Directors’ Pay

Chuka Umunna Excerpts

Wednesday 20th June 2012 Commons Chamber

[Mr Chuka Umunna (Streatham) (Lab)]

I thank the Secretary of State for advance sight of his statement.

In the past decade, the value of FTSE 350 companies increased by 80% while the average total earnings of executives in those companies increased by 108%. So the evidence is clear: many of these rewards, as the Secretary of State said, are not linked to success or performance. This problem has grown over the past few decades under Governments of all persuasions. In fact, one has to go back to 1979 to find things more in proportion, with executive pay growing by 0.8% on average in the three decades since that year. It is imperative that we all do what we can to address this problem.

In government, rightly, we did not rush to legislation. It was right to see whether legislation could be avoided. When it became clear that that was not the case, in 2002 we made it mandatory for quoted companies to publish a separate directors’ remuneration report, and we gave shareholders the right to vote on remuneration through advisory votes. As the Secretary of State said, shareholders, to their credit, have been exercising those rights with some verve this year. That is very welcome, because change and reform must be led by them.

The Secretary of State outlined a number of proposals to assist shareholders in that endeavour. I welcome the binding vote on exit payments, the measures to simplify pay reports and the measures to increase transparency, but I have a number of concerns and questions in relation to the other things that he mentioned.

First, on the annual binding vote on future remuneration policy, it is deeply disappointing that having marched us all up the hill, the Secretary of State appears to be marching us back down again by performing a U-turn on his original proposal. Having proposed an annual vote, he now seeks one every three years, unless there is a change to the policy during those three years. Will that not incentivise boards to draft policy as broadly as possible to avoid anything other than a triennial vote? Exactly how does he define a change to remuneration policy? Who will be the arbiter in each company as to whether a change has occurred—the board or the shareholders? I know that bureaucracy has been raised as an objection to an annual vote, but given that there are many other annual votes, I am not sure whether that holds water.

Secondly, the Government should have been bolder on the majority that is required for a pay policy to be approved and gone for a 75% threshold, as opposed to a simple majority. Dominic Rossi, the chief investment officer of Fidelity Worldwide Investment, has said that such a threshold would

“ensure that companies consult widely with shareholders prior to a vote.”

He went on to say that it would give

“companies a clear mandate and the need for a clear majority also encourages all shareholders to express their views”.

Why does the Secretary of State not take heed of that advice?

Thirdly, the Secretary of State says that employees’ views on pay are important. If that is the case, why does he persist in standing in the way of the requirement for employee representatives to sit on board remuneration committees?

Fourthly, we fully support the introduction of an annual advisory vote on how remuneration policy has been implemented over the previous year. The Secretary of State said that the loss of such a vote would “automatically trigger a binding vote on policy the following year.” Will he clarify to which vote in the following year he was referring—the backward-looking vote that would usually have been advisory or the forward-looking vote on policy?

Finally, I too welcome the CBI’s call for the Financial Reporting Council’s corporate governance code to be updated. Will the Secretary of State consider requiring the FRC to produce an annual report on the operation of the UK stewardship code to keep shareholder activism and good pay and remuneration practices high on the national agenda in the years to come? It would be a great shame if it fell off the agenda.

[Vince Cable]

I thank the hon. Gentleman for his positive comments. It was useful that he started with a bit of history. It is worth recalling that in the 13 years of Labour Government, seven Secretaries of State occupied my job—eight if we include Lord Mandelson twice. In the seven years that followed the introduction of advisory votes, none of my predecessors thought it necessary to introduce a binding vote on pay, despite there being, as the hon. Gentleman acknowledged, a continuing trend for top pay to diverge from the performance of companies, let alone from the pay of employees.

The hon. Gentleman continues to raise the issue of workers on boards. I think that having workers on boards is an excellent idea. The question is whether it should be mandatory. If it was such a good idea, why did none of my predecessors do anything about it? Most of them were nominated by trade unions and one was a distinguished general secretary of a trade union. None of them took any action to implement the measure that the hon. Gentleman is demanding. I welcome employee participation and will expect a report back from companies on whether they have consulted their employees on pay.

There will be an annual vote if pay policy changes. The hon. Gentleman seems to find a problem with the idea that if nothing changes, a policy can last for a three-year period. I would have thought that he would see the obvious attraction of a system that encourages companies to think long term. As I understand it, he has just copied my example in setting up a report on long-termism. We want companies to think long term. Should they choose to use the three-year process and leave their policies unchanged, it would put a stop to the ratcheting of annual pay awards. That process would be a considerable improvement should companies choose to use it, but for the most part, as I have indicated, the vote will take place annually.

I personally believe that it would be desirable to have a 75% vote threshold in the advisory votes, and the FRC will pursue the requirement of a statement to the market. As the hon. Gentleman will know, the FRC is an independent body, and I do not mandate it, but I believe that having a higher threshold would be desirable in that case.

The hon. Gentleman specifically asked what the FRC was doing to strengthen overall corporate governance. It is pursuing investigations on a variety of issues such as how companies should formally respond when a significant minority oppose a pay vote, requiring all companies to adopt clawback mechanisms and the extent to which executives should serve on remuneration committees in other companies. Those are big issues, and subject to the FRC’s recommendations we will have considerable improvements in the corporate governance system.

These are radical changes, and I would have thought it would enhance the hon. Gentleman’s reputation if he was gracious enough to acknowledge that a major set of reforms has been undertaken.