Enterprise and Regulatory Reform Bill

Lord Tugendhat Excerpts

Wednesday 14th November 2012 Lords Chamber

[Lord Tugendhat]

My Lords, this is a wide-ranging, detailed and innovative Bill but I will concentrate on one aspect of it, as the noble Lord who has just spoken did, and that aspect is directors’ remuneration.

I congratulate the Government on tackling this issue. They have not done as much as I would have liked or as some other people would have liked, but they have created a precedent and a platform on which investors, remuneration committees, directors, the media and public opinion can all build in future. This is not an area in which everything has to be done by government or by statute. The Government have established that there is a public interest involved in this matter—that is very important—and they have established minimum standards. Others can build on these and I will make suggestions on how that might be done.

Let me make it clear that I approach this issue from the standpoint of a strong supporter of capitalism. I believe that capitalism has demonstrated that it is the best way of creating a prosperous society and enhancing the life chances of the great majority of people. That is not in itself a sufficient condition for a society to be fair, free and just, but it is a necessary one.

However, pace Gordon Brown, capitalism does go through periods of bust as well as boom and it develops warts and faults that need to be corrected. We are in just such a situation at present—and not just in this country, as the debate in the United States on these issues shows. Economic growth is slow and unemployment, especially for the young, is high. Uncertainty is rife and living standards for many of our fellow citizens are being painfully squeezed. That has now been the case for some years, yet during those years, and continuing now, the total compensation of those who run our largest companies has increased at a phenomenal rate. In 1998, according to the Financial Times, FTSE 100 CEOs’ pay in all its various forms was 47 times that of average employees. In 2010, it was 120 times higher. There are a number of other measures that have different bases, but basically they all convey pretty much the same impression: those who run our largest companies have enjoyed a bonanza in terms of pay that is quite out of line with any other segment of society.

What this has led to was made starkly clear by two news stories, one above the other, that happened to appear on page 6 of the Financial Times on 6 November. One reported that in addition to the increases I have just mentioned, the median pay of FTSE 100 directors rose by 10% last year, or more than six times the increase in overall average earnings. The other was headlined:

“Business chiefs warn against compulsion on living wage”.

Of course I realise that these are complex matters, that circumstances differ from company to company, and that generalisations are dangerous. I have chaired two FTSE 100 companies in my time and I have sat on the boards and remuneration committees of several others. I know that the CEOs and other senior executives who manage these companies are entitled to high rewards. Those who create wealth for others deserve to be generously rewarded. But I also know that the state of our society and of our capitalism, as revealed by the juxtaposition of these two stories, is deeply troubling and unsustainable.

The country needs its business leaders to speak out in the interests of their companies and of business in general, but when their pay and pay increases so far outrun those of the people who work for them, they lose moral authority, their words will be discounted and the business case on important economic and social matters will go by default. The Government are right to act and investors, remuneration committees and directors themselves would be wise to build on what has been done. The long-term health of our society and of our capitalist system demands that.

I will conclude with a short list of practical suggestions that can be introduced voluntarily, or as the result of investor or public pressure, to build on the Government’s minimum standards. First, the three-year gap between AGMs for approving a board’s remuneration policy is too long; it should be voted on annually. Secondly, a simple majority is not sufficient; two-thirds would be more appropriate. Thirdly, there is too much deliberate opacity and obfuscation in too many top-of-the-line remuneration packages. What is at stake and what is required to achieve it needs to be clearly comprehensible. One way of achieving that would be for the auditors to be required to provide a detailed explanation. Fourthly, an axe must be taken to bonuses and rewards that are linked to short-term share price movements. These are too open to manipulation, they tend to distort the judgment of executives, and they have exacerbated the tendency towards short-termism in British industry. I am not saying that there should be none, but I am saying that great care needs to be taken to avoid prejudicing a company’s overall long-term future in order for executives to be able to pocket substantial short-term rewards.

Finally, the activities of those Father Christmas figures, the remuneration consultants, must be curbed. At the very least, they should be hired by the non-executive remuneration committee, with no input from the executives, and they should on no account be permitted to carry out, at the same time, any other services for the company in question.

As I say, I do not think statutes are required to achieve all the objectives that I have set out. However, I do think that some further legislation to build on the Government’s admirable start would be helpful. I much look forward to the Private Member’s Bill of the noble Lord, Lord Gavron, which will be introduced in the not too distant future.