Draft Companies (Miscellaneous Reporting) Regulations 2018

Debate between Catherine West and Andrew Griffiths

Wednesday 4th July 2018 General Committees

[Andrew Griffiths]

I thank my hon. Friend and constituency neighbour for raising that point. The John Lewis Partnership is an exemplar of the way businesses should deliver corporate governance. It has a well-earned reputation for doing the right thing. Although it would be wrong of us to be prescriptive about pay ratios, sunlight is the best antiseptic, and this kind of transparency will change behaviour.

[Catherine West (Hornsey and Wood Green) (Lab)]

There is good practice in certain local authorities where chief executives are paid only 10 times what, say, a cleaner is paid. A chief executive’s role is complex, but pay should not be excessive, so I would say that 10 times is about right. What does the Minister think of that?

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[Andrew Griffiths]

I am not sure whether it is the heat, but there is certainly a lot of excitement in the Committee Room. Perhaps I can calm things down a little bit, first of all by agreeing with the hon. Member for Feltham and Heston. She is absolutely right: pay restraint and doing the right thing in relation to employees is an important element of good corporate governance, but making sure that women take their rightful place in the boardroom in senior positions is hugely important. I am delighted to see the recent figures from the Hampton-Alexander review, which show that only 10 of the country’s biggest companies now have male-only boards. I think that is 10 too many and have written to each one of those businesses to ask why they cannot find, among the millions of fantastic women in the workplace today, just one woman good enough to take up a position on their board. It is unacceptable. The hon. Lady is absolutely right.

There were concerns about boardrooms being remote, unrepresentative and disconnected from employees and the experiences of ordinary people. There was also heightened interest in the standards of corporate governance in large private companies in the wake of the failure of BHS and some other large private companies. There is growing awareness that large private companies can have an economic importance similar to that of listed companies. Their size means that their conduct and governance can have an equally significant impact on the interests of employees, suppliers, customers, pensioners and others.

[Catherine West]

Will the Minister update the Committee on whether employees will be sitting on company boards?

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[Andrew Griffiths]

I will be delighted to come to that point, but I hope the hon. Lady will bear with me a moment.

The Government’s response, announced in August last year, set out nine key reform measures. There was a combination of new statutory reporting requirements and changes to the UK corporate governance code, which is the responsibility of the Financial Reporting Council, and industry-led measures. The regulations we are debating today will implement the four new company reporting elements of the reform package.

First, large companies will be required to explain in their annual reports how their directors have complied with the requirements of section 172 of the Companies Act 2006, including the need to have regard to employee interests and fostering business relationships with suppliers, customers and others. Investors and the public are increasingly interested in how companies take account of stakeholder views and interests, because they are important to a company’s long-term, sustainable success. The information will make it easier for shareholders to hold companies to account and encourage directors to think more carefully about how they take account of such matters.

Secondly, very large companies will need to make a statement about their corporate governance arrangements, including whether they follow a corporate governance code and if so, how. That requirement will encourage directors to consider the robustness of their existing arrangements and the ways in which they are communicated. Extra transparency will also strengthen public confidence in the way large private companies are run.

Thirdly, quoted companies with more than 250 UK employees will be required to publish pay ratios comparing the CEO’s remuneration to median employee pay and employee pay at the 25th and 75th quartiles. The ratios will need to be accompanied by an explanation, including the reasons for an increase or decrease in the ratio from year to year and whether the median pay ratio is consistent with the pay, reward and progression policies for UK employees as a whole. The hon. Member for Feltham and Heston asked which employees are taken into account. We think it would be difficult for companies to include those who are employed through agencies, as they are not directly responsible for paying those employees, so they would not be included within that pay ratio. The information will give shareholders new information to help them assess whether pay at the top is justified and consistent with pay and incentive arrangements in the rest of the workforce.

Finally, quoted companies will be required to illustrate more clearly for shareholders the impact of future share price growth of 50% on the value of share-based incentive plans. That will give shareholders a better understanding of how significant share price growth over a performance period will increase executive pay. It will also encourage remuneration committees to consider, if appropriate, whether any discretion should be exercised to avoid mechanistic pay outcomes.

None of those reporting requirements will apply to small businesses. As the Minister responsible for small business, I am keen to ensure that regulation does not become over-burdensome. The measures are aimed at quoted, large and very large companies. The total costs for business arising from the new reporting requirements are expected to be £16.7 million in year one and £9.8 million annually thereafter.

The reporting obligations complement and in some cases reinforce other elements of the corporate governance reform package. They should not be seen in isolation. For example, the new regulation 14, requiring large private companies to make a statement about their corporate governance arrangements, is linked to work being undertaken by James Wates to develop corporate governance principles suitable for use by large private companies. Those principles are being consulted on with a view to finalising them by the end of the year, but we expect that many companies will use them as an appropriate framework when making a disclosure about their corporate governance arrangements under the new reporting regime.

Importantly, the Financial Reporting Council has a new UK corporate governance code. The new requirements on companies to state how they have had regard to the employee and other wider stakeholder interests set out in section 172 of the Companies Act will help to underpin revisions to the code. Those revisions include a new code principle establishing the importance of boardroom engagement with stakeholders and a new provision requiring boards, on a comply-or-explain basis, to establish at least one of three robust methods of gathering the views of the workforce: having a director appointed from the workforce, having a formal workforce advisory panel, or having a designated non-executive director. The FRC has been consulting on those changes and expects to publish the final, revised code on the 16th of this month.

In addition, the Investment Association, at the Government’s request, has launched a public register—a world first in transparency—of companies encountering significant shareholder dissent of more than 20% to executive pay packages and other resolutions. That shines a stronger light on companies that are not listening to their shareholders, and in particular on companies that face significant opposition in successive years.

[Catherine West]

Will the Minister give way?

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[Andrew Griffiths]

I thank all hon. Members for a debate that has challenged the nature of the proposals and raised some important questions, which I will address as quickly as I can.

The hon. Member for Hornsey and Wood Green raised the issue of employees on boards. These regulations, plus the new provisions of the corporate governance code, significantly strengthen the employee voice in the company boardroom while driving up accountability. For the first time, all large companies will have to report each year on how they have regard to their employees’ interests and the impacts of that. Strengthening the employee voice at board level will happen at different levels. Given the huge variety of companies in the UK and the different ways that groups operate and are structured, one method would not suit, but as I laid out earlier, the range of options to ensure that the employee voice is heard in the boardroom is adequately addressed in the regulations.

To reiterate the point about employees and not the wider workforce being covered, the regulations are being made under the Companies Act 2006, and we are using the definition of an employee in that Act, which is someone employed under a contract of service by the company. It is not for the regulations to redefine what is meant by an employee. We did not consult on that matter, which is part of a much bigger employment rights question. For instance, a person employed by a company under a zero-hours contract would be regarded as an employee for the purpose of gathering that information.

[Catherine West]

To clarify, what other protection will there be for non-employees, such as other agency workers?

[Andrew Griffiths]

The hon. Lady will know that, as part of our enforcement, we have doubled the amount we are putting into protecting those on the lowest pay. We are increasing resources in the Employment Agency Standards Inspectorate to protect agency workers. Through our work in relation to the Matthew Taylor review, we are specifically looking at what we can do to strengthen the protections for agency workers and give them more rights and more clarity in relation to who employs them and the pay that they should receive. It is part of a wider corporate governance package and a wider set of protections for workers such as those employed by the Employment Agency.

Corporate Governance and Insolvency

Debate between Catherine West and Andrew Griffiths

Tuesday 20th March 2018 Commons Chamber

[Andrew Griffiths]

I agree with my hon. Friend. This is why we are specifically consulting, in this document, about what more we can do to protect small businesses. In lots of these failures, we have seen clever directors with clever advisers, clever lawyers and clever tax accountants putting in place a regime that allows them to walk away scot-free while hard-working businessmen and women in our constituencies pay the price. This consultation looks at how we can put an end to that and be on the side of the small guy, not the big guy.

[Catherine West (Hornsey and Wood Green) (Lab)]

In the consultation, will the Minister consider extending the 30-day limit for late payments to other non-governmental contracts, to create a new way of doing business? Also, what will he do to protect apprentices who are often caught in the subcontracting chain and who lose their apprenticeships with SMEs, which are the lifeblood of our economy?

[Andrew Griffiths]

The hon. Lady asks two important questions. The Government have a role to play in this as a customer. We give billions of pounds of contracts and we have the power in our own hands to demand that the supply chain is treated properly. I can assure her that, in the very near future, we will be coming forward with a clearer set of principles and tools to ensure that the supply chain is treated properly and paid fairly, using the 30-day terms. That is what we expect of our suppliers. I agree with her point about apprentices. Unfortunately, we have to accept that there will always be businesses that go bust. That is one of the realities—[Interruption.] That is the way in which the business environment works. We are putting the employees at the heart of this consultation and at the heart of the decisions we make.