Water (Special Measures) Bill [HL]

Duke of Wellington Excerpts

Committee stage
Monday 28th October 2024 Lords Chamber

I look forward to hearing from the noble Lords, Lord Remnant and Lord Sikka, whose amendments seek to ensure that rules made by this authority can be scrutinised by Parliament. The amendment of the noble Lords, Lord Roborough and Lord Blencathra, seeks to set a six-month time limit for publication of the rules under new Section 35B. Finally in this group, Amendment 101, from the noble Lord, Lord Sikka, seeks to give the authority the power to curb excessive dividends and empower stakeholders to object to excessive dividend payments.

[The Duke of Wellington (CB)]

My Lords, first, I congratulate the Government on having set up, last week, the review under Sir Jon Cunliffe. That is an excellent move by the Government; a very respected individual will carry out the review, and a number of us have been asking for this for a while. I really think the Government have made a wise decision.

I want to comment on Amendment 2. I have sympathy with “must” rather than “may”, but I have a reservation about the then wording, “must issue rules”. It seems to me that it is necessary for the authority to issue what I would prefer to call “guidance” rather than “rules”. That would give a certain flexibility to individual companies—no two companies will ever have the same set of circumstances, either among their executive management or in the environment in which they are operating. I ask the Government to consider changing the wording of the clause, so that it reads: “The Authority must issue guidance about the arrangements made by relevant undertakers”.

There is no doubt that the water companies have abused the total independence they have had to date around setting remuneration and everything associated with it. They are monopolies, and I think they have gone too far. Many people have been rather dismayed to see the levels of executive remuneration. I ask the Minister to consider changing “rules” to “guidance”. That would be a great improvement.

On Amendment 3, in a light-hearted manner I point out to the noble Lord, Lord Remnant, a misprint, where his amendment refers to “renumeration” rather than “remuneration”. I am sure that that is an oversight which he will have already noticed.

There is a good point in the amendment from the noble Lord, Lord Remnant, in his proposed new Section 35B(1B)(b), about the importance of attracting, motivating and retaining persons of sufficient quality to work in the industry. We must all remember that what we all want is better-run water companies. I do not think we should be tying too tightly the hands of remuneration committees and the board in general in how they attract and retain executives. I am very persuaded by that particular aspect of the noble Lord’s amendment, but I worry about seeking to define too closely exactly how water companies should make their remuneration arrangements.

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[Baroness Pinnock (LD)]

My Lords, I start by reminding the Committee that I have an experience, rather than an interest, as I was a non-executive director for a number of years on the board of Yorkshire Water. I reassure the noble Lord, Lord Sikka, that I never had a bonus during that time, for the reasons that the noble Lord, Lord Remnant, has explained.

This group of amendments follows on neatly from the previous discussion about performance-related pay and the remuneration of senior directors of water and wastewater companies, so I thought it was worthwhile to draw out a bit more of the debate around this issue. The fundamental problem lies in the fact that water and wastewater companies are regulated by a number of different institutions. Ofwat is the economic regulator and, because of the way that the water Act was written, is primarily looking at the financial performance of the water companies. That inevitably leads to a disregard for the environmental outcomes of water companies as a priority. Consumers, who see that their rivers, lakes and coasts are being heavily polluted by these water companies, are astounded to see the same water companies giving huge bonuses to their directors. That is because the two issues are not related in the mind of Ofwat. That is why my party wants a single regulator for water companies, so that all the issues that are the responsibility of water and wastewater companies are taken into account. Part of that debate was reflected in the first group of amendments, discussed earlier.

We need to remind ourselves that remuneration in companies is decided by boards of directors. They will look at the financial objectives of the company and the outcome of the price review agreed by Ofwat and come to conclusions, whether or not objectives have been achieved or considerable benefit to the company accrued by the actions of directors.

That is part of the problem. As the noble Lord, Lord Sikka, has attempted to describe, the price review is a tussle of words and figures between the companies on the one hand and Ofwat on the other. I remember the discussions. If you are in a company and you want to make sure there is a good outcome for your owners and shareholders, you make sure that the submissions you make in a price review to Ofwat enable profits to be made. That is the whole purpose of a private company. It is at the heart of all the discussions we are having about water companies, their performance and their remuneration and bonuses. The 1991 Act was designed for them to be private companies with shareholders, who were going to receive dividends as a consequence. If that is the prime duty, and the main regulator oversees that prime duty, the other issues that water companies ought to be taking into account—the environmental issues in particular, as we heard earlier—become less important.

I hope that, when we come to Report and discuss these issues more closely, the Minister will think about a government amendment that strengthens the duties of water companies, and of Ofwat as the regulator, to take into account these other issues. For me, that is at the heart of the discussions we have had on this group and the previous group. I agree with the amendment from the noble Lord, Lord Remnant. You cannot try to control pay awards further down the company; those often very talented people need to be attracted into water companies if we are to improve what is a sad state of affairs.

[The Duke of Wellington (CB)]

My Lords, I support Amendment 18 in the name of the noble Lord, Lord Remnant, which simply deletes new subsection (5)(c) on page 2. It seems to me that we cannot allow the authority—whatever it may be in the future, after the review, or even from now on—to start getting involved in the remuneration of those below board level. That really becomes too much intrusion into the way a company is run.

The noble Lord, Lord Sikka, is entirely correct that, in the end, a director of a company is a director, whether executive or non-executive, as covered by the Bill; it mentions “a director” of the company. It seems to me that, while senior role remuneration should have some guidance from the authority, that should be restricted to the chief executive and other executive board members. There is no point entering into a discussion about non-executive directors, who clearly do not participate in performance-related pay or bonuses or anything like that. I think the noble Lord, Lord Remnant, is right; it would be appropriate to delete new subsection (5)(c) and include in this clause only the chief executive and any other executive director.

[Lord Roborough (Con)]

My Lords, I thank the noble Lord, Lord Sikka, for moving Amendment 4. It is right that the Government should take steps to put appropriate pressure on water and sewage companies to reduce the frequency and scale of water pollution incidents, and imposing financial penalties on board-level executives is a powerful way of disincentivising unwanted behaviours in the sector. But if we are to have financial penalties targeted at water executives who do not meet the standards expected of them, we must ensure that these are appropriate. As we discussed in the last debate, it is crucial that Parliament gets the opportunity to scrutinise the rules that Ofwat will be implementing.

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[Lord Cromwell (CB)]

My Lords, I will speak to Amendment 16 in my name. I underline at the outset that this is not about putting people on the board; if that is a misapprehension, I want to dispel it. Civil society has been at the forefront of raising issues around water pollution, including monitoring pollution incidents, and, frankly, it has done a better job than the regulators, which have been playing catch-up ever since.

There is an unbalanced and sometimes adversarial power relationship between civil society, water companies and the regulator, and this has given rise to numerous complaints about a lack of transparency—for example, companies deliberately adopting a very narrow definition of “environmental” in order to reject and bat away inquiries from civil society and others. This amendment would require the regulator and water companies to engage with civil society on a regular and formalised basis to agree actions and to record these actions publicly.

This achieves two things. It addresses the disbalance between civil society, the water companies and the regulators and will be an important means to increase transparency, including detailed public transparency as to what is going on, what the regulators and water companies are being challenged on and what actions are planned. It is very easy to underestimate the importance of this. In a previous role I had, we were handing over large sums of money to organisations and one of the stipulations was that they had to publish on their own website exactly what actions they had committed to. This made life very easy for us, because the media then held them to account against those actions. I suggest that a formal process where these things are recorded properly and publicly will be of great assistance to keep the water companies and the regulators up to the mark. Without a formal process of that sort, the relationship will remain distant and most likely adversarial. Therefore, I hope the Minister will look favourably on this amendment or produce one of her own from the government side.

[The Duke of Wellington (CB)]

My Lords, I will speak to Amendments 21 and 23 in my name. In effect, they both seek to amend new subsection (6) on page 2. The main point of my amendment is that I believe it does not lead to effective governance of a board of directors if sectional interests are represented directly on the board. It is much more effective and likely to have more influence if a specialist panel is created to advise and meet the chief executive. I cannot understand why the Government’s clause refers only to the views of consumers. It seems essential—I agree in various ways with the noble Earl, Lord Russell—that environmental interests are similarly represented on a panel. It could be a separate panel or one representing both consumer and environmental interests; I think it would be better to have two panels.

The real point is that I have never seen a board work effectively where there is a sectional interest represented directly on the board, with one or two members of the board speaking only for that particular interest. It makes it very difficult to reach a consensus on a board. Most boards work by consensus, and there has to be a collegiate atmosphere on any board. Where a particular interest is represented, be it environmental or consumer, that is less likely to lead to effective management of the board of that company.

I would like to persuade the Minister to delete from new subsection (6) “board” and “committee” but leave in “panel”, to include consumers and environmentalists on those panels and, importantly, that those panels should have regular meetings with the chief executive to exercise real influence over the conclusions of the board when it next meets on that subject.