Queen’s Speech

Lord Tugendhat Excerpts

Wednesday 16th May 2012 Lords Chamber

[Lord Tugendhat]

My Lords, my big disappointment in the Queen’s Speech is the absence of a Bill to deal with top executive pay. Mr Cable appeared to promise one and it is long overdue. In the previous Parliament, the noble Lord, Lord Gavron, introduced such a Bill, which I supported, as did the noble Lord, Lord Taverne, and several other noble Lords from both sides of the House. I am pleased to see that he has reintroduced a similar Bill, so if the Government do not come forward with a measure, it at least lies in the hands of the House of Lords to push this proposition along. I hope it will enjoy the all-party support that it deserves.

The fact that shareholders are at last exercising some muscle over excessive pay linked to poor performance is encouraging. I refer here to the recent revolts at Aviva, AstraZeneca, Barclays, Trinity Mirror and Xstrata, to name only a few companies. We have seen similar phenomena in the United States and Switzerland. However, the fact that shareholders are now exercising some muscle does not mean that the Government can sit back and do nothing. The examples to which I have referred are egregious. We need a framework and a set of criteria within which shareholders can act and the rest of society can assess their effectiveness.

“Society” is a key word here. As Niall FitzGerald, the former chairman of Unilever, has pointed out:

“Business is part of society, not outside it”.

The rate at which top executive pay has increased in recent years puts those who receive it beyond the range of normal society. Here, I do not refer to just the banks by any means. Between 1999 and 2009, the total earnings of FTSE 100 CEOs jumped from 47 times UK median full-time earnings to 88 times. In 2010, the increase in CEO remuneration was 43%, while other top executives achieved even more. Last year’s increase looks likely to be more modest but still way beyond that of most other—probably all—sections of society.

Richard Lambert, the former director-general of the CBI, made two very important points about this phenomenon in an article in the Financial Times last November. One was that this is a “big company” issue, involving a small group of individuals. Those in SMEs are in nothing like the same category. The other was that it,

“is damaging the interests of British business in political, economic and reputational terms”.

Two months ago, Simon Walker, the current—I emphasise “current”—director-general of the Institute of Directors was more blunt. He wrote in the Financial Times that,

“executive remuneration at our biggest companies is at the wrong level”.

Therefore, let us hear no more nonsense about politicians criticising or seeking to act on top executive pay being anti-business. To the contrary, it is necessary to save business from itself.

Against this background I should like to set out some points and principles that should inform the Government’s approach. The first is to subject to severe scrutiny arguments about an international market in executive talent and the UK being in danger of losing out. There is indeed such a market, there are such individuals and we must ensure that the United Kingdom does not lose out. However, this market is very much smaller and the number of individuals much fewer than most of this theory’s proponents tend to put forward. They account for a very small proportion. Most senior executives do not fall into this category and are neither willing nor able to move internationally. What happens is that the enormous packages sometimes—quite often properly—awarded to the internationally mobile, whether British or foreign, pull up other people’s packages behind them. You then have the phenomenon whereby because someone—whether British or foreign—who has been recruited from outside earns an astronomical amount of money, his or her colleagues therefore need to be within the same range. Of course, that does not follow at all.

That is one reason why it is very important to make senior executive contracts simpler and more transparent. In recent years they have become ever more complex and opaque, and designed to make it hard for outsiders to comprehend the level of benefits. It is vital that shareholders should be able to understand exactly what senior executives stand to get in return for meeting what objectives, and what their severance terms are. The Dodd-Frank reforms in the United States require the publication of a single aggregate figure for the total annual compensation of each board member and we should have the same.

Linked to that, the time has come to look carefully at so-called incentivisation schemes. Too often in recent years these have led to corporate strategies being distorted by the desire of executives to earn bonuses linked to short-term growth in profits or share price rather than taking a long view.

Finally, under this head, Richard Lambert makes a good point when he suggests that companies should be required to produce a budget for the pay of their top executives so that if one executive gets more for some exceptional reasons, others would share in a smaller pot. This budget in turn should be linked to the company’s strategy.

As I said a few moments ago, business is part of society. By that, I mean that it also comprises not only those who run it but those who own it—shareholders, directly or indirectly—and those who work in it. The ultimate decision on senior executive pay must rest with shareholders. But I believe that we should also strive to find a way of ensuring that those who work for an enterprise are able to make an input into what senior executives are paid. The senior executives should have to explain and justify their remuneration to those who work for them. Finding the right way to do that will be extremely difficult but I think that that is one element that also needs to be looked into and to which we need to find an answer.