Draft Companies (Directors’ Remuneration Policy and Directors' Remuneration Report) Regulations 2019

George Freeman Excerpts

Wednesday 15th May 2019 General Committees

[George Freeman (Mid Norfolk) (Con)]

I am grateful to the Minister for introducing this measure. It is all about the transparency of pay, which we should all believe in because it helps shareholders to hold directors to account on our behalf. Some smaller technology companies are concerned about employee share option schemes, which the Minister knows are a key way of rewarding people in tech start-ups. Can she reassure me that there is nothing in the draft regulations that will in any way change a company’s ability to set the strike price at a level that rewards directors or employees? I believe that may be in some other measure, but I just want to check that it is not contained in the draft regulations.

[Kelly Tolhurst]

My hon. Friend is quite right that a part of the particular sector to which he refers has concerns about potential future restrictions. However, this measure is about transparency and making sure that when shareholders are asked to vote, they have access to that information, and also that that information is publicly available. It is all about transparency and shareholders being able to exercise their rights and having the right information to make informed decisions.

On the impact of the draft regulations, the Government believe that the additional cost to business will not be significant. The UK’s executive pay reporting framework is already one of the most robust in the world, and the draft regulations propose only targeted enhancements to the existing remuneration policy and remuneration report. The Government tested the draft regulations in advance with a wide range of interested parties, including business groups, investors and civil society representatives. No significant concerns were raised, and a small number of technical comments helped to inform the final drafting of the regulations before they were laid in Parliament.

Much of the shareholder rights directive provisions on executive pay are already enacted in UK law, following previous rounds of Government reform on executive pay domestically. I pay tribute to Parliament and in particular the Select Committee on Business, Energy and Industrial Strategy for the active and constructive role that MPs have played in supporting and informing the ongoing reform process.

Most recently, the BEIS Committee has produced a number of recommendations following its recent fair pay inquiry, and I was glad to appear before it and give evidence. The Government will respond to the Select Committee’s report very soon. In the meantime, and to sum up, the draft regulations will increase further the ability of shareholders to scrutinise how directors are rewarded for their performance. In doing so, the draft regulations will enable the UK to implement articles 9a and 9b of the revised shareholder rights directive covering executive pay, to the extent that they are not already given effect in the UK. I hope that the Committee will approve the draft regulations.

[Bill Esterson (Sefton Central) (Lab)]

It is a real pleasure to serve with you in the Chair, Ms McDonagh, and it gives me the opportunity to congratulate you on the fine work you have done over the years in fighting for workers’ rights on a number of occasions. [Hon. Members: “Hear, hear.”] I am glad to have had the opportunity to say that.

The draft regulations remind us of how promises to curb executive pay used to have a prominent place in this Government’s agenda, along with issues such as having workers on boards. It was encouraging to see Julian Richer give employee ownership a vote of confidence yesterday, with his announcement about the future of Richer Sounds. I might also add that that was a welcome endorsement of Labour policy. It is in the context of long-running debates between both parties represented here this afternoon about worker and shareholder democracy that we are considering the draft regulations.

We do not oppose the draft statutory instrument, but we do not think it goes far enough in tackling the gap between the high pay of a handful of senior executives and the pay of everyone else.

The Institute for Public Policy Research North report that was published yesterday was a timely reminder of the income inequality that sees one in four workers in the north of England being paid less than the living wage, with many worse off than 10 years ago. Similar challenges and income inequalities exist right across the country.

The draft regulations state that the directors’ remuneration report must be made available, free of charge, on the company website for 10 years, showing any split or fixed and variable payment to directors. Crucially, reports must compare the annual change in directors’ pay with the yearly change in the pay of company employees, including over a five-year rolling period.

That sounds broadly fine but, as noted by the Secondary Legislation Scrutiny Committee and the House of Lords, the directive and draft regulations introduce other responsibilities that cut across a wide range of bodies, both departmental and non-departmental. The Minister referred in her opening remarks to those measures relating to the Treasury, the Financial Conduct Authority and the Department for Work and Pensions. When she responds, will she update us on whether other Departments will need to introduce regulations and, if so, when we can expect to see them? I ask that because the deadline to incorporate the EU directive into UK law is 10 June, so if additional regulations are required the Government will have to get a move on. That also gives rise to the question as to why it has taken until today to bring these draft regulations to Committee. Were the Government anticipating a no-deal Brexit, which would have resulted in the draft regulations not being transposed?

The essay crisis Prime Minister left office after the 2016 referendum. In his absence, I wonder if he has been replaced by an essay crisis Government. Looking at the former Minister, the hon. Member for Watford, who is sitting opposite me, perhaps I am on to something.

The High Pay Centre report shows that the Government urgently need to do more. It shows that between 2014 and 2018, the first full five years of the “say on pay” regime introduced by the coalition Government, every single FTSE 100 company pay policy put to annual general meetings was approved by shareholders. Across more than 700 pay-related resolutions voted on at AGMs over the same period, the average level of shareholder dissent was just 8.8%, and only 11% of pay-related resolutions attracted significant dissent levels of over 20%.

The intervention by my hon. Friend the Member for Slough about the challenge posed by the disengagement of owners and shareholders of large corporations is particularly pertinent. He asked how the draft regulations address the gap between top executive pay and everybody else’s, as well as the gender pay gap. The Minister has indicated, as do the draft regulations, that information is provided. What is not provided is a way not just to change the culture of shareholder disengagement, but to create a regulatory environment or teeth to address the challenge and difficulties presented by both the pay gap and the gender pay gap.

[George Freeman]

Does the hon. Gentleman agree that it is important to look not only at the gap between the highest and lowest paid in a company, but at the extent to which remuneration is linked to company performance overall, and the extent to which those who are being rewarded are being rewarded for taking risks and delivering above-trend growth? Does he also agree that we should look at the broader issue of wider share ownership in a company? Inequality in itself is not necessarily a problem, provided that the people who are lower paid are benefiting from the success of the company. Does the hon. Gentleman agree that that is as important a metric?

[Bill Esterson]

That is a very good challenge. Julian Richer is a responsible employer who has treated his employees very well over many years. He is giving a £1,000 bonus to each staff member and delivering an employee-owned future for the business.

One of the historical problems with the regime of rewarding performance is that it has rewarded apparent immediate success without taking the longer term into account. There have been scandals over many years, with some senior executives raking in enormous bonuses only for us to discover later that the apparent success of the organisations they ran was built on sand and that the true underlying performance was not reflected in the short-term results. We can all think of some very high-profile examples; Enron is one, but there have also been many in this country, which I deliberately will not mention at this stage. The hon. Gentleman’s challenge is an important one, but we have to make sure that any executive remuneration is truly fair over a longer period.

To be fair to the hon. Gentleman, I think he accepts the wider point that fair pay must reflect the contributions of people throughout the organisation. There is a degree of consensus that it is extremely important for the relationship between the pay of senior executives and that of others in the organisation to be fair and balanced, difficult though attempts to achieve that may be. I welcome this debate and the fact that the draft regulations address the matter, but the question is how much further we need to go and what steps we must take to maximise the potential benefits.

When the current Prime Minister took over, she made an initial commitment to put workers on boards, but it was very quickly downgraded and appears not to have advanced. Perhaps the Minister could tell us when those sorts of measures might be introduced.

Following on from the intervention from the hon. Member for Mid Norfolk, what is the most effective way to bring up the pay of working people and combat rising inequality? The answer is to join a trade union. The Government have failed to move beyond the union-busting mindset—that is obvious from their Trade Union Act 2016—and to look to a future that involves unions and employers working together responsibly. The Institute for Public Policy Research has shown that there is a strong correlation between high shares of income going to the top 1% of earners and low trade union membership.