Corporate Governance and Social Responsibility

Jim Shannon Excerpts

Wednesday 14th December 2016 Commons Chamber

[Louise Haigh (Sheffield, Heeley) (Lab)]

I thank you, Mr Deputy Speaker, for allowing time to debate this issue of critical importance today.

Having worked in corporate governance before I was elected, I am well accustomed to the fact that it is not a subject that excites or even particularly interests many people. I completely accept that, and it is demonstrated by how rarely it is raised or debated in this House. However, it is utterly fundamental to the workings of our economy and to how wealth is distributed across the country. What it essentially boils down to is this one key question: who does our economy work for?

In a year of global convulsions, that is a question being asked in unlikely quarters. When Mark Carney made his significant intervention, warning of “staggering inequalities” in an economy where many “lack a stake”, some voices said that he had strayed too far from his brief. Not only was his intervention appropriate, it was absolutely urgent, because while 75 companies on the FTSE 100 collectively made a profit of £32 billion last year, most ordinary people’s wages are predicted to flatline well into a second lost decade. That makes people justifiably angry and society less robust.

In is in that context that the Prime Minister’s corporate governance agenda should be seen, and although it was welcome that the Secretary of State for Business, Energy and Industrial Strategy should introduce proposals for reform, I am afraid that the signals are not good. The Prime Minister floated worker representation on boards on her first day in office, but then informed the CBI that that would be voluntary. In a statement to the House, the Secretary of State lauded his own success in bringing down average pay for chief executive officers from £4.3 million to £4.25 million—I am afraid that that is hardly a job well done.

I know first-hand the enormous creative potential that a well-functioning company, backed by a strong governance regime, can unleash. Unlike the Government, who appear to have stepped back from desperately needed reform, I know that the status quo cannot continue. It represents grotesque pay ratios between the top and the bottom, and astronomical executive pay. We have seen the corporate greed of BHS, Sports Direct, Gunstones, ASOS and JD Sports, which treat their low-paid workforce with little more than contempt; the behaviour of energy companies quick to hike prices to maximise profits, but slow to lower them when the market shifts; and the short-termism that has resulted in productivity flatlining and investment being stifled as directors seek to maximise shareholder value at the cost of everything else.

That is nothing short of a crisis of legitimacy in the shareholder model, because confidence is placed in shareholders that, in my experience, is undeserved and misunderstands the completely altered nature of shareholders in UK plc. Although I welcome the Green Paper, I fear that it clings to a model that belongs firmly in the last century. We are not dealing with the shareholders of 30 years ago, who had a stake in the UK and held shares for a significant period. In 1998, just a third of shares were owned by non-UK investors, but now the vast majority are owned by such investors. In fact, it is almost absurd to talk about shareholders as investors, as most do not hold the shares for long—some hold them for just seconds. The figures are contested, but the most reliable ones that I have seen suggest that the average holding period has fallen from eight years in the 1960s to just four months, and as much as 70% of trades are high frequency.

The equity chain is grossly over-intermediated, meaning that those with skin in the game have little or no involvement in the company at the other end of the chain. Investors tend to own only about 3% of a company at any given time. The notion that that fragmented group will clamp down on executive remuneration, or is interested in the voice of workers or the long-term contribution of the company to the communities that it serves, is either naive or disingenuous.

[Jim Shannon (Strangford) (DUP)]

I thank the hon. Lady for giving way in a speech on an important issue. Does she agree that the Government’s social responsibility does not lie simply in assessing how much GDP goes on benefits? It should be a living, breathing policy that takes account of the changing needs of the communities that the hon. Lady has discussed, rather than a document that is assessed at Budget time. Does she further agree that the previous Government’s big society ideal was never given the resources that it should have been given to take off? That should be considered and, indeed, reviewed.

[Louise Haigh]

I completely agree with those sentiments. Corporate responsibility is too often tacked on at the end of a company’s activities, in a completely separate report. It is not embedded throughout the organisation as it should be, which is why a strong, effective governance regime is vital to ensure that companies respect the communities in which they operate, the environment and their social impact.

At ASOS, despite the shocking evidence with which it was presented of mistreatment of its workforce, investors went ahead and backed the bumper pay package for executives. Why rock the boat when investors are getting their return? Since advisory votes on executive pay came into force, CEO pay has continued to climb to obscene levels, and the average vote in favour of remuneration packages has been a shocking 93%. The Kay review, commissioned by the coalition Government, which presented a fantastic analysis of the issues but fell disappointingly short on recommendations, said that

“the pursuit of shareholder value has distorted corporate principles”.

Rather than push against that open door, the Government seem intent on clinging to an outdated and inappropriate model that puts the interests of international shareholders above all else—above the interests of the workforce, of stakeholders, of supply chains and of the wider community. It does not make economic sense and it is deeply unpatriotic.

Yes, the shares in UK plc may rise and international investors will have their red letter day. What good is that if workers and communities here in this country do not feel the benefit? The Government cling to a model that says that hedge funds on Wall Street are more important, and should have a greater say over the direction of a UK company, than the workers whose mortgages, pensions and livelihoods are dependent on the success of that business. Rather than having a stake in the community, investors are increasingly coming to resemble buy-to-let landlords, skimming off profits with little interest in the community at large, yet they hold all the cards.

As the Bank of England’s Andy Haldane has said, if shareholders hold all the power,

“we might expect high distribution of profits to this cohort, at the expense of ploughing back these profits…or distributing them to workers”.

That is exactly what we have seen. Wealth for the 1% has grown unchecked while wages for the rest have stagnated.

It is not without reason that research and development spend in countries like our own is so low when the focus of investors and directors alike is on maximising the value of shares. That is why we need change. Our companies must look closer to home and above all to their employees, their supply chains and their communities, and give the people they rely on a stake. British workers create the wealth, the services and the products from which shareholders earn their reward. We should give them real influence in the businesses that they work for. We must modernise company law to correct the absurdity that denies employees a say but gives power to hedge funds.

If we give powerful voting rights to overseas investors who speculate in the shares of our major employers, it is right to give the programmer, the secretary, the driver or the picker who works for those businesses some power too. It is not about one or the other. It is about giving employees an equal stake. Having grappled with these issues in practice myself, I know that the big issue is that the more directors are accountable to increasingly anonymous investors, the more our top businesses end up being accountable to no one at all.

Preparing for today’s debate, I was reminded that Keynes wrote that bad ideas die slowly. He also wrote:

“Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”

I am not pretending that reform in this area is easy. If we are honest, the reforms to fiduciary duties by the last Labour Government have had little impact, given that conservative legal advice invariably prejudices short-term shareholder interests. That is why transparency has to be at the heart of any reform. Large companies should report qualitatively on their impact on their communities, their environment and their workers, in the interest not merely of corporate accountability but of good management.

Reforms to section 172 of the Companies Act 2006 will inevitably be an important part of that. The Financial Reporting Council made the point that more focused reporting on exactly how companies are complying with the various elements of section 172 is crucial. That may very well have to become a requirement, as surveys suggests that a large number of shareholders are not aware of the very section on which it is their duty to hold directors to account.

Today Mark Carney supported better reporting on climate change risk, which is undeniably material for a growing number of sectors. However, I have real concerns about how effective section 172 is. After all, it was introduced back in 2006 and since then we have seen some extreme examples of corporate excess and recklessness that have brought the economy to its knees and led to a bail-out of such astonishing proportions that we will still be paying for it for decades to come. Section 172 has been in force for more than 10 years, and in that time a director has had to have regard to the interests of the company’s employees, the impact of the company’s operations on the community and the environment, and the desirability of the company maintaining a reputation for high standards of business conduct. It would be almost laughable if it were not such a desperate example of the corporate neglect which has maligned this country for decades.

Throughout that time we have lacked a regulator with teeth, yet still the FRC says that it should be incumbent on shareholders to enforce the provisions of section 172. The fact that the FRC is only now commencing its investigation into KPMG’s audit of HBOS, some nine years after the collapse and bail-out, should tell us all we need to know. There is a serious problem with the enforcement of our corporate governance regime. The Government need to go much further if they want to see meaningful change. I am not convinced by the argument that we should leave such a crucial aspect of company law to shareholders who have so consistently demonstrated little interest in it and an authority seemingly unwilling to take action.

In its current definition, the duty to promote the success of the company under section 172 is seen as serving shareholder interest. As John Kay found in his review of equity markets, with share trading playing an increasingly important role in the strategy of investors, it is not at all clear how short-term investors can support the long-term good of companies. The long-term success of a company must therefore be codified in changes to section 172.

Changes in the legal duties of directors to prioritise the long-term success of the company at large over shareholders would be a significant shift, but it is one that many voices that previously advocated only minimal change are now calling for. Employees having a statutory role at board level must also be a line in the sand. The Government must not row back on giving workers an equal stake and, with it, bringing their different priorities and fresh perspective to the boardroom. Diversity is vital in governance terms—not for moral or representative reasons, but to challenge and address what Margaret Heffernan has termed “wilful blindness”.

With that in mind, I would like to ask the Minister what proposals she has discussed and considered. Much has been said about introducing a statutory role, with a third of the board being drawn from workers, whose representatives would themselves be elected. Has the Minister considered those specific proposals? What assessment has she made of the quality of reporting on environmental, social and governance issues and the impact it has had on internalising costs? Has the Minister considered the need for advisory panels to sit alongside the board, which would draw from those directly referred to in section 172, bringing a much-needed voice to directors’ responsibilities under that section?

Surely the long-term goal has to be allowing other stakeholders an equal stake in holding the board and directors to account. The Government simply cannot afford to row back on that reform. At the heart of it is the crisis that Carney referred to: people lack a stake, and they cannot see a way to exert influence.

When I was working in the City of London, the risk taking, bonuses and pay packets were viewed as the symbol of the corporate neglect that has done so much to shake trust in big business and that played its part in bringing our economy to its knees. No doubt those things were and still are grotesque, unchecked by shareholder power and in need of urgent reform. There is a crisis of legitimacy over who governs our companies and, in turn, whose interests they act in. The Government would be wise to seize that with both hands, because we cannot ignore it any longer.