Businesses: Employee-shareholder Scheme

Debate between Viscount Younger of Leckie and Lord Mitchell

Thursday 9th January 2014 Lords Chamber

[Lord Mitchell]

To ask Her Majesty’s Government what assessment they have made of the level of interest from businesses in the United Kingdom in the employee-shareholder scheme, in the light of figures given to the Financial Times in response to a freedom of information request.

[The Parliamentary Under-Secretary of State, Department for Business, Innovation and Skills (Viscount Younger of Leckie) (Con)]

My Lords, the employee-shareholder employment status came into force as recently as 1 September 2013. Companies are not required to register or apply to government to use it, and no qualitative assessment of levels of interest has yet been made. However, since 1 September, the online detailed guidance was viewed nearly 15,000 times, with people spending, on average, more than seven minutes on the pages. This clearly shows an initial level of interest in the scheme.

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[Lord Mitchell (Lab)]

My Lords, last year these Benches argued passionately against the shares for workers’ rights scheme. Last week, the Deputy Prime Minister said that it should be scrapped. According to the freedom of information request, the number of enquires that the BIS has received in respect of the scheme is the magnificent total of 19. Let us be honest; it is a flop. Is it not time for the Government to cut their losses?

[Viscount Younger of Leckie]

My Lords, it was not unexpected that this issue would return to your Lordships’ Chamber, and the noble Lord, Lord Mitchell, has obliged—although perhaps slightly earlier than I might have hoped. The status has only been introduced recently, so the phrase “early days” springs to mind.

In terms of the point that the noble Lord made about the freedom of information response given to the Financial Times, it was on the number of inquiries that the Government had received on the status. I know that the noble Lord submitted a Written Parliamentary Question to me relating to the number of people who had become employee-shareholders. There were two distinct questions that required different answers.

Payday Loans

Debate between Viscount Younger of Leckie and Lord Mitchell

Wednesday 26th June 2013 Lords Chamber

[Viscount Younger of Leckie]

My noble friend makes a very good point. This is precisely why the summit will, I hope, be helpful in highlighting the concerns. However, I stress that the Government have been taking some tough action and have given 50 firms—90% of the market—12 weeks to change their business practices or risk facing legal requirements or the loss of their licences. Two have already told the OFT that they are surrendering their licences. Since 6 March, the OFT has revoked the licences of three firms engaged in payday lending and has three further investigations open.

[Lord Mitchell]

Noble Lords will be as horrified as I was yesterday to discover that the leading online payday lending company has raised the interest rate on its loans from 4,214% to 5,853%. Religious leaders, community leaders and Members of both Houses of Parliament have begged the Government to cap interest rates, but they continue to refuse. Why is this? Could it be that some of the shareholders in some of the payday lending companies are also some of the donors to the Conservative Party?

[Viscount Younger of Leckie]

The Government remain very concerned by the evidence of harm in the payday loan market, but we do not think that the current evidence points to a cap on the cost of credit as a solution at this time. The Bristol report on high-cost credit indicates that a cap could have unintended consequences and risks harm, such as reducing consumers’ access to credit and leading to crime, lenders imposing new charges outside the cap, and less understanding shown to customers. Therefore, we do not agree that this is right or, indeed, that a ban would be right.

Enterprise and Regulatory Reform Bill

Debate between Viscount Younger of Leckie and Lord Mitchell

Monday 11th March 2013 Lords Chamber

[Viscount Younger of Leckie]

I can confirm that it would have to be voted on immediately, because the change had happened in that particular year, so there would be that trigger for year two, in effect. If I have failed to do so already, I ask the noble Lord to withdraw his amendment.

[Lord Mitchell]

I thank the Minister for his comments and all other noble Lords for their contributions. I will deal first with the 75% special resolution issue, which was raised by the noble Lord, Lord Blackwell. As my noble friend Lord Wills was saying, it is important for the shareholders to hold the executives’ feet to the fire in some respects. This is a crucial issue. I know there is a difference in this between the ordinary and the special resolution, but that was why we went for the 75%.

The main issue is the annual point. You only have to read any newspaper in this country, and indeed around the world, to see what a vexatious issue this is at the moment. The population is disturbed, and the financial press is disturbed. Not only the popular press but leading newspapers in this country and throughout the world bring up this issue of executive pay. It has got out of kilter. We are going for the annual situation rather than the triennial situation because it should be an automatic consequence and is just as important as the selection of auditors and the approval of the accounts. Three years just seems to us to be too long for such an important issue. I have listened to what the noble Lord has said, but I would like to test the opinion of the House.

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[Lord Mitchell]

My Lords, we are very supportive of this amendment. It is clearly needed. I have only one question about whether the words “reasonably” and “honestly” are strong enough. A lot of lawyers would have a field day with this. I just ask the Minister to go away and think about whether we can perhaps have something a little more assertive, which would leave less latitude for a lot of lawyers to make lots of fees.

[Viscount Younger of Leckie]

I thank the noble Lord, Lord Mitchell, for that, and also for his contribution on this important issue. The proposed amendment to Section 226E ensures that those who should be rightly relieved of liability can be, while those who should be held liable will be. To answer his question about how one can define or further improve on the definition of “reasonable”, the concept of reasonableness has been thoroughly tested by the courts, which are very rigorous in judging directors. A court might take into account what advice a director had sought, what conversations had taken place, and what records were kept. Of course, it remains up to the court to decide and it will vary in each case. The court will take into account, for example, the full context of the situation. Therefore, the expectations of a “reasonable” director of a FTSE100 company with a strong compliance function and ease of access to professional advisers will be much higher than those of a director of a smaller quoted company. I hope that that takes matters forward and helps answer the noble Lord’s question. I also thank noble Lords for their understanding of the need for various minor and technical amendments.

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[Viscount Younger of Leckie]

Noble Lords will be aware that the administration procedure is the primary mechanism for effecting business rescues. It is important to recognise that the objective of administration, if the rescue of the company is not feasible, is to provide the best return for creditors. A pre-pack sale is merely a means of achieving that outcome and should therefore always be in the interests of creditors. I am most grateful to the noble Lord, Lord Mitchell, for his helpful description of pre-packs for the benefit of the House.

As the noble Lord said, pre-packs can be an effective way to the best outcome for creditors, enabling businesses to be rescued and preserving jobs, but we recognise that there can be scope for abuse. That scope is greatest where pre-pack sales are to connected parties, such as the directors or their families. Again, I am grateful for the anecdotal evidence given tonight by the noble Lord, Lord Mitchell. That is when most concerns are expressed, and it is vital that everyone involved has confidence that such sales are at fair value. We have been listening carefully to concerns expressed about the use of pre-packs, and Ministers have met with stakeholders to discuss the issue. I am aware that, as the noble Lord, Lord Mitchell, mentioned this evening, he recently met with the Minister for Employment Relations and Business Affairs, Jo Swinson, to discuss the issue. We have also invited those who have complained about the procedure to provide evidence of abuse, so that that can also be pursued.

I reassure noble Lords that work is already under way to improve the transparency about pre-pack sales. There is a statement of insolvency practice, SIP 16, setting out the information that has to be provided to creditors by insolvency practitioners. That is being strengthened to ensure that more information will be disclosed and that creditors will receive that information at an earlier stage. Insolvency practitioners will also have to confirm that a pre-pack sale is in the best interests of creditors. That should provide greater confidence that the pre-pack sale is justified. The Insolvency Service is proactively monitoring information disclosed under SIP 16 reports to establish whether there has been any abuse. Where there is evidence to suggest abuse, it is reported to be relevant regulatory body for action to be taken. Such action can include fines, sanctions and, ultimately, loss of the insolvency practitioner’s licence. The Insolvency Service will report on its findings in this regard.

We therefore already have measures in place to protect against abuse, and continue to monitor the pre-pack process to ensure that it is being used appropriately. However, I share many of the concerns raised by the noble Lord, Lord Mitchell, which I know have been expressed on other occasions in both this House and the other place.

I agree that an independent review into the issue would be beneficial. For that reason, I confirm that we will commission an independent review into pre-pack sales in late spring, once the strengthened SIP 16 is in place and after the Insolvency Service has reported on the findings from its monitoring.

On the review issue surrounding continuation of supply to insolvent businesses, this is now the subject of a Government amendment being debated shortly. We propose to consult on the issue prior to implementing reforms and I am satisfied that this will address the concerns in this area. In view of this assurance to commission an independent review into pre-pack sales, I hope that the noble Lord will agree that it would be unnecessary to introduce a statutory requirement to do so, and will therefore withdraw his amendment. I conclude by thanking the noble Lord, Lord Mitchell, for raising this important issue.

[Lord Mitchell]

My Lords, I thank the Minister for his words. I remember when we were in Grand Committee, he too had an anecdote on this same subject. I suspect that many other people have as well. I thank him for what he has said and for the Government’s plans for a review of this area. I beg leave to withdraw the amendment.

Enterprise and Regulatory Reform Bill

Debate between Viscount Younger of Leckie and Lord Mitchell

Thursday 31st January 2013 Grand Committee

[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.

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[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.

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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.

Enterprise and Regulatory Reform Bill

Debate between Viscount Younger of Leckie and Lord Mitchell

Wednesday 12th December 2012 Grand Committee

[Viscount Younger of Leckie]

My Lords, I am grateful for these amendments, initiated by the noble Lord, Lord Mitchell, which highlight the importance of competitive markets to small and medium-sized enterprises. I welcome the noble Lord to the Dispatch Box and I hope that I can do a little better, in his eyes, in addressing his issues and concerns than perhaps I did before.

I agree that Britain’s small businesses are absolutely vital in leading the economic recovery, and the Government take its role in this area very seriously. This Bill contains a number of measures that will deliver real benefits to SMEs by strengthening and streamlining the competition regime; for example, it will make entry into markets easier, deter anti-competitive practices and speed up competition cases. While I support the overarching intention behind Amendment 24BC—to support SMEs—I do not believe that a dedicated SME unit within the CMA is necessary.

First, the competition authorities already undertake a range of work that directly benefits SMEs. For example, following an OFT market study into the retail pharmacy sector, a number of administrative restrictions on entry were removed, which enabled more competitors, including SMEs, to enter the market. Another example is in banking, which I know the noble Lord, Lord Mitchell, is particularly focused on. OFT interventions in markets such as personal current accounts, small and medium-sized enterprise banking and cash ISAs have found long-standing problems, such as high concentration, low transparency of fees, low levels of switching and high barriers to entry, which hamper effective competition.

The OFT has launched a programme of work designed to achieve a more competitive and customer-focused retail banking sector, and this will consider both personal and SME banking. The OFT also works actively with bodies representing SMEs, such as the Federation of Small Businesses and the British Chambers of Commerce, to identify competition problems faced by SMEs. The Government expect this engagement to continue when the CMA is established.

I urge caution against restricting the CMA’s ability to allocate its resource independently, according to the priorities of the day. There is also a risk that a dedicated SME unit would be inundated with complaints about competitors, rather than competition issues. This would take vital resources away from competition enforcement itself.

The new clause inserted by Amendment 25G would have the effect of bringing small businesses within the definition of “consumer” in Part 4 of the Enterprise Act, which deals with market investigations. This means that super-complaints could also be brought to the CMA about potential competition issues affecting small businesses.

We need to take care when thinking about small businesses within competitive markets, so that the line between consumers and competitors is very clear. The Government consulted on whether to extend the super-complaint system to SME bodies, as the noble Lord’s amendment proposes. The consultation asked for evidence of the type of issues that may be brought to the CMA as a potential super-complaint by small business organisations, but we did not receive any. Furthermore, the majority of responses to the consultation on this question actually opposed the proposal. Respondents felt strongly that SMEs should not be given special status, which could allow them to challenge business practices that might be pro-competition and efficiency-enhancing.

Amendment 26E would have the effect of bringing small businesses within the definition of “consumers” for the purpose of Part 4 of the Bill, which deals with competition reform. This would have the effect of enabling the CMA to launch a market study into a market which seemed not to be working well for small businesses.

I agree with the sentiment behind this amendment, that the CMA should be able to look at markets that are not working well either for consumers or small businesses. I do not believe that it is necessary because the existing legislation has not to date constrained the OFT from considering business-to-business markets. If there are competition issues in these markets, they will usually ultimately affect end consumers as well.

For example, the OFT’s current review of retail banking will look at SME banking as well as personal consumer banking. The OFT’s aggregates market study, which has now been considered in more detail by the Competition Commission for a market investigation, considered how easy it was for small ready-mixed concrete businesses to source cement and aggregates competitively. I hope that noble Lords will see that the competition authorities already carefully consider competition issues that affect SMEs in the existing regime and that legislating to assign resources to a particular area may prevent the CMA from focusing where enforcement is most needed. I would, therefore, ask the noble Lord to withdraw his amendment.

[Lord Mitchell]

I thank the Minister for his comprehensive reply. There is a need for a dedicated unit; small and medium-sized enterprises need a particular focus point to which they can refer. Our amendments are a “may”, not a “must”. The Minister gave an example of banking and the OFT. That may be, but here we are today, with high street banks still dominating and other types of banking organisations only just coming through.

In summary, we are trying to set up a mechanism that will enable the CMA as it progresses to take actions in favour of the SME sector—to enable it specifically in that area. I ask the Minister to think about what I have said. We will think about what we have said, and with that, I beg leave to withdraw the amendment.