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

Kelly Tolhurst Excerpts

Wednesday 15th May 2019 General Committees

[The Parliamentary Under-Secretary of State for Business, Energy and Industrial Strategy (Kelly Tolhurst)]

I beg to move,

That the Committee has considered the draft Companies (Directors’ Remuneration Policy and Directors’ Remuneration Report) Regulations 2019.

It is a pleasure to serve under your chairmanship, Ms McDonagh. The draft regulations will add certain new requirements to the reporting of directors’ remuneration by publicly quoted and traded companies. They will give shareholders more information to assess how the rewards to directors match performance, for example by requiring companies to provide more detail about the award of company shares to directors.

The new requirements are contained in new European directive 2017/828, which is more commonly known as the revised shareholder rights directive and is due to be transposed into UK law by 10 June 2019. The draft regulations will implement articles 9a and 9b of the directive, which cover the reporting of directors’ remuneration, to the extent that they do not already have effect in UK law. Other parts of the directive are being implemented by Her Majesty’s Treasury, the Financial Conduct Authority and the Department for Work and Pensions. For example, the FCA and the DWP are implementing new obligations for asset managers and pension funds to report on how they engage with the companies in which they invest on behalf of their clients.

The draft regulations will add a small number of requirements to the directors’ remuneration policy and the directors’ remuneration report that publicly quoted companies are already required to produce under the Companies Act 2006.

The main change to the directors’ remuneration policy is that companies will be required to provide additional detail about the arrangements under which directors can eventually exercise their shares. The Government believe that that will be a valuable addition to the existing framework for executive pay reporting. The award of company shares to directors is of great interest to shareholders because it has the potential to better align the interests of directors with the long-term success of the company. The draft regulations also provide for the remuneration policy to set out more information on directors’ service contracts and highlight key changes introduced since the previous policy.

[Mr Tanmanjeet Singh Dhesi (Slough) (Lab)]

How will the draft regulations affect the deplorable and widening gap between the highest and lowest paid within companies, or the unsatisfactory gender pay gap? What are the Government doing to tackle those issues?

--- Later in debate ---

[Kelly Tolhurst]

As I had started to outline, the draft regulations, which implement the shareholder rights directive, will require more information to be included in remuneration reports so that shareholders have more information when they vote and make decisions on policy. As hon. Members know, we implemented ratio reporting last year, the whole idea of which is to give shareholders more transparency on what executive directors are earning in comparison with the rest of the organisation’s employees, so that they have more information to exercise their votes.

[Mr Dhesi]

And the gender pay gap?

[Kelly Tolhurst]

That is a wider conversation. The draft regulations relate to remuneration reports, whereas the gender pay gap is part of a wider discussion.

I will make some progress on detailing the draft regulations. The main new requirement proposed for the remuneration report is for companies to compare the annual change in directors’ remuneration with the annual change in average employee pay over a rolling five-year period. This will provide greater transparency on how pay in the boardrooms of quoted companies aligns with pay and reward across the company as a whole. It will also complement a new obligation introduced by the Government last year for quoted companies to disclose and explain each year the ratio of their chief executive officer’s total annual pay to the average pay of the company’s UK employees. The draft regulations additionally propose that future remuneration reports show the split between fixed and variable pay for each director in each year. Taken as a whole, the new measures will further strengthen confidence that the UK’s executive reporting framework is based on transparent, consistent and accessible public reporting to shareholders.

I will also highlight two provisions that will ensure the compatibility of the new measures—which, as I have said, originate from the revised shareholder rights directive—with the UK’s existing company law framework. The first concerns the scope of the companies covered by executive pay reporting. The UK’s existing executive pay regime applies to quoted companies, whereas the shareholder rights directive that the draft regulations will help to implement applies to traded companies. In practice, the vast majority of traded companies are also quoted, meaning that their shares are both tradeable on the regulated markets and quoted on the FCA’s official list. The draft regulations address this small technical difference in company definitions between the directive and UK company law by providing for executive pay reporting to apply both to quoted and to traded companies, whether or not they are quoted on the official list.

The second provision, which will ensure compatibility between the new measures from the directive and existing UK law, is a small procedural change to the Companies Act to allow shareholders to retain their existing right to a binding vote on any proposed payments to directors that would otherwise be outwith the terms of the directors’ remuneration policy. This procedural change provides that shareholder approval for any payments to directors outwith the remuneration policy result in an amendment to the policy for the purpose of those payments. In this way, UK law will be compatible with the requirement in the directive that all payments to directors must be in line with a shareholder-approved remuneration policy.

[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.

--- Later in debate ---

[Kelly Tolhurst]

As always, I thank the hon. Member for Sefton Central for his comments. In particular, it was great to hear him recognise that there are some very good employers who are trying their absolute best to look after their employees and ensure they are sharing out the success of their firms. He is quite right to say that although this debate is about ensuring that we put transparency and scrutiny into the system for shareholders, there are some organisations that operate extremely well, with a strong sense of corporate and social responsibility.

It is true that pay for top executives quadrupled from £1 million to £4.3 million between 1998 and 2013, with pay ratios increasing from 47:1 to 132:1. The figure has since fallen to an average of £3.9 million. Although there was a big increase over that period, executive pay has tended to stabilise. The Government maintain our commitment to implement transparency, which is why we introduced ratio reporting to make companies give more detail on their remuneration policies. They have to report on the pay ratios between executives and the lowest paid, and explain how wider considerations affect the company and its stakeholders more widely.

Quite rightly, the hon. Gentleman asked about the other parts of the directive and whether other Departments will be laying statutory instruments. DWP and HMT will lay other instruments for the implementation of the directive. I am happy to write to him with further details, if he is happy to accept that.

Secondly, the hon. Gentleman was quite right to ask why this has taken so long, because it was agreed by the European Commission in 2017. Unfortunately, the Commission had to consult on other implementation periods and processes, and that was not done until the second half of 2018. Indeed, some consultation was still going on in March, so that is why we are implementing the measure at this stage. I should also like to point out that the draft regulations will come into effect on 10 June, so it would have been slightly unfair to expect organisations to implement European directive rules a year earlier than other European Union member states.

We take wider reform very seriously. We have introduced reforms since 2013 and continue to do so. The hon. Gentleman knows about the wider corporate governance package—we spoke about it last summer—and our aspirations regarding organisational behaviour and the need to provide transparency to shareholders so that when they vote they have all the information and understand how executives formulate remuneration policies. The directive’s measures will complement our own, and I am very supportive of the reforms.

In response to the hon. Gentleman’s comments about worker representation on boards, we have made it clear that no one size fits all. We have outlined a number of ways to get workers’ voices into organisations. We remain committed to that and to ensuring that workers’ voices are heard. Obviously, we always need to go further and to continue to review. I take that seriously in my role as a Minister. I have spoken about the issue in many debates and Select Committees, so I am well aware of some of the comments and feelings out there. Ultimately, the draft regulations implement a European-wide directive, and the Government are absolutely committed to adhering to our responsibilities as a full member of the European Union until such time as we leave.

I thank the hon. Gentleman for his contribution. To sum up, the Government’s intention with the draft regulations is to provide a number of very small but important enhancements to the UK’s well-established statutory framework for the reporting of directors’ remuneration at public companies. In particular, by enabling greater transparency in how company share awards can be exercised by directors, and in how boardroom pay relates to the rest of the company, shareholders will have increased scope to access information on whether pay at the top is appropriate and aligned with the company’s long-term success. In doing so, the draft regulations will complement and build on the important new measures on executive pay that were approved by Parliament last year.

Those measures, which are now in place, include a requirement on companies to report their executive pay ratios. Between 2017 and 2018, there was a 67% increase in the number of companies listed on the Investment Association register as having votes of more than 20% against pay policies, so the policy is having an impact, as is the obligation to state whether discretion has been exercised in the award of share-based remuneration. At the same time, the draft regulations will implement articles 9a and 9b of the revised shareholder rights directive, to the extent that those articles are not already given effect in UK law.

Question put and agreed to.

Resolved,

That the Committee has considered the draft Companies (Directors’ Remuneration Policy and Directors’ Remuneration Report) Regulations 2019.