Companies (Miscellaneous Reporting) Regulations 2018

Lord Stevenson of Balmacara Excerpts

Monday 9th July 2018 Lords Chamber

[Baroness Drake (Lab)]

My Lords, I am conscious that Members of the House want to move on to other business, so I shall concentrate on two issues in the regulations that I think warrant being brought out and receiving attention.

There is a cross-cutting concern that, in referring to directors’ reporting responsibilities in relation to engagement with and having regard to the interests of their employees, the regulations do not refer to their “workers”; they refer only to their “employees”. This is a weakness in the regulations, as they do not encompass the reality of modern employment practices and business models, explicitly referred to in the Taylor review and the impact assessment. Reporting on a company’s impact on employment should be reflective of the entire workforce and not just direct employees.

A significant minority of the UK’s workforce is now not covered by the term “employee” and there is a correlation between indirect employment and low pay and insecurity. Excluding indirectly employed workers, some of whom are the most vulnerable, from the scope of these regulations contradicts a key rationale for statutory intervention—promoting equality and fairness. It will mean that directors’ reports will present an incomplete picture of engagement with the people whose work contributes to companies’ output and value. Therefore, do the Government intend to review Section 172 of the Companies Act to allow reporting on directors’ duties to address the workforce as a whole and not restrict it to employees only?

Another element of the regulations concerns me. Regulations that require reporting on the pay ratios of CEOs’ remuneration to employees’ remuneration are to be welcomed, but there is a risk that these regulations will fall short of what is needed. Again, they refer to employees and not the whole workforce, and that could result in misleading evidence on those pay ratios. The public interest is in the gap between wider workforce pay and executive remuneration. There is a precedent: gender pay-gap reporting covers both workers and employees, not just employees.

If evidence on pay ratios is to contribute to restoring public trust in business, it is important that there is integrity around the data collected and reported. Clear audit requirements need to be put on these pay-ratio exercises, and the lessons learned from the reported gender pay gap, highlighted by the Financial Times analysis, should not be missed. The Financial Times revealed that one in 20 UK companies that has submitted gender pay-gap data to the Government has reported numbers that are statistically improbable and therefore almost certainly inaccurate. Therefore, when do the Government intend to extend pay-ratio reporting to cover both workers and employees, and how will they satisfy themselves about the quality of the data provided on these pay-ratio reports?

[Lord Stevenson of Balmacara (Lab)]

My Lords, I am conscious that the House wants to move on but it would be wrong to pass over these regulations, because there are rather important points within them. My noble friend Lord Haskel raised a number of points about the overall shape of the Government’s response to company powers. He talked about the need to think again about the way that shareholders are always given priority and the missed opportunity to stress the importance of productivity. My noble friend Lady Drake raised a number of points about how the figures can be used in a positive way, and I want to come back to that, although I will not go through all the points in detail. In fact, a lot of them were covered by the noble Baroness, Lady Bowles, although I am afraid that she lost the House during her speech. It may be worth reading again what she said, because a lot of it was very relevant to what our future agenda needs to be.

First, I congratulate the team behind these regulations. The Explanatory Memorandum that accompanies them runs to 55 pages and is one of the best that I have seen, but I bet that very few people here have read it. They should do so because, even if they are not up to speed with the latest arithmetical terms, it will tell them about averages and means in a way that will bring home any questions that they might have had about why people use one term or another. If I may say so, it has chosen the wrong term, but has done so in a way that has allowed it to at least shine a spotlight on the difficulty of comparing, for instance, the pay of the top person in a company with the median or average or whatever other term you want to use. It points out more difficulties than it solves so it is worth reading.

Secondly, on the date of application of the regulations, some Members of the House will be aware that I have concerns about the fact that we are observing in its absence the common commencement dates for when new regulations are placed on companies and businesses. These regulations come in 21 days after they are passed and not on the common commencement dates, which are 6 April and 1 October. I am keeping a score of the Minister’s efforts in this matter. He will be delighted to know that, of the 13 regulations he has brought forward recently, his score is now 11:2, and even those two were almost cheating because one of them was done by exception and another was done a year late. Nevertheless, I appeal to him to try to up his game.

The key point is: why are the Government not doing more on Section 172(1) of the Companies Act 2006? This section requires directors to act in a way that they consider in good faith promotes the success of their company as a whole and to have regard to, among other things, the long-term consequences of their decisions and the interests of their employees. This needs to be looked at very seriously and rewritten for the 21st century. As part of that, the review should look at the issues that should be in place for all directors, whether in private or public companies, and should include matters such as late payment of suppliers, productivity and the use of powers to try to ensure that stakeholders of the company benefit from it.

Thirdly, the point has already been made that the threshold of 250 UK employees mirrors existing thresholds, but it does not make any sense for it to be limited to UK citizens only. The Government should make it clear that the intention of the legislation is for companies to report on their whole workforce. My noble friend Lady Drake asked why we are not including “workers” as well as “employees”. All employees are workers but not all workers are employees, and it is time that this was updated to reflect that. I think the Minister has already accepted that, in time, they will do that.

My final point is that, without some central registry of reports, this requirement will not be satisfactory. I hope that the Minister will take account of what I have said and perhaps write to us on the key points, in order that we might make progress today.

[Lord Henley]

My Lords, like the noble Lord, Lord Stevenson, I would like to make progress, and I suspect that the House would also—I am sure the Chamber is not as full as it is purely to listen to me wind up on this order.

I start by dealing with the noble Lord’s comments about common commencement dates; I know this is a matter of great concern to him, and I always try to comply. Wherever practical we like to follow them but, because we are proposing to introduce these significant new regulations designed to coincide with the start of the company reporting year, we felt that 1 January might be more suitable. I will allow him to continue to keep his scorecard and on those rare occasions that we diverge from the common commencement dates—although they are perhaps less rare than they might be—I will make it clear why we are doing so.

My noble friend Lady Neville-Rolfe asked whether we could have a review of some of the arrangements in five years, particularly in the light of her comments on pages 41 to 51 of the impact assessment. I give an assurance that we will do that. The success criteria include company executives focusing more on long- term performance, and the new Section 172 reporting requirement must include reporting on the impact of directors’ decision-making in the long term.

I appreciate that although the noble Lord, Lord Haskel, welcomed the regulations, he felt that they possibly should go further. He expressed concern about the reluctance, particularly of some institutional shareholders, to intervene. It is important to remember that increasing knowledge is always a benefit to any shareholders. I think that he recognised this and that shareholders were increasingly becoming more assertive in holding companies to account. They have, for example, strongly backed pay ratios and other rules introduced today. The Investment Association’s new public register of shareholder dissent, to which I referred in my opening remarks, is putting significant and welcome new pressure on companies to listen to their concerns.

The noble Baroness, Lady Drake, asked about the definitions of “employee” and whether they should also cover other workers. The regulations we are using are made under the Companies Act and, therefore, we will follow the definitions of “employee” in that Act—that is, someone employed under a contract of service with the company. Having said that, I recognise her more general concerns about the definitions of “employee”—we have discussed these matters on other occasions—given the changing nature of the workforce. The Taylor review has addressed this issue and the Government will need to respond further in the light of that and recent court decisions. However, for the moment, for these regulations it is necessary that we stick to the Companies Act definition.

As the noble Lord, Lord Stevenson, suggested, it would be right for me to write in greater detail on some of the questions put to me in the course of the debate. However, I have heard a general welcome for these regulations.