Enterprise and Regulatory Reform Bill

Lord Lea of Crondall Excerpts

Monday 11th March 2013 Lords Chamber

I thank noble Lords for their contributions on these important issues and understand that their intention is to ensure that these reforms genuinely empower shareholders.

[Lord Lea of Crondall]

I am grateful to the noble Viscount for giving way. I would like to check that I have understood. He referred to the words “pay policy”, and an amendment is coming up shortly on the question of top to bottom ratios. If this is now an acceptable form of words, why do the Government not think there is now a need for a top to bottom pay policy, which we will come to in a minute?

[Viscount Younger of Leckie]

I will come to this in a minute. If the noble Lord will forgive me, I think it is best that we continue with this rather than move on to that particular subject. We can then focus on the noble Lord’s comment during the debate on the next amendment.

I should reiterate that throughout our consultation shareholders with considerable experience in investments research and analysis consistently expressed concerns about the downside effects of annual votes and special resolutions. This was acknowledged by my noble friend Lord Tugendhat. It is a fact, and it is the main point I want to make. Stakeholders have expressed their support for the Government’s proposals. For example, the Association of British Insurers stated that it is,

“pleased the Government has decided to proceed with this with a 50% voting threshold”.

The noble Lord, Lord Mitchell, raised some questions. First, he asked to which year a policy would relate if it were renewed annually. Well, he did not raise precisely this question, but it was alluded to. It is important to provide companies with the flexibility to decide themselves how the timing of the pay proposals will best work for them. Whether a pay policy relates to the current financial year or the following one is a decision for companies and shareholders to take together.

The noble Lord, Lord Mitchell, also raised the issue of the Cox review. I acknowledge this review, and the Government welcome its publication. The review raises some key issues about directors’ pay. I reassure the House that we will consider the recommendations made in the Cox review in the context of the Kay report. The Kay report provides a framework to restore relationships of trust and confidence, and to realign incentives throughout the investment chain. I remind noble Lords that the Government are fully committed to taking forward the recommendations made in Professor Kay’s review that investment in equity markets supports UK companies to deliver sustainable growth.

To conclude, my noble friend Lord Tugendhat raised the matter of annual votes, on which some fairly strong comments were made. I stress that in the end this is about giving companies and shareholders the flexibility to do what is best for them. However, the noble Lord is correct that a vote would be required in the event of any change in policy, so annual changes would lead to an annual vote.

--- Later in debate ---

[Lord Mitchell]

My Lords, Amendment 84AHAA speeds right to the heart of the matter in hand. The disparity in pay between top and bottom earners has informed much of the public outrage about remuneration, and it no doubt lies behind the polling figures that I mentioned previously. Had the minimum wage kept track with executive pay since it was introduced, it would now be worth in the region of £19 per hour. Instead, we see a very pronounced wage discrepancy. It is felt particularly acutely here in London, where many FTSE 100 companies and our financial sector are based. In 2010, the top percentile here received 16.5% more than the bottom percentile. The ratio between top and bottom pay has gradually grown over the past 30 years to the point that in both the Lloyds Banking Group and Barclays top pay was 75 times that of the average employee in 2011. By way of comparison, in 1979 the difference was only 14.5 times.

Put simply, too many are being left behind. This is certainly not the one-nation economy that this country needs. Therefore, shareholders should have more power to hold to account the companies they invest in, as we argued with regard to the previous amendment. Greater transparency about levels of pay at the top and bottom of the company would give shareholders the tools they need to make informed decisions on how they vote. This amendment gives shareholders those tools by requiring companies to disclose the top and bottom 10 earners outside the boardroom.

There are corresponding moves to increase transparency on pay, so it is worth going over why we consider there to be a need for this amendment. Most of the moves to get companies to release more information on pay to their shareholders cover only banking. The Treasury’s current consultation proposal is that the top eight highest-paid earners beneath boardroom level in banks are to have their salaries disclosed. Although it is difficult to know the details at present, it appears as though the European capital requirements directive IV will opt for a different disclosure proposal, whereby the figures for those earning more than €1 million a year are to be collated and sent to the EBA, which will then produce the numbers in a common format. It is possible that in some institutions this could produce less information than the Treasury proposal.

Both these proposals from the Treasury and in the European capital requirements directive IV differ from ours in several important ways. First, they concern only the banking sector, but this issue is not limited to that industry. Let us consider the top pay at BP. In 2011, it was 63 times that of average employee pay, whereas in 1979 the difference was only 16.5 times. However, these proposals had nothing to say about the severe problem of low pay, which, as my noble friend Lady Turner of Camden pointed out in Grand Committee, produces many difficulties in our society. I think we could all agree that pay at the bottom of a company should be considered when pay at the top is set.

The initial Private Member’s Bill of my noble friend Lord Gavron contained a similar provision. Clause 2 said:

“A company’s annual report must prominently feature details of the remuneration ratio between the highest remunerated director or employee and the average remuneration of the lowest remunerated 10% of employees”.

This amendment is slightly different but would have the same effect, introducing a measure of transparency as to the ratio between the highest and lowest paid workers.

Yesterday, Secretary of State Vince Cable pledged to support a push for openness about what tax businesses pay in different countries. This amendment is a similar push for transparency. I hope that the Government will find that they are able to support it. I beg to move.

[Lord Lea of Crondall]

My Lords, I strongly back this amendment. I know that it is not for here and now with the present Government, but in two years’ time it will be very interesting to see how a Labour Government get the architecture together to relate the income distribution of the rest of the enterprise to the incomes at board level. That is what they have in the most successful European societies—I include Germany, Holland and Scandinavia, and I do not think that anyone would draw up a very different list. In answer to the notion that these economies are not competitive, their place in growing world market share is far superior to that of Europe generally and certainly to that of Britain.

The point has just been made that the banking sector is a rather special sector. I can tell you one respect in which it is very special: people get paid enormously more at the top than in any other sector. That is what is special about it. It is not special in the sense that there has not been a huge growth in the disparities in all the rest of the sectors. Anybody close to industry will know that two things happen when pay at the top gets to 30, 40 or 50 times that at the bottom. The first is that there is a crossover effect in the rest of the sectors—in construction, mining or any other sector. Banking does not live in a world of its own, although in some respects, of course, it does. Some people say that the banking industry is Britain’s biggest industry. When we were young, to say that banking was Britain’s biggest industry would have been thought a rather risible thing to say. Yet that is infecting the rest of the economy. A lot of the best talent used to go into the Civil Service. Now, not as much of the best talent is going into the Civil Service. Not as much of the best talent is going to many of the sectors that had their share of the best available talent years ago.

While we are on the subject of top people and talent—and what you might call inherited wealth, which is part of this question—the fact is that we are failing to bring out the best of the talents and opportunities of everybody else in society. So when one talks about 1%, one immediately says, “What about the 99%?”. I think that for this Government to ally themselves ideologically with the interests of the 1% at the top is going to prove a fatal mistake.

The clock is ticking, and those of us who now believe what this side of the House believes, in the challenges that we will face in two years’ time there must be some connection between our policy of worker representation on boards and what is happening in the rest of the company. You do not need to be Einstein to figure out that if there is some new structure of boards, there has to be some substructure. You cannot have a superstructure without a substructure. Whether it is through information and consultation bodies or any other way, it will be a major challenge to get it right this time under the next Labour Government. It is rather academic from the point of view of Members opposite in the Conservative Party, but it is a very interesting pointer to the future that this is one of the elements in the architecture that will be built.

[Lord Blackwell]

My Lords, I have listened very carefully to the speeches of the noble Lords, Lord Mitchell and Lord Lea of Crondall. While they made some interesting points, I did not find that either of them had any compelling rationale for this particular amendment.

We have all agreed that the remuneration policy for those at the top of companies has to be transparent and has to be voted on and agreed by shareholders; that is only proper. As for the low-skilled workers on the minimum wage, that is a matter which is voted on by Parliament in setting the minimum wage. However, I am not sure that to juxtapose those two things in a company’s annual report provides any useful information. Let us consider company A, which, we hope, does a great job for the community in employing lots of people, including low-skilled workers, on relatively low wages. Offering them employment helps them to come off benefits and thus creates a great benefit to society. Company B, operating in the same sector, decides to ship all those jobs off to India. Which company would shareholders—or, indeed, society as a whole—think is doing a better job? I do not think that juxtaposing how many people a company successfully employs at the lower end of the skill level compared to the top end, and comparing that with other companies, gives any useful information about whether those at the top of the company are being rewarded appropriately.

[Lord Lea of Crondall]

The noble Lord asked a direct question about the connection, because of the minimum wage, between the bottom and the top. One phrase that gives a clue to the connection is, “We are all in it together”. Does that not give any sort of clue to the noble Lord?

[Lord Blackwell]

That is precisely my point. I would have thought that the company that successfully employs lots of people at all skill levels, including those on the minimum wage or at a low-skill level, is helping society and helping us all to prosper together.

Another example is a company in a consultancy that employs only PhDs. The ratio between the top and the bottom in that company may be relatively small. Is that a better company than one that employs lots of people on the minimum wage? I think that this information is almost entirely irrelevant to any judgment about whether the pay at the top of the company is appropriate. That is a relevant question, but this information is potentially misleading and potentially encourages those viewing the annual report to take a misguided view of the appropriateness of the pay policy within the company. I do not think a case is being made for it.