Lord Mitchell
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Lord Mitchell
Lord Mitchell
My Lords, in moving Amendment 84AHAZB, I will also speak to Amendment 84AHBA, which is consequential. These would give shareholders an annual binding vote on executive remuneration.
Last year, my noble and very dear friend Lord Gavron tabled a Private Member’s Bill on the subject of executive pay. Sadly, he cannot be with us today. In the next few days, he is due to have a very serious operation. I know that I speak for the whole House when I wish him a very safe and speedy recovery. It was the noble Lord who first stimulated my interest on this issue when he asked me to support his Bill. Of course, I was pleased to do so. Since then, I now find myself on the Front Bench and fortuitously in a position to lead the opposition position on this issue. It must also be said that the noble Lord, Lord Gavron, is also a generous supporter of the High Pay Centre, which has conducted a great deal of important research on this subject. Based on discussions that the noble Lord had with the noble Lord, Lord Marland, and others, he felt that the Government had taken his points on board and in consequence he withdrew the Bill. To their credit, the Government have indeed incorporated some of the points made in the Gavron Bill, but I believe that this Bill can still be improved on. That is what we are seeking to do.
At the heart of the matter lies the empowerment of shareholders. Just in case noble Lords question my position in speaking on this subject, I add a little personal background. From 1972 to 2006, I set up numerous businesses. Some were very successful, some were total disasters. I will make no further reference to the Soho restaurant that vanished without trace. I lost a packet and there were several others like that. On the other hand, I have had my notable successes. I have been in the IT services business most of my adult life. I created three businesses from scratch, built each of them over 10 or more years and then sold them. Each company became a market leader and two of them were international operators. Not surprisingly, I dwell upon my successes these days although it must be said that the failures made me a better man. I learnt one golden rule: stick to what you know.
I am a senior entrepreneur in tooth and claw. I know that success is wonderful and failure is painful. I understand the rules of the game. I have made this personal statement to put it all in context because the series of amendments I have tabled, and which we are about to discuss, centre around the rights and powers of the shareholder, with whom I have a strong personal sympathy. The shareholders are the owners. If the company does well, their share price goes up. If it fails, they can lose the lot. Executives can move on; shareholders are left with a loss. The board of directors is accountable to the shareholders and the management reports to the board of directors.
In many small private companies, the management, the board and the shareholders are often one and the same, but in quoted companies this is seldom the case. That is one of the reasons why these amendments refer solely to quoted companies. There are, of course, other stakeholders in all companies, first and foremost, the employees, but also the customers, the suppliers and the community where the company is located. They are important but just for now we are concentrating on the shareholders and their rights to know and to control. When we address executive pay, we are saying that this subject is so important that the shareholders of a publicly listed company should not only be consulted but should also vote on the policy and the actuality of the pay packages that senior executives are to receive.
Much today is said about the shareholder spring—the hope that shareholders will assert themselves more and, of course, we agreed wholeheartedly with this. If we look around the world, shareholders are flexing their muscles in all sorts of ways. In the United States, the Dodd-Frank enactment of 2010 has significantly tightened shareholder scrutiny on executive compensation. This is referred to as “say on pay”. In the EU a couple of weeks ago, strong recommendations were announced with respect to bankers’ pay and bonuses. It will not have escaped noble Lords that just over a week ago, the Swiss, of all people, held a referendum on curtailing bankers’ bonuses. The proposal received 67% support among Swiss voters; 1.6 million of them turned out to vote; and all 26 cantons approved it. Were we to have such a referendum here, one wonders what the result would be, although we can get some idea by looking at the attitudes of the British public. Only 7% of those polled say that they think that the CEO of a large company should receive compensation of more than £1 million and only 1% think that they should be paid more than £4 million a year. Is that any wonder when profits for failure feature so heavily in the news? For example, last week, HSBC announced that 204 of its global staff were to receive £1 million in bonuses and compensation—this in a year that has seen the bank fined £1.2 billion for laundering Mexican drug money. RBS has made it clear that a £5.2 billion loss was no barrier to paying out more than £600 million in bonuses.
Lord Wills
I am very grateful for that, but I just hoped that before my noble friend sat down he could address one particular issue that is of concern to me. He has put forward a compelling case for these amendments, and I hope that the Government will consider them extremely carefully. In his closing remarks he put his finger on one of the main problems with this whole area; it is not just that shareholders find it difficult to hold companies to account for their remuneration policies but that those shareholders are for the most part, as he has identified, large financial institutions. They are not as accountable as they perhaps should be to those whose savings they manage. Has my noble friend given any thought to making those institutions give an account of their policies on remuneration to those whose savings they manage, and why they have taken a particular stance on a company’s remuneration policy—to making those institutions more accountable—which might make them even more activist than they already are?
Lord Mitchell
I thank my noble friend for that comment. I think it is a really good idea. They should be accountable. They manage so much money, and I think it is a very important factor.
Lord Blackwell
My Lords, I am sure that all of us who are directors of public companies agree with the spirit of the Bill: that directors have an obligation to carry shareholders with them and to win their support for policies on remuneration as on other matters. However, the noble Lord’s particular point about having a special resolution to approve remuneration policy I found very difficult to follow. I am not sure that that argument was well made.
The special resolution requiring a 75% vote to approve a remuneration policy in effect biases any vote of shareholders against approving the director’s recommendations. I do not quite follow why, if 51% of voter shareholders believe that the remuneration policy is to the advantage of shareholders and 49 % believe it is against, the 49% should hold sway over the 51% who agree with directors. I could argue that there might be a case for biasing the vote the other way: that there ought to be presumption that the director is acting in the interest of shareholders and not necessarily that the majority voted the other way. However, I am perfectly happy to go along with a majority vote one way or the other. I just do not think that the noble Lord made any case for requiring a special resolution.
Viscount Younger of Leckie
I can confirm that it would have to be voted on immediately, because the change had happened in that particular year, so there would be that trigger for year two, in effect. If I have failed to do so already, I ask the noble Lord to withdraw his amendment.
Lord Mitchell
I thank the Minister for his comments and all other noble Lords for their contributions. I will deal first with the 75% special resolution issue, which was raised by the noble Lord, Lord Blackwell. As my noble friend Lord Wills was saying, it is important for the shareholders to hold the executives’ feet to the fire in some respects. This is a crucial issue. I know there is a difference in this between the ordinary and the special resolution, but that was why we went for the 75%.
The main issue is the annual point. You only have to read any newspaper in this country, and indeed around the world, to see what a vexatious issue this is at the moment. The population is disturbed, and the financial press is disturbed. Not only the popular press but leading newspapers in this country and throughout the world bring up this issue of executive pay. It has got out of kilter. We are going for the annual situation rather than the triennial situation because it should be an automatic consequence and is just as important as the selection of auditors and the approval of the accounts. Three years just seems to us to be too long for such an important issue. I have listened to what the noble Lord has said, but I would like to test the opinion of the House.
Lord Mitchell
“(2B) The regulations must require the inclusion of information regarding the 10 highest paid and 10 lowest paid employees in the company outside of the board and executive committee.”
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 Mitchell
My Lords, I shall come first to the Minister’s final point. These are good pointers that he draws to our attention. Much of what we have been trying to do is to accelerate the process, and to encourage shareholders to become much more involved so that we get even further results on this.
My noble friend Lord Lea of Crondall made an eloquent speech about working people working for companies and the fact that it is useful to see these disparities in black and white. Indeed, it is usual for countries in the north of Europe to do it, and they seem to be doing very well in the world economy. The noble Lord, Lord Blackwell, again made a useful contribution. I am not sure that I agree with his position but it was useful and not dissimilar to that of the noble Lord, Lord Kerr of Kinlochard. Our position is that it is information that some investors would like to know about companies: what is the disparity in those companies? I say to the noble Lord, Lord Kerr, that I had not really thought about it, but it must refer only to the United Kingdom. It had not occurred to me that we could be looking at the pay that somebody in a call centre in India gets compared with the senior executive of, say, a bank in this country. I have listened closely to everything that has been said, and I beg leave to withdraw the amendment.
Lord Mitchell
My Lords, we are very supportive of this amendment. It is clearly needed. I have only one question about whether the words “reasonably” and “honestly” are strong enough. A lot of lawyers would have a field day with this. I just ask the Minister to go away and think about whether we can perhaps have something a little more assertive, which would leave less latitude for a lot of lawyers to make lots of fees.
Viscount Younger of Leckie
I thank the noble Lord, Lord Mitchell, for that, and also for his contribution on this important issue. The proposed amendment to Section 226E ensures that those who should be rightly relieved of liability can be, while those who should be held liable will be. To answer his question about how one can define or further improve on the definition of “reasonable”, the concept of reasonableness has been thoroughly tested by the courts, which are very rigorous in judging directors. A court might take into account what advice a director had sought, what conversations had taken place, and what records were kept. Of course, it remains up to the court to decide and it will vary in each case. The court will take into account, for example, the full context of the situation. Therefore, the expectations of a “reasonable” director of a FTSE100 company with a strong compliance function and ease of access to professional advisers will be much higher than those of a director of a smaller quoted company. I hope that that takes matters forward and helps answer the noble Lord’s question. I also thank noble Lords for their understanding of the need for various minor and technical amendments.
Lord Mitchell
“Pre-packs
(1) The Secretary of State shall commission an independent review into pre-pack administration.
(2) Such a review shall report on but not be limited to the following—
(a) the adequacy of existing requirements in relation to transparency of arrangements;(b) compliance with existing requirements by pre-packs including Statements of Insolvency Practice;(c) adequacy of existing enforcement mechanisms in relation to compliance;(d) rules relating to the continuation of supply to businesses on insolvency.(3) A review under this section shall report to the Secretary of State no later than 12 months following the day on which this section comes into force.
(4) A copy of the report under subsection (2) shall be laid before both Houses of Parliament.”
Lord Mitchell
My Lords, I speak to Amendment 84AHNZA, which calls for the Government to commission an independent review into pre-pack administrations. Noble Lords will see that this amendment represents the recommendations of the BIS Select Committee report to the Insolvency Service, released on 29 January this year.
It might be helpful if I attempt to define a pre-pack administration. I find many people do not know what it is, and I am not surprised. It is where the directors of a failing company seek to preserve its continuing existence after administration by lining up replacement owners and finance before the administration takes place—in effect, relaunching the company with many of its creditors and minority shareholders stripped out, while effectively continuing the existing business in another name. It gives the business a second chance, but often at the expense of these creditors and shareholders. My contention is that it is often unprincipled and unfair. Usually, there is no creditors meeting and no consultation with the court before this takes place. The sale may be to individuals who were directors of the firm before the pre-pack administration, and the new firm may have a similar name. As I say, the only difference is that the new company is shorn of its debt and maybe its smaller shareholders. Effectively, it is cooking the books. Such firms have sometimes been known as phoenix companies, having risen from the ashes of the old insolvent company.
My interest in pre-packs arose when a company in which I had a minority shareholding interest wanted to restructure its financing to my detriment. To do this, it needed me to sign off on a revised deal. I refused. It threatened me with a pre-pack, a term that I had not heard of before, but about which I learned pretty quickly. I still refused and, fortunately, it backed down. However, I saw how that could be used as a negotiating tactic. More to the point, I saw how the small people can get hurt. Despite that, I am prepared to concede that pre-packs can have a very important function. They can allow a company to continue and the administrator to move quickly to preserve the business and, most importantly, jobs. That is what all of us want.
Viscount Younger of Leckie
Noble Lords will be aware that the administration procedure is the primary mechanism for effecting business rescues. It is important to recognise that the objective of administration, if the rescue of the company is not feasible, is to provide the best return for creditors. A pre-pack sale is merely a means of achieving that outcome and should therefore always be in the interests of creditors. I am most grateful to the noble Lord, Lord Mitchell, for his helpful description of pre-packs for the benefit of the House.
As the noble Lord said, pre-packs can be an effective way to the best outcome for creditors, enabling businesses to be rescued and preserving jobs, but we recognise that there can be scope for abuse. That scope is greatest where pre-pack sales are to connected parties, such as the directors or their families. Again, I am grateful for the anecdotal evidence given tonight by the noble Lord, Lord Mitchell. That is when most concerns are expressed, and it is vital that everyone involved has confidence that such sales are at fair value. We have been listening carefully to concerns expressed about the use of pre-packs, and Ministers have met with stakeholders to discuss the issue. I am aware that, as the noble Lord, Lord Mitchell, mentioned this evening, he recently met with the Minister for Employment Relations and Business Affairs, Jo Swinson, to discuss the issue. We have also invited those who have complained about the procedure to provide evidence of abuse, so that that can also be pursued.
I reassure noble Lords that work is already under way to improve the transparency about pre-pack sales. There is a statement of insolvency practice, SIP 16, setting out the information that has to be provided to creditors by insolvency practitioners. That is being strengthened to ensure that more information will be disclosed and that creditors will receive that information at an earlier stage. Insolvency practitioners will also have to confirm that a pre-pack sale is in the best interests of creditors. That should provide greater confidence that the pre-pack sale is justified. The Insolvency Service is proactively monitoring information disclosed under SIP 16 reports to establish whether there has been any abuse. Where there is evidence to suggest abuse, it is reported to be relevant regulatory body for action to be taken. Such action can include fines, sanctions and, ultimately, loss of the insolvency practitioner’s licence. The Insolvency Service will report on its findings in this regard.
We therefore already have measures in place to protect against abuse, and continue to monitor the pre-pack process to ensure that it is being used appropriately. However, I share many of the concerns raised by the noble Lord, Lord Mitchell, which I know have been expressed on other occasions in both this House and the other place.
I agree that an independent review into the issue would be beneficial. For that reason, I confirm that we will commission an independent review into pre-pack sales in late spring, once the strengthened SIP 16 is in place and after the Insolvency Service has reported on the findings from its monitoring.
On the review issue surrounding continuation of supply to insolvent businesses, this is now the subject of a Government amendment being debated shortly. We propose to consult on the issue prior to implementing reforms and I am satisfied that this will address the concerns in this area. In view of this assurance to commission an independent review into pre-pack sales, I hope that the noble Lord will agree that it would be unnecessary to introduce a statutory requirement to do so, and will therefore withdraw his amendment. I conclude by thanking the noble Lord, Lord Mitchell, for raising this important issue.
Lord Mitchell
My Lords, I thank the Minister for his words. I remember when we were in Grand Committee, he too had an anecdote on this same subject. I suspect that many other people have as well. I thank him for what he has said and for the Government’s plans for a review of this area. I beg leave to withdraw the amendment.