Companies (Miscellaneous Reporting) Regulations 2018

Baroness Bowles of Berkhamsted Excerpts

Monday 9th July 2018 Lords Chamber

[Lord Haskel (Lab)]

My Lords, I welcome any attempt to raise the reputation of business and to increase the trust and confidence in business in the eyes of the public, so I very much welcome these regulations, but I wonder how effective they will be.

These regulations require public companies and large private companies to publish pay ratios and other data to show that the directors are taking into account the broader interest of customers, employees and communities, as the Minister has explained. These data are useful to provide more information to enable shareholders to question the directors and, if necessary, to vote at shareholder meetings. But who are the shareholders? Many shares are held by institutions, which are reluctant to act as long as the financial returns are as expected. Frequently they have a limited and sometimes short-term interest in the company. Also, much share trading is carried out by algorithms—and who knows on what formula they base their decisions? There are still many day traders active, and their trading, again, is based purely on numbers. As I understand it, this is the way the majority of shares now change hands.

I ask the Minister: even if the published data leads to naming and shaming, how effective will these regulations be in changing behaviour? I know there is a lot of concern about misleading comparisons between companies, but perhaps we should ask for other data to be published, such as benchmarking data on productivity so that shareholders can compare how well their company is doing in comparison with competitors.

Surely, there must also be concern about the reliability of the numbers. The big four accountancy firms almost exclusively audit for the large companies that are the subject of these regulations; they are also their financial advisers. In their role as financial advisers to these companies, I am sure that they will have lots of schemes to make the ratios look a lot more attractive. This joint relationship has come in for a lot of criticism recently. Is there any sign of any change so that these regulations will become more effective?

I welcome the rules applying to large privately held businesses. Most respondents in the consultation wanted to see more data about these companies and I hope that these regulations will produce it. Generally, I welcome these regulations, but would like to see them widened and made more effective.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I first apologise to the Minister for being caught out—

[Baroness Vere of Norbiton (Con)]

Is it really appropriate that the noble Baroness speaks, given that she was not here for any of the Minister’s introduction of the statutory instrument at all?

[Baroness Bowles of Berkhamsted]

I apologise: I got caught out because I was advised of a rather different timescale. With the permission of the House, may I speak?

[A noble Lord]

Yes, I think you had better.

[Baroness Bowles of Berkhamsted]

Thank you. I notice that I am not the only one who had to run in. I declare my interests, as in the register, in particular as a non-executive director of London Stock Exchange plc. I welcome the provisions in these regulations and will speak mainly about the Section 172(1) report and stakeholder engagement.

Recent events surrounding BHS and Carillion have reminded us, yet again, that it is not just share- holders but the public purse, ordinary workers and pensioners that bear the brunt of corporate failures and misdemeanours. Incorporation and limited liability is a bargain with society, meant to encourage entrepreneurism and growth for the common good. The public-interest side of that bargain has to be upheld. That is the message from the Green Paper responses: 86% and 85% respectively of respondents agreed with steps to strengthen stakeholder voice and governance for private companies.

In fact, looking after the public interest has always been the majority view. I took the time a couple of years ago to go through the evidence in the Law Commission consultation leading up to the Companies Act 2006. It was a minority—a concerted one—who supported “one master, the shareholder”, which then became “enlightened shareholder value”. The majority wanted a more express public-interest requirement, but lost out as they were not co-ordinated around a single suggestion. So here we are again, just as with the creation of the strategic report, trying to fix it again.

I am not sure whether it counts as an interest, but I was the author of the Liberal Democrat response to the Government’s Green Paper, in which I put a long— 32-paragraph—section on interpretation and enforcement of Section 172 of the Companies Act 2006. It included a call for legislation to correct the distortion that has occurred in practice to the intentions of the so-called enlightened shareholder value and for the discharge of the duty in Section 172 to be susceptible to checking and challenge. That is a regulator’s job: they look after the public interest on behalf of the Government, and that matter needs some revision and upgrading for companies.

I doubt that all the deficiencies in Section 172 could be dealt with by secondary legislation, but these regulations are a decent attempt to remedy the fact that the “have regard to” formulation is weak, to the point of being non-existent. I sincerely hope that the 172(1) reporting proves, as I put it, “susceptible to checking and challenge”, and that the perfunctory statements which, in effect, say “we thought about it and dismissed it” are not left unchallenged. I say this also with regard to the requirements in paragraph 13 of Part 3 regarding engagement with employees, suppliers, customers and others. These clarify that there must be not only an explanation of the engagement with employees and wider stakeholders, but statements explaining how directors have performed the “have regard to” requirements and a summary of the effect of that regard on principal decisions. These statements must not be allowed to say “no effect” without substantive reasoning—no getting away with the sort of simplistic, “we take the best person for the job” explanations that have been prevalent on gender equality.

In paragraph 9.2 of the Explanatory Notes, it says that the FRC has agreed to include guidance on how companies should make a Section 172(1) statement. The forthcoming revised corporate governance code will have a “comply or explain” requirement concerning the mechanism of employee engagement, choosing from the three options of a designated non-executive director, a formal employee advisory council or a director from the workforce. I have no problem with having options, and suggest that again, this has to be a “comply or say what you are doing instead that is just as effective” type of comply or explain, not a “we didn’t think it suited our business” type of explanation. Indeed, a weak explanation would seem to offend against the employee involvement provisions in Part 3 of these regulations.

--- Later in debate ---

[A noble Lord]

Too long!

[Baroness Bowles of Berkhamsted]

The time shown on the timer is not all mine.

With regard to employee engagement, I take this opportunity to suggest that it is worth looking at employee-owned businesses—that is, businesses where, alongside some share ownership, employees have a significant say through various different mechanisms. I commend to noble Lords the report The Ownership Dividend, launched at the end of July, which followed a year’s inquiry and, for the first time, substantial collection of UK data. I had the honour to chair the inquiry so I declare an interest. The inquiry showed that many governance problems are solved, including those around wider stakeholders, and that productivity increases when there is employee ownership. So embracing the formal involvement of employees is nothing to shy away from, even if it is not within a formal employee-owned structure.

I have spent some time on the Section 172 and stakeholder matters because they are key to culture. The fact that these regulations need more pages dedicated to executive pay than the other governance matters is itself a sad reflection on corporate and executive culture. I welcome the additional transparency and ratio comparisons; the truth needs to be told, and unfairness and mechanistic escalators exposed. Hopefully, some rebalancing will happen, whether that be through shareholders or shaming.

[Baroness Neville-Rolfe (Con)]

My Lords, I declare my interests as set out in the register, and as a director of companies over a number of years and as a chartered secretary. I will not delay the House, but I am doubtful of the value of some of these changes, which represent micromanagement and/or bureaucracy, and there is a decidedly mixed level of support for some of them, as can be seen on pages 49 to 51 of the impact assessment.

I am a huge supporter of good governance, but it should be geared towards long-term value creation, and in a responsible way. Good companies create value, and the tax-take from such companies—not only company taxes but all the taxes they collect: VAT, rates and income tax—finances our schools, hospitals and public services.

There is no sunset clause but perhaps the Minister can confirm that there will be a review of these arrangements in five years’ time. Further, does he agree that creating long-term value and companies’ contribution to our economy, including productivity, which was mentioned by the noble Lord, Lord Haskel, should form part of that review?