Corporate Governance

Lord Foster of Bath Excerpts

Tuesday 29th November 2016 Lords Chamber

[Lord Mendelsohn (Lab)]

My Lords, we welcome the Green Paper on corporate governance. I do not think there is anyone who does not recognise the mood of the country given that, since the financial crisis, we have faced growing disparities and unfairness that are neither justifiable nor economically efficient. We also have to recognise that we have long delayed any serious action to deal with chronic issues such as short-termism, weak R&D investment, the lack of large UK businesses acquiring overseas and the problems with productivity. This is a vital debate and the Green Paper should be welcomed as an opportunity to start the long required process of change, not end it. However, this Green Paper will have as much impact on changing the issues at hand as a stick would have in changing the course of a river: it is the exercise of power without purpose and policy development designed for press releases, not practical impact.

Business and business people are also crying out for change, be they investment managers, entrepreneurs, investors or corporate leaders. However, this measure does little but protect the status quo. To set the debate in terms of shareholders’ influence on executive pay is too limited, not least when a huge underlying problem in our country concerns the investment industry. Its pay, performance and methods of charging are, in and of themselves, part of the problem. It is also instructive that BlackRock, for example, is now being criticised by its own shareholders and investors for voting against positive environmental policies despite claiming to adhere to them. Shareholders are arguably less of a problem than the boards which fail to address the normally compliant shareholders’ voting patterns when they vote against executive pay.

To extend the public company governance requirements to private companies is rubbernecking on media coverage and not a serious analysis even of the event that it purports to address. Its obvious weakness will be starkly laid out in the attempts to draft legislation, if it ever gets that far. As for the watering down of the commitment to place workers on boards, that is an illustration of the limited thinking about the effectiveness of governance on public companies. Advisory panels and non-executive advocates—this is thin stuff. No wonder we have ended up with a debate on publishing pay ratios to do with remuneration—a suggestion so limited that it does not deserve the controversy that it has generated.

The chronic problem is that the current arrangements for corporate governance enshrined in the corporate code is the problem. All you have to do is read the few paragraphs on relations with shareholders, which does not even muster a page, to understand the nature of the problem. This Green Paper is not enough. We have to admit that the road started by Cadbury has gone too far in the wrong direction and needs to be addressed.

The balance between shareholders, workers and customers has drifted too far away from the interests of the country, and nothing but a complete overhaul and review of the combined code will deal with it. The 2009 Walker review was, and should have been seen as, the drink in the last chance saloon. The glass is now empty. Will the Minister accept that the Green Paper should accept the debate on all aspects, including the code itself? Does the Minister also agree that the code itself should not be seen as the gold standard to set against private companies, and that to extend it to all private companies will require its own evaluation, given the very different nature of what a private company can be?

Executive remuneration is out of control—a point recognised in the Minister’s Statement. Will he please tell us whether this Green Paper will rein back some of the completely unjustified leaps in executive pay? Does he agree that pay itself is an example of the weakness of a second-rate code being mixed with transparency? The principal reason is that what is known as the “ratchet effect” has occurred. Remuneration consultants present a company with data comparing their executives’ pay—now that it is fully published—with others. They ask: “Does the company want to be seen as a company in the top quartiles—the top performers and payers; those who are most attractive?”. Of course, every director will want to appear in the top one or two quartiles of pay, but for every director who is inserted in the top half, another must fall to the bottom—a fact that will soon be drawn to their attention by remuneration consultants. So the ratchet clicks over and creates a natural inflationary effect, with no relationship to pay, performance or anything to do with the company. This has become a chronic problem. I urge every Member of this House to look at the reports of company accounts of companies that declare that they are in the upper quartiles. That tells you the story of unrelenting pay advances with no justification.

Remuneration consultants have done an appalling job and a great disservice to the UK economy. They represent a prophylactic for weak and lazy boards. As the noble Lord, Lord Myners, the former Trade Minister said,

“They allow the remuneration committee to say ‘this is what the consultants say, so we should do it’”.

Non-execs frequently complain that the report they have seen has been redrafted to the advantage of the executives by the executives with the remuneration advisers. Will the Minister recognise the problem with remuneration consultants and confirm that their role will be the subject of a review, whether in this Green Paper or at any other time?

It is not as if we do not have enough challenges ahead. Yes, the Government should be credited for starting a debate, but it does no credit to set it off in a manner that just feeds media headlines and is poor policy. It will inevitably lead to thin and limited proposals like this and, rather like the non-appearance of the Small Business Commissioner tackling late payments, will be delayed as the Government do not listen to the sensible suggestions, which I am sure will come from all sides of the House, that will make this work.

This Green Paper is a new type of dangerous dogs debate. We should be wary of the bark being worse than the bite.

[Lord Foster of Bath (LD)]

My Lords, we on these Benches acknowledge that we have many excellent businesses with high standards of corporate governance. However, following the appalling cases of BHS and Sports Direct, it was hardly surprising that the Investment Association and many others said that big business needed to rebuild trust. When the public see that executive pay has grown much faster than employee pay, with FTSE 100 CEOs earning 128 times more than average pay, they too want reform.

This Statement and the accompanying Green Paper offer some proposals that will help rebuild trust, and we offer a cautious welcome to them. They include strengthening shareholder voting rights and requiring larger, privately owned businesses to meet higher corporate governance and reporting standards. I single out for special mention the welcome proposal for large companies to have a dedicated non-executive director on the board to give small suppliers a voice, improve prompt payment and challenge supply-chain bullying. This measure is vital to help our SMEs and start-ups.

However, we also have disappointments. When the Prime Minister said,

“we’re going to have not just consumers represented on company boards, but workers as well”,

it was widely believed that she meant that elected employees would be on boards, emulating the practice in many countries and in many of our own successful start-up businesses, but now we learn that she has bowed to industry pressure. So I want to ask the Minister a very clear question. Will the proposed representatives of employees who serve on boards in the future be elected by the workforce or just be allocated the job from among existing board members? After all, the public have a right to choose their representatives in Parliament, so should employees not have the right to choose their board representatives? Better still, why do the Government not do what more than 60% of the public want, which is to put workers on boards?

Why is there nothing in this Statement or the Green Paper about increasing board diversity? Only three weeks ago, the Business Minister, Margot James, said:

“It is not right that boardrooms in 2016 can still be predominantly male and exclusively white”.

What plans do the Government have to ensure a diversity of voices on boards?

Although we welcome the Government’s intention to consult on improving the transparency of executive pay, we acknowledge that they are right to accept that a simple ratio of CEO pay to median salary could produce misleading results. Does the Minister agree that, as part of avoiding that problem, there would be considerable merit in ensuring that companies report on the total remuneration of both executives and employees? Is it not important that companies that provide, for example, enhanced childcare facilities or in-work training for employees, have that acknowledged and thereby, it is hoped, encourage others to do the same?

Reference is made in the Statement to the role of shareholder influence on executive pay. Does the Minister agree that there would be a real impact on this from a massive expansion of employee share ownership—not the disastrous George Osborne model, where shares are traded for basic employment rights, but with shares forming part of everyday remuneration for all workers, not just those at the top—giving everyone a stake in the company and a vote on how to run it?

Similarly, why are there not proposals to encourage more companies to mutualise? Some of the best examples of British companies—John Lewis being the obvious one—are run on alternative business models such as the mutual. Does the Minister agree that there is great merit in having a diversity of types of companies, rather than simply relying on listed and private company models?

The vast majority of businesses in this country act responsibly, but if we want to restore faith in business we should go even further. We should put workers on the boards, as happens in other countries, improve share ownership schemes and ensure that support made available to workers, such as training and skill development, is highlighted, alongside information on pay, as part of any reporting system.

[Lord Henley]

My Lords, I start by thanking both the noble Lord, Lord Mendelsohn, for his initial welcome for the Green Paper—he seemed to go off a bit after that when he compared this to a dangerous dogs debate—and the possibly slightly more generous welcome we heard from the noble Lord, Lord Foster. However, that too went a bit off as he went through his various disappointments. I hope I can deal with a number of those points in my response.

The first thing I must make absolutely clear to both noble Lords is that this is a Green Paper and therefore it is out for consultation. We are not, at this stage, telling people what our plans are. We are looking for views from noble Lords, including the noble Lords, Lord Mendelsohn and Lord Foster, and we are reaching out to people throughout the country to give us their views on how we should proceed It is important to remember that this is collaborative in its intent. We are not seeking to impose solutions. As I said, we are seeking consultation and high standards with low burdens.

The noble Lord, Lord Mendelsohn, claimed that the proposals have been designed purely to protect the status quo and watered down from earlier ideas. I completely refute that. As I said, this is a Green Paper designed to seek the views of noble Lords and people throughout the country as to what they want to do. We want to make this country one of the best places in the world to work. We want to invest and do business, and to seek the means to continue to have the right corporate governance framework, as is currently admired across the world—we have to look only at the amount of inward investment into this country to see evidence of that. We also seek further improvements that will receive the support of industry and of all others, including trade unions, who might have an interest in this.

The noble Lord, Lord Foster, asked what we are going to do to improve board diversity. It is not for us to impose solutions but we will certainly support the Hampton-Alexander review and its call to increase gender diversity in the boardroom—something I would like to see more of from boards. The noble Lord also mentioned small suppliers. It is very important that, as a constituency, small suppliers, which sometimes have problems with larger companies, be appropriately consulted and their voice better heard, whether in board decision-making or other fields.

The range of the consultation is obviously important and, as I said, we want to reach out to and hear the views of all concerned. For that reason, the Green Paper will focus on ensuring that executive pay is properly aligned to long-term performance, giving a greater voice to employees and consumers in the boardroom, and raising the bar for governance standards in the largest companies, whether privately owned or otherwise. Obviously, there will be other opportunities for noble Lords and others to put their views forward as we discuss the Green Paper. The consultation period will continue until 17 February next year. I will certainly welcome the views put forward by both noble Lords who have spoken and others, and I am sure the department will as well.