Financial Services Bill

Lord Davies of Stamford Excerpts

Monday 8th October 2012 Lords Chamber

[Lord Davies of Stamford]

My Lords, my noble friend and namesake has put forward a most valuable amendment, and I support it.

I have a long-standing interest in the subject—no longer a financial interest but in the past I have served on the boards of both financial and non-financial companies and institutions. Until I joined the Government I was chairman of the remuneration committee of the largest building and concessions group in the world, Vinci, which had then more than 150,000 employees and €30 billion in turnover. I was therefore in a fairly prominent position with regard to remuneration decisions.

I have no financial interests at all now in industry or business but I still have a great continuing intellectual interest in this subject and a very pressing policy interest, for exactly the reason that my noble friend has set out. The excesses of remuneration that we have seen over the past few years, both in this country and elsewhere in the EU and the US, have contributed greatly to the malaise we currently face, and of course a great many of the worst abuses—although not all—have arisen in the financial services sector.

That situation is not good for the future effective performance of a capitalist market economy, and it is certainly not conducive to a happy society. This is an important and pressing problem. My noble friend has obviously given this matter a great deal of thought, and has come up with two excellent suggestions to deal with it, although he himself said that no one solution—let alone a purely legislative solution—will solve the whole problem.

I deal in turn with the two proposals he has put forward, first in relation to employee representatives on the remuneration committee. Vinci, a multinational, is a French company, and we therefore had the benefit of two employee representatives on the main board. I have become a considerable supporter of that system. I made a proposal in the formal consultation that the Government launched a few months ago on corporate governance. Nothing much seems to have happened to it, unfortunately. I wrote to the Minister and spoke in this House, suggesting that we should incorporate the same provision in this country’s company law in future. When I was chairman of the Vinci remuneration committee, I explored the possibility of putting one of those two employee representatives on our board, on our remuneration committee. I discovered, however, and I think my noble friend may find this helpful, that the individual concerned had a certain personal reluctance to do that. I think he felt that he would spend all his time with his workmates defending any level of executive remuneration, which was bound to be much greater than that of his workmates, and that his life, job and role would be rather blighted as a result. So the right solution may be to introduce an element of compulsion. It is not a magical solution, but it can only be helpful.

My noble friend’s second proposal is even more important. He raises the issue of remuneration consultants. I do not think there has been anything like enough attention paid to the role of remuneration consultants. I have not seen any articles in the financial press or otherwise about the role of remuneration consultants. As far as I know, the matter has never been raised in this House and it is time that it was. Every major public company will have remuneration consultants reporting to the remuneration committee, and we had that in Vinci. However their influence was quite nefarious in many cases. The reason for appointing them was often simply to protect the remuneration committees or the boards from criticism. People often hire executive search consultants for similar reasons. It is not merely for the value that they add, although they do add a lot of value in certain cases. It also protects the boards against any accusation of cronyism or nepotism. In the same way, companies automatically take on remuneration consultants, which is a valuable business for them.

The only remuneration consultants I have ever come across are subsidiaries, either of executive recruitment firms or of accountancy partnerships or firms. They have almost a universal franchise now. Everybody feels they have to hire them. In practice the way they work is very dubious. They carry out for their clients a survey of the executive remuneration in comparable companies of a comparable size in a comparable sector, and then present it to the remuneration committee with a proposal for a level of increase for the senior executives for which the remuneration committee has a responsibility.

Let us say that the average increase is 10%, just to have easy figures to deal with, and they say, “We think 10% is appropriate”. However, remuneration consultants like to flatter their clients, in which case they add one or two points on top of that. The board, particularly the remuneration committee, may feel proud of their firm, and feel attached to their chief executive. They will want to encourage him and not humiliate him. So they will probably say, “Okay, we’ll give him 13%”. That will be good in relation to competition. They will be saying to the public that they think they have the best chief executive, the best finance director, and the best senior executives. That is fine. The decision is taken. Everybody feels protected and covered by the fact that they have had professional advice from professional remuneration consultants. The next week, the remuneration consultants go on to their next client, and they say “The latest figure is actually 13%, so you may want to start with that figure as your basis”.

I would not be talking about recruitment consultants in the House of Lords without having a lot of experience of the subject or having thought carefully about it. These remuneration consultants do amount to a kind of engine of inflation of remuneration of senior executives. The sooner we face up to that the better.

If we face up to it, what do we do about it? My noble friend has come up with the solution that the remuneration consultant should be responsible to the shareholders, rather than the board. Again, it very much depends on how that is interpreted, how it works in particular cases. There is no solution and no magic wand and I know my noble friend would be the first to say that. However, if we want to change the culture—I think we need to do so—this is a good and sensible way forward.

There has been no collusion at all between myself and my noble friend on this matter. I had no idea he was going to put down this amendment until I saw the Marshalled List today. However, I do think it has been particularly well-conceived and is particularly pertinent, whether or not it is accepted immediately by the noble Lord, Lord Sassoon. The noble Lord, Lord Sassoon, never seems to accept proposals put forward on any Bill that I have seen him taking through, although he is a very competent Minister, but he seems to be very embattled whenever anybody makes a suggestion for improvement. Whether the Government are prepared to accept that today or not, I do hope that my noble friend’s initiative will start a debate on this subject and cause a lot of thought to be put into this subject, and action to be taken on this matter, which seems to be very necessary.

[Baroness Noakes]

My Lords, I do not like to disappoint the noble Lord, Lord Davies, but this is not the first time that recruitment consultants have been debated in your Lordships’ House. I recall more than one occasion when we had a discussion of the role of recruitment consultants in the levels of pay within the financial sector and more generally, but before the noble Lord joined your Lordships’ House. It is a subject which has previously arisen and I am sure that if the noble Lord searches Hansard he will find earlier debates.

[Lord Davies of Stamford]

My Lords, I daresay I stand corrected. I am delighted to hear that I was wrong in that respect.

[Baroness Noakes]

More broadly, I think everybody accepts that executive pay has some problems attached to it. I do not wish to dismiss the amendments of the noble Lord, Lord Davies of Oldham, out of hand, although it will not surprise him to find that I do not support his amendments. I do not support them because they come close to interfering in the corporate governance model, which broadly serves the UK extremely well. The corporate governance model has boards which are responsible for making decisions, and these boards have committees of boards, including remuneration committees, which are responsible to those boards. To insert somebody who is not a board member outwith the context of having employee representatives on the board starts to change that dynamic. Similarly, if you have remuneration consultants who should be reporting independently to the remuneration committee being appointed by the shareholders, it is difficult to see what the relationship then is to the board and the board’s committees. There are a lot of problems in the solutions that have come up.

Remuneration is under huge scrutiny. There have been proposals from BIS in the last few years, and the regulatory ratchet has been increased with greater intensity. The involvement of the FSA, for example, in banking and other financial institution regulations, is not minor, and equally with regulators in other parts of the world. So we may have a problem which almost certainly will not be addressed by the amendments before us and which already has a lot of moving parts.

[Lord Davies of Stamford]

I am most grateful to the noble Baroness for giving way a second time. I wanted to rise to agree with her. She is absolutely right. You should never put on a remuneration committee someone who is not a member of the board. The remuneration committee must be a sub-committee of the board, and it was in the context of employee representatives being fully members of the board in every possible sense, that I put forward my suggestion.

[Baroness Noakes]

I am pleased to see that we are in agreement. Finally, I was concerned whether or not the noble Lord, Lord Davies of Oldham, thought that his amendment meant that all listed companies would be dealt with by the PRA and the FCA, because I do not think they have powers to deal with other than those bodies that are within the regulatory net, so it would only cover a relatively small proportion of his target.