Directors’ Pay

Lord Stevenson of Balmacara Excerpts

Wednesday 20th June 2012 Lords Chamber

[Lord Stevenson of Balmacara]

My Lords, I thank the Minister for repeating the Statement made earlier in another place. In January this year, the Prime Minister said on the Marr programme:

“it’s the excessive growth in payment unrelated to success that’s frankly ripping off the shareholder and the customer and is crony capitalism and is wrong. And it’s also—I think a key point—payments for failure, those big rewards when people fail, I think make people’s blood boil and again is actually taking money from the owners of the company, the shareholders and everyone with a pension in Britain … I think you know what we should be doing here is what are the best market tools to try and correct this market failure and I think transparency is a key tool, so we can all see what’s happening, and then clear votes so you’re empowering the shareholder”.

In March, the Secretary of State for Business, Innovation and Skills announced in a Written Ministerial Statement a public consultation,

“that provides more detail on a model which will give shareholders greater influence on the issue of executive remuneration. The main components of this are … An annual binding vote on future remuneration policy … Increasing the level of support required on votes on future remuneration policy … An annual advisory vote on how remuneration policy has been implemented in the previous year … A binding vote on exit payments over one year’s salary”.

We supported this initiative, building as it does on work done by the previous Government in 2002. So, today, we are happy to confirm our support for much of what is in the Statement, including the binding shareholder vote on exit payments, the measures to simplify pay reports to increase transparency, and an annual advisory vote on how remuneration policy has been implemented in the previous year.

What has happened to the brave new world outlined by the Prime Minister in January and echoed by the Secretary of State in March? In March, an annual binding vote on future remuneration was one of the “main components” of the Secretary of State’s plan to give shareholders greater influence. This has been watered down to one vote every three years, unless during that three years there is a change to the policy. But will that not simply incentivise boards to draft policy as broadly as possible so as to avoid anything more than a triennial vote? Who will be the arbiter as to whether there has been a change of policy in each company—the board or the shareholders? Bureaucracy has been raised as an objection to an annual vote, but given that there will still be annual advisory votes on the implementation of remuneration policy in the previous year alongside other annual votes such as the election of directors, surely that objection simply does not hold water.

Secondly, the Government proposed to increase the majority required for the pay policy to be approved, but in the Statement the Government have reverted to a simple majority. We believe that they should have gone for a 75% threshold; as Dominic Rossi, the chief investment officer of Fidelity Worldwide Investment has said, such a threshold would ensure that companies consult widely with shareholders prior to a vote and give companies a clear mandate, and the need for a clear majority would also encourage all shareholders to express their views. Why did the Government not take heed of this advice?

Thirdly, the Statement says that,

“employee views on pay are important”.

If that is the case, why has the proposal been limited to companies reporting,

“on whether they have taken steps to seek the views of their workforce”?

Will the Minister explain why the Government have not introduced the requirement for employee representatives to sit on board remuneration committees?

In the accompanying Directors’ Pay: Guide to Government Reforms, published today, the Government say:

“Over the last decade, directors’ pay in the UK’s largest listed companies has quadrupled with no clear link to company performance. Business leaders and investors now agree that this is a problem. Key stakeholders have spoken out in favour of action”.

Sir Roger Carr, president of the CBI, is quoted as saying in May 2012:

“In the way we pay ourselves … now is the time to be more transparent, more responsible and more accountable. High pay must be for exceptional performance, not mere attendance”.

Simon Walker, director-general of the IoD, is quoted as saying in March 2012:

“The level of executive pay at the UK’s largest companies has become unjustifiable over the last decade and it’s right that the Government recognises that it is shareholders who have the power to control it”,

and Otto Thoresen, director-general of the ABI, is quoted as saying in April 2012 that,

“the days of gold-plated payouts for failed leaders are coming to an end. We have the chance to agree a new set of rules focused on greater simplicity, greater transparency and genuine reward for performance. It is an opportunity we must take”.

Those are powerful comments, made by key stakeholders, and the Government should take careful heed of what is being said.

I note that the Government are claiming credit for a growth in shareholder activism. Indeed, “success has many fathers”. In the so-called shareholders’ spring, shareholders have been flexing their muscles and exercising their current, albeit restricted, rights with some verve this year. That is very welcome. Change and reform must be shareholder led—it is they who own our businesses—and surely we in Parliament should do what we can to empower and encourage them as much as possible.

There is the whiff of a U-turn in the air. The Government have talked up what they were intending to do in this area, but in the event they have failed to deliver, as the final proposals are, to be frank, a bit limp. They are certainly not the strong package of reforms, but they could become that. As the Statement indicates, this is not the last chance we will have to discuss these topics. We look forward to debating the amendments to the Enterprise and Regulatory Reform Bill, which will give these proposals legislative effect, in your Lordships’ House in the not too distant future.