2012, several firms saw their remuneration reports voted down, including big companies such as Aviva and WPP. We have also seen many companies taking the initiative and engaging constructively in response. This is an important step for encouraging more responsible paysetting.

The Government’s reforms will build on this, and promote better engagement between companies and shareholders. By giving shareholders clearer information about what directors are paid and binding votes on pay policy, shareholders will be better equipped to hold companies to account. Business and shareholders agree that this comprehensive package of reforms strikes the right balance. It will promote a stronger link between directors’ pay and company performance but avoid placing unnecessary or inappropriate burdens on companies. The head of the Association of British Insurers has said that these proposals,

“are practical, workable and should help tackle excessive executive pay”.

The amendment requires that companies report on high and low pay outside the board. The issue of high pay below board level is most prevalent in the financial services industry because poorly designed remuneration structures can incentivise excessive risk-taking—a point alluded to by the noble Lord, Lord Mitchell. The Government are committed to improving remuneration disclosure in banks and achieved progress on disclosure below board level as part of Project Merlin. At the same time, Europe has proposed bringing in its own disclosure rules. We await the outcome of these negotiations before deciding on how to proceed with any domestic proposals for disclosure below board level at banks. The Government will argue strongly for the right outcome and remain committed to ensuring that the UK has a transparent and comprehensive remuneration disclosure regime for all companies, including the financial services sector.

However, we do not believe that high pay below board level is a major issue in other sectors. Through our consultations with investors, we learned that there is no demand for such a disclosure, which, if adopted, would place an unnecessary regulatory burden on companies.

Regarding the pay of employees more generally and how directors’ pay compares to that of lower-paid workers, the Government recognise that this is an issue of concern for shareholders, employees and the public in general. We want remuneration committees to consider the broader context when setting top pay. That is why, under government proposals, companies will have to say more about how they have taken into account pay of employees at all levels, and publish the percentage increase in pay of the chief executive officer compared to that of the workforce.

Last year, we published a draft of the regulations that will implement these proposals. These regulations will determine the content of remuneration reports in future. We invited people to comment on the draft regulations and a copy is available in the House Library. Noble Lords will have the opportunity to debate this matter thoroughly later this year when these regulations are brought forward.

Amendment 58BB would mandate that regulations prescribing the content of directors’ remuneration reports must require companies to disclose information about fees paid to remuneration and recruitment consultants in respect of directors’ remuneration. Noble Lords will be aware that the Secretary of State already has the power to require companies to disclose this type of information in the directors’ remuneration report and that we have published draft regulations that would give effect to this. Under these proposals, companies would be required to explain how consultants have been appointed, what services they have provided and how much they have been paid. By way of an update for the noble Lord, Lord Mitchell, we invited comments on these draft regulations and are currently considering the responses.

The noble Lord, Lord Mitchell, rightly drew attention to pay in banks, which I alluded to in my remarks. However, it is worth re-emphasising that high pay outside the boardroom is most prevalent in financial services, and we want to see greater scrutiny of how senior executives in large banks are incentivised because their behaviour can have a material impact on a firm’s risk profile. That is why we have committed to extending pay disclosure in large banks to highly paid non-board executives. This would mean that the UK had the most transparent bank pay of any major financial centre, but we do not propose to apply this in other sectors, as mentioned earlier, where it is less relevant. We consulted on this and found that there was no demand from investors for this extra information. Indeed, it would be an unnecessary extra reporting burden on companies.

I thank the noble Lord for raising this issue, but I suggest that the amendment is unnecessary, given that the Government already have the power to do this and have proposed considerable action in this area. I therefore ask the noble Lord to withdraw the amendment.

[Lord Mitchell]

I thank the Minister for that reply. I think we are not too far away in our philosophy and in what we would like to do in this section of the Bill. What we are suggesting would perhaps give the Bill a little more bite than it has at the moment. It is something we need to think about. My instinct is that we need to pursue these amendments.

I shall say one thing in particular. I do not understand why non-financial companies are not part of this. If I were a shareholder, I would like to know this information, even if it were—to name one company—WPP, which is not in financial services. There are many companies out there that pay pretty massive salaries, and I do not understand why they should be excluded from this. The Minister said that consultation with the investment community showed otherwise, but for all of us who invest in companies, this is key information that we should have. I hope the Minister takes into account what I have said. I beg leave to withdraw the amendment.

Amendment 58BA withdrawn.

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Moved by

[Lord Mitchell]

58BD: Clause 70, page 66, line 8, leave out “ordinary” and insert “special”

[Lord Mitchell]

My Lords, this group of amendments is about accountability. We will be going over some of the area we have discussed before, but some of the points need stressing. Again, the issue is about putting power back into the hands of the shareholders.

Amendment 58BD, where we intend to change the word “ordinary” to the word “special”, talks about the type of resolution that would be necessary to get through any changes in the principle. We feel that a special resolution, which would be 75% of the shareholders, gives it a greater importance as far as the company is concerned and makes any changes to the principles of remuneration that much harder to make.

The current arrangements for backward-looking votes have given some power to shareholders, but have not sufficiently empowered them. While we welcome the changes, we feel that more could be done. In 2012, at the height of what became known, as the Minister said, as the shareholder spring, there were significant votes against directors’ pay, such as those at Aviva, Barclays and William Hill. The most memorable was the voting down of a 30% pay increase for Sir Martin Sorrell at WPP.

However, from 2011 to 2012, there was an increase in executive pay to the tune of 12%. By comparison, the rate at which pay increased for everyone else averaged 2.8%. Only 12% of the country received a pay increase of more than 4%. Needless to say, there was no rise in share price to equate with that 12% jump in wages, and nor would one be expected. In the past 10 years, FTSE 100 executive pay increased by 300%, while the FTSE 100 index has increased by 48% and, more devastatingly, fallen by 8.1% in the past five years.

It is far more difficult for shareholders to organise today than it would have been in the past, mainly because ownership is so global. Indeed the Kay review into the effect of UK equity markets on the competitiveness of UK business pointed out that the increase in foreign ownership has made it much more difficult for a disparate group of shareholders to organise and collaborate. In 1981, the percentage of shares in UK-listed companies held outside the UK was 3.6%. Today the figure is 41.5%—a dramatic change. Shareholding is also often a much more short-term affair than in the past. In 1998, the average holding in US and UK banks was around three years. Ten years later it had reduced to three months. It is probably even less today.

With that in mind, shareholder protest should be reconsidered. If 40% of shareholders in a company combine to oppose a remuneration report, it is a hugely significant development showing a deep level of dissatisfaction with company policy. Indeed the Government’s consultation in March appeared to acknowledge precisely this problem. Under the proposed rules, however, it would be possible for a company to ignore the report. The amendment would rectify that.

I want to address the question of an annual vote, which, of all the issues that I am addressing, we feel very strongly about. Our amendment is also about empowering shareholders. It proposes an annual binding vote for shareholders on a company’s remuneration policy, as opposed to a three-yearly binding vote. Having such a vote will ensure that executive pay is a matter that directors have to engage with regularly and will ensure that the issues around it are kept in mind. It would not be a difficult requirement to comply with, and I do not imagine that businesses will find much difficulty in doing so. This is because there are already many reporting requirements on an annual basis. Indeed the triennial approach, while a well thought-out idea, probably loses sight of that fact. The idea of a binding annual vote on pay has broad support. Indeed, it is again the case that the Government’s consultation in March seemed to suggest that it was their preferred approach.

In this case, there was every indication that Vince Cable and the Government initially supported an annual vote, but then performed a U-turn once it became apparent that pressure had been applied to them by large firms—yet another example of this Government talking big and acting small. A Financial Times editorial piece on the subject said of directors:

“Annual votes would at least put them firmly on the spot. Mr Cable’s triennial polls, however well-meaning and thoughtful, may not”.

This is not to be confused with my party advocating short-termism. We believe that in many cases pay has been thought about with too short-term an approach. The triennial vote actually reflects that to a certain extent, as for many companies, three-year share options are thought of as long-term. However, that is for companies themselves to think about. What the annual binding vote would do is ensure that whatever remuneration policy is chosen, shareholders have the power to hold it to account. I beg to move.

[Lord Razzall]

My Lords, this is clearly a serious issue and the noble Lord, Lord Mitchell, is right to use this opportunity to get the issue debated. I do not wish to delay the Committee for too long on this point, unlike some of my colleagues, but the point ought to be made that while the noble Lord is of course right that the Secretary of State’s initial position was to look at annual binding votes, one of the objectives of consultation on these issues is to try to arrive at a consensus. It looks as though a consensus about the triennial proposal has been found that gets both the TUC and the CBI on side. That is a significant achievement, given that this is a tricky issue. The initial position could have been significant hostility from one side to the other, whatever the Secretary of State’s recommendation had been. It should be noted that the compromise was well negotiated between the two positions. It is not often that the trade union movement and the CBI can be got to agree on something so complex.

[Viscount Younger of Leckie]

My Lords, Amendments 58BD, 58BF and 58BG would make the vote on remuneration policy a special resolution, requiring companies to secure the support of 75% of shareholders to pass. The level of support required for remuneration resolutions is a matter that the Government have consulted on extensively. The vast majority of investors agree that the vote on pay policy should remain an ordinary resolution. They would be concerned if a minority of shareholders could overturn the views of a majority. In cases where voting turnout is low, it would take only a small number of activist investors to reject the pay policy.

Investors have welcomed the Government’s decision to keep this as an ordinary resolution. They have shown this year that a majority of shareholders are often willing to vote against egregious pay policies. In 2012, we saw a succession of companies lose the vote on pay policy with at least 50% opposition from shareholders, as the noble Lord, Lord Mitchell, said. Special resolutions should be reserved for rare issues that have a major impact on shareholder rights or company value, such as recapitalisation or changing the articles of the company.

However, the Government agree that companies should have to take action when a large minority of shareholders reject a remuneration resolution, even if legally it has been passed. Therefore, the Government welcome the Financial Reporting Council’s commitment to look at whether companies should formally respond when a significant number of shareholders vote against a pay resolution and to consult on this being in the Corporate Governance Code.

Amendment 58BE would remove the requirement for companies to put their remuneration policy to a shareholder resolution at least every three years—triennially—and instead require that this is done annually. We considered that carefully when consulting with investors and companies. They welcome the option of a three-year pay policy, which encourages companies to plan for the long term and discourages them from making annual tweaks to pay packages. Investors agree that this will help to put a brake on annual pay ratcheting.

Major investors and investor bodies, including the Association of British Insurers, have backed this approach. The ABI has said that it will,

“help the task of keeping executive pay proportionate and aligned to corporate strategy”.

Of course, companies can choose to have an annual vote on pay policy and will be required to if they make any change to it. However, if the policy remains totally unchanged, it is an unnecessary burden on both companies and shareholders to require a vote on it.

We have, however, built in a safety net. Shareholders will continue to have an annual advisory vote on how the pay policy is being implemented. If they are not satisfied, they can oppose the advisory vote and this will trigger a requirement to have a binding vote on the pay policy at the next AGM. Shareholders also have the existing right to force a resolution at an EGM. That means that shareholders could force an annual binding vote on remuneration policy, should they wish to.

The noble Lord, Lord Mitchell, asked whether the high-profile votes against pay last year were a flash in the pan. As he said, last year we saw several such votes against high pay—he cited some examples—which were a step in the right direction. We are pleased that shareholders and businesses are increasingly working together to sort out pay issues, but it will take more than one year to do so. The government reforms will come into force in October this year and will give shareholders more power to push for change. Looking further ahead at least 18 months, if we see less public anger over pay because companies have sensible pay packages, we will have gone some way towards succeeding.

The noble Lord, Lord Mitchell, echoing remarks made by my noble friend Lord Razzall, raised the recent Kay review, and I am grateful to noble Lords for their welcome of that review on how to encourage a more long-term view in our equity markets. This is one of the reasons why, after consultation, we considered that a three-year vote best enabled us to focus shareholders and directors on the long-term value of the company.

Given the wide support for the approach that the Government have taken on this issue, I ask the noble Lord to withdraw his amendment.

[Lord Mitchell]

My Lords, I thank the Minister for his comments. We are perhaps a little further away from each other than we were on the previous amendments. As the noble Lord, Lord Razzall, said, it is some event when the TUC and the CBI come together on such a key issue, but we still feel that the annual side of this is an important issue.

I shall deal with the special resolution and the 75%. It is part of what we are saying about the need for this issue to be treated as important. In the next round, we would probably want to keep it as it is, but I will think about it. As for the annual side, and the request that it stays on a triennial basis, every single year at annual general meetings a series of issues go through, such as the approval of auditors and accounts. I do not see any reason at all why there should not be an approval of directors’ remuneration principle and package; it should slot in: one; two; three. I am sure that is the correct way for it to be. It does not matter what companies want to do. It is what we should be telling companies to do, so that those who invest and are stakeholders in those companies can really understand what has been going on in the past 12 months.

Having made those points, I beg leave to withdraw the amendment.

Amendment 58BD withdrawn.

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[Viscount Younger of Leckie]

My Lords, Amendments 58BH, 58BJ and 58BK relate to the information that must be published by a company when a person ceases to be a director. They seek to clarify the information that must be disclosed and ensure complete transparency. Whenever a person ceases to be a director, shareholders want to know the details of their exit package. At present they may have to wait several months before they find this out. We believe that requiring companies to publish this information as soon as possible after a director departs will help to put pressure on companies to moderate such payments. Clause 72 introduces this requirement and requires the company to publish on its website details of payments for loss of office. However, because of the complexity of directors’ pay, some payments made after loss of office will technically be classed as remuneration payments rather than loss of office payments, so, legally, companies would not have to include details of them. Such payments can represent a substantial part of an individual’s exit package and so should form part of the disclosure on a company’s website. These amendments address this gap, bringing within scope,

“particulars of any remuneration payment … made or to be made to the person after ceasing to be a director, including its amount and how it was calculated”.

This will close a loophole which could otherwise have been exploited by companies attempting to evade the spirit of the legislation by not making full disclosures on exit payments. I beg to move.

[Lord Mitchell]

My Lords, we welcome this amendment. It is in the spirit of giving shareholders more information. We are very happy to support it.

[Viscount Younger of Leckie]

I am pleased to have support for these minor and technical amendments.

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[Lord Razzall]

My Lords, I have considerable sympathy with the amendment proposed by the noble Lord, Lord Stevenson, and the noble Baroness, Lady Hayter. These issues are always extremely tricky in that it is a matter of getting the balance right between the wish of companies or individuals to carry on trading following an insolvency action and that of creditors to protect their interests. There is a slightly wider issue of pre-pack administrations and sale of businesses where the major losers are the unsecured creditors. That is something that your Lordships have looked at from time to time to see whether any change needs to take place. This is a relatively small amendment to marginally shift the balance in relation to organisations which, although insolvent in one form or another, are carrying on trading. We have had a lot of evidence—obviously on the Labour side as well as on our side—that there are quite significant occasions when the suppliers of these services, rather than cutting off the service, say that they will carry on the service but charge a significant extra amount. That seems not to be conducive and, in this case, shifts the balance far too far away from the creditors’ interests. Therefore, I think that this amendment is very appropriate and the Government should consider it seriously.

[Lord Mitchell]

My Lords, I had not intended to talk about what I am talking about now, but it is pertinent, particularly as the noble Lord, Lord Razzall, mentioned pre-pack administration. I would like to say a little more about that.

Some pretty awful stuff is going on out there. Pre-pack administration is a situation in which a company is in trouble, particularly with its creditors, and is just about hanging on, when at the very same time some influential shareholders get together with a friendly administrator and say that they will put the company into administration. They suggest that the moment that it is put into administration there will be just a short period of time in which to sell it, then they will come in with company mark 2, which will buy the assets and business from the administrator and start up again, often with a very similar name. The effect of doing that is that the small creditors, which is the area that I care about because they are generally SMEs, and the small shareholders, get absolutely stuffed, because the company ceases to exist—and it then in its revised form continues with a different name and some of the same shareholders. They have an agreement with their banker. They have dumped all the toxic stuff into the river and moved on and started the company again. This does goes on; I have seen lots of examples of it happening. In fact, I am a minority shareholder in a company and there was a time when the majority shareholder was threatening to put the company into pre-pack, which would have meant me losing my shareholding. This was several years ago but I have experienced the threat of it. In effect, it never happened but it is one of the weapons that a company can use to dump shareholders and creditors. I put this down as something that I might come back to. I am not expecting the Minister necessarily to come back on any key points but I just want to make that point.