Corporate Governance and Social Responsibility

Louise Haigh Excerpts

Wednesday 14th December 2016 Commons Chamber

[Louise Haigh (Sheffield, Heeley) (Lab)]

I thank you, Mr Deputy Speaker, for allowing time to debate this issue of critical importance today.

Having worked in corporate governance before I was elected, I am well accustomed to the fact that it is not a subject that excites or even particularly interests many people. I completely accept that, and it is demonstrated by how rarely it is raised or debated in this House. However, it is utterly fundamental to the workings of our economy and to how wealth is distributed across the country. What it essentially boils down to is this one key question: who does our economy work for?

In a year of global convulsions, that is a question being asked in unlikely quarters. When Mark Carney made his significant intervention, warning of “staggering inequalities” in an economy where many “lack a stake”, some voices said that he had strayed too far from his brief. Not only was his intervention appropriate, it was absolutely urgent, because while 75 companies on the FTSE 100 collectively made a profit of £32 billion last year, most ordinary people’s wages are predicted to flatline well into a second lost decade. That makes people justifiably angry and society less robust.

In is in that context that the Prime Minister’s corporate governance agenda should be seen, and although it was welcome that the Secretary of State for Business, Energy and Industrial Strategy should introduce proposals for reform, I am afraid that the signals are not good. The Prime Minister floated worker representation on boards on her first day in office, but then informed the CBI that that would be voluntary. In a statement to the House, the Secretary of State lauded his own success in bringing down average pay for chief executive officers from £4.3 million to £4.25 million—I am afraid that that is hardly a job well done.

I know first-hand the enormous creative potential that a well-functioning company, backed by a strong governance regime, can unleash. Unlike the Government, who appear to have stepped back from desperately needed reform, I know that the status quo cannot continue. It represents grotesque pay ratios between the top and the bottom, and astronomical executive pay. We have seen the corporate greed of BHS, Sports Direct, Gunstones, ASOS and JD Sports, which treat their low-paid workforce with little more than contempt; the behaviour of energy companies quick to hike prices to maximise profits, but slow to lower them when the market shifts; and the short-termism that has resulted in productivity flatlining and investment being stifled as directors seek to maximise shareholder value at the cost of everything else.

That is nothing short of a crisis of legitimacy in the shareholder model, because confidence is placed in shareholders that, in my experience, is undeserved and misunderstands the completely altered nature of shareholders in UK plc. Although I welcome the Green Paper, I fear that it clings to a model that belongs firmly in the last century. We are not dealing with the shareholders of 30 years ago, who had a stake in the UK and held shares for a significant period. In 1998, just a third of shares were owned by non-UK investors, but now the vast majority are owned by such investors. In fact, it is almost absurd to talk about shareholders as investors, as most do not hold the shares for long—some hold them for just seconds. The figures are contested, but the most reliable ones that I have seen suggest that the average holding period has fallen from eight years in the 1960s to just four months, and as much as 70% of trades are high frequency.

The equity chain is grossly over-intermediated, meaning that those with skin in the game have little or no involvement in the company at the other end of the chain. Investors tend to own only about 3% of a company at any given time. The notion that that fragmented group will clamp down on executive remuneration, or is interested in the voice of workers or the long-term contribution of the company to the communities that it serves, is either naive or disingenuous.

[Jim Shannon (Strangford) (DUP)]

I thank the hon. Lady for giving way in a speech on an important issue. Does she agree that the Government’s social responsibility does not lie simply in assessing how much GDP goes on benefits? It should be a living, breathing policy that takes account of the changing needs of the communities that the hon. Lady has discussed, rather than a document that is assessed at Budget time. Does she further agree that the previous Government’s big society ideal was never given the resources that it should have been given to take off? That should be considered and, indeed, reviewed.

[Louise Haigh]

I completely agree with those sentiments. Corporate responsibility is too often tacked on at the end of a company’s activities, in a completely separate report. It is not embedded throughout the organisation as it should be, which is why a strong, effective governance regime is vital to ensure that companies respect the communities in which they operate, the environment and their social impact.

At ASOS, despite the shocking evidence with which it was presented of mistreatment of its workforce, investors went ahead and backed the bumper pay package for executives. Why rock the boat when investors are getting their return? Since advisory votes on executive pay came into force, CEO pay has continued to climb to obscene levels, and the average vote in favour of remuneration packages has been a shocking 93%. The Kay review, commissioned by the coalition Government, which presented a fantastic analysis of the issues but fell disappointingly short on recommendations, said that

“the pursuit of shareholder value has distorted corporate principles”.

Rather than push against that open door, the Government seem intent on clinging to an outdated and inappropriate model that puts the interests of international shareholders above all else—above the interests of the workforce, of stakeholders, of supply chains and of the wider community. It does not make economic sense and it is deeply unpatriotic.

Yes, the shares in UK plc may rise and international investors will have their red letter day. What good is that if workers and communities here in this country do not feel the benefit? The Government cling to a model that says that hedge funds on Wall Street are more important, and should have a greater say over the direction of a UK company, than the workers whose mortgages, pensions and livelihoods are dependent on the success of that business. Rather than having a stake in the community, investors are increasingly coming to resemble buy-to-let landlords, skimming off profits with little interest in the community at large, yet they hold all the cards.

As the Bank of England’s Andy Haldane has said, if shareholders hold all the power,

“we might expect high distribution of profits to this cohort, at the expense of ploughing back these profits…or distributing them to workers”.

That is exactly what we have seen. Wealth for the 1% has grown unchecked while wages for the rest have stagnated.

It is not without reason that research and development spend in countries like our own is so low when the focus of investors and directors alike is on maximising the value of shares. That is why we need change. Our companies must look closer to home and above all to their employees, their supply chains and their communities, and give the people they rely on a stake. British workers create the wealth, the services and the products from which shareholders earn their reward. We should give them real influence in the businesses that they work for. We must modernise company law to correct the absurdity that denies employees a say but gives power to hedge funds.

If we give powerful voting rights to overseas investors who speculate in the shares of our major employers, it is right to give the programmer, the secretary, the driver or the picker who works for those businesses some power too. It is not about one or the other. It is about giving employees an equal stake. Having grappled with these issues in practice myself, I know that the big issue is that the more directors are accountable to increasingly anonymous investors, the more our top businesses end up being accountable to no one at all.

Preparing for today’s debate, I was reminded that Keynes wrote that bad ideas die slowly. He also wrote:

“Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”

I am not pretending that reform in this area is easy. If we are honest, the reforms to fiduciary duties by the last Labour Government have had little impact, given that conservative legal advice invariably prejudices short-term shareholder interests. That is why transparency has to be at the heart of any reform. Large companies should report qualitatively on their impact on their communities, their environment and their workers, in the interest not merely of corporate accountability but of good management.

Reforms to section 172 of the Companies Act 2006 will inevitably be an important part of that. The Financial Reporting Council made the point that more focused reporting on exactly how companies are complying with the various elements of section 172 is crucial. That may very well have to become a requirement, as surveys suggests that a large number of shareholders are not aware of the very section on which it is their duty to hold directors to account.

Today Mark Carney supported better reporting on climate change risk, which is undeniably material for a growing number of sectors. However, I have real concerns about how effective section 172 is. After all, it was introduced back in 2006 and since then we have seen some extreme examples of corporate excess and recklessness that have brought the economy to its knees and led to a bail-out of such astonishing proportions that we will still be paying for it for decades to come. Section 172 has been in force for more than 10 years, and in that time a director has had to have regard to the interests of the company’s employees, the impact of the company’s operations on the community and the environment, and the desirability of the company maintaining a reputation for high standards of business conduct. It would be almost laughable if it were not such a desperate example of the corporate neglect which has maligned this country for decades.

Throughout that time we have lacked a regulator with teeth, yet still the FRC says that it should be incumbent on shareholders to enforce the provisions of section 172. The fact that the FRC is only now commencing its investigation into KPMG’s audit of HBOS, some nine years after the collapse and bail-out, should tell us all we need to know. There is a serious problem with the enforcement of our corporate governance regime. The Government need to go much further if they want to see meaningful change. I am not convinced by the argument that we should leave such a crucial aspect of company law to shareholders who have so consistently demonstrated little interest in it and an authority seemingly unwilling to take action.

In its current definition, the duty to promote the success of the company under section 172 is seen as serving shareholder interest. As John Kay found in his review of equity markets, with share trading playing an increasingly important role in the strategy of investors, it is not at all clear how short-term investors can support the long-term good of companies. The long-term success of a company must therefore be codified in changes to section 172.

Changes in the legal duties of directors to prioritise the long-term success of the company at large over shareholders would be a significant shift, but it is one that many voices that previously advocated only minimal change are now calling for. Employees having a statutory role at board level must also be a line in the sand. The Government must not row back on giving workers an equal stake and, with it, bringing their different priorities and fresh perspective to the boardroom. Diversity is vital in governance terms—not for moral or representative reasons, but to challenge and address what Margaret Heffernan has termed “wilful blindness”.

With that in mind, I would like to ask the Minister what proposals she has discussed and considered. Much has been said about introducing a statutory role, with a third of the board being drawn from workers, whose representatives would themselves be elected. Has the Minister considered those specific proposals? What assessment has she made of the quality of reporting on environmental, social and governance issues and the impact it has had on internalising costs? Has the Minister considered the need for advisory panels to sit alongside the board, which would draw from those directly referred to in section 172, bringing a much-needed voice to directors’ responsibilities under that section?

Surely the long-term goal has to be allowing other stakeholders an equal stake in holding the board and directors to account. The Government simply cannot afford to row back on that reform. At the heart of it is the crisis that Carney referred to: people lack a stake, and they cannot see a way to exert influence.

When I was working in the City of London, the risk taking, bonuses and pay packets were viewed as the symbol of the corporate neglect that has done so much to shake trust in big business and that played its part in bringing our economy to its knees. No doubt those things were and still are grotesque, unchecked by shareholder power and in need of urgent reform. There is a crisis of legitimacy over who governs our companies and, in turn, whose interests they act in. The Government would be wise to seize that with both hands, because we cannot ignore it any longer.

[The Parliamentary Under-Secretary of State for Business, Energy and Industrial Strategy (Margot James)]

I congratulate the hon. Member for Sheffield, Heeley (Louise Haigh) on securing today’s debate on corporate governance and social responsibility. I know it is an area in which she has a long-standing interest and considerable expertise born of her previous career—she and I share a business background. However, I listened carefully to what she said, and I do not fully recognise the picture of corporate life she has painted, although, certainly, some of it had strong resonance.

We require no reminder of just how important it is that business is conducted in a socially responsible way. There are over 3 million businesses in the UK, from small start-ups to large established businesses with a presence across the globe. They provide employment for over 26 million people. Whether large or small, they are a critical part of our society. They are not in some way separate from it. The way businesses operate and the decisions they take have a big impact on their employees, customers and suppliers and on the communities in which they are based.

The Government have a key role in setting minimum legal standards that businesses must meet in areas such as employment and consumer protection, environmental standards, and the protection of creditors in the event of insolvency. These provide a vital underpinning for business activity; it is the corporate and legal responsibility of business to comply with that framework, and I believe the vast majority do. Where businesses fall short, they are rightly held to account.

However, corporate responsibility and the way businesses manage their impact on society go beyond simple legal compliance. If we are to achieve our objective of an economy that works for everyone, we need more businesses to aim at the high standards of responsible business practice achieved by our best companies. The Government’s role in that context is to encourage those businesses that lead in good practice and to encourage others to follow suit.

The hon. Lady mentioned diversity in senior business management and at board level. We are encouraging business-led moves towards a more diverse and inclusive culture in the top management of our biggest companies that will set a lead for others to follow. Boardrooms should mirror wider society, and businesses should make the most of all the talent they have in their diverse workforces. We are following up the success in increasing representation of women on boards of our biggest companies by working with businesses to ensure that more talented women achieve senior executive roles. We welcomed the report last month from Sir Philip Hampton and Dame Helen Alexander, who are now pressing ahead with proposals to drive up the representation of women at senior executive level and build on the pipeline for female management and talent.

We also welcomed last month the launch of the report by Sir John Parker and his recommendations for addressing the worryingly low level of representation of black and minority ethnic directors in UK boardrooms. Half the FTSE 100 companies do not have ethnic minority representation on their board, and that is shameful. Diversity at the top of our businesses is about trust. It shows workforces that their boards are representative of them and that routes to the top are open to them. People want to believe that if they work hard they too can get there, whatever their background.

As the hon. Lady reminded the House, the Government have recently published a Green Paper on corporate governance reform in which we are exploring options for strengthening aspects of our corporate governance framework. The UK has a good reputation for corporate governance that combines high standards with low burdens, but this reputation can be maintained only if Government and business review and upgrade those standards from time to time. She mentioned several recent reports on corporate governance, which followed landmark reports by Cadbury, Greenbury and Hampel in the 1990s.

The Green Paper invites views on three main areas. First, it asks for views on options to strengthen shareholder influence on executive pay, to improve the transparency of reporting on executive pay, and to strengthen the link between executive pay and long-term company performance. The hon. Lady was right to point out that the gap between rising CEO pay and corporate performance had grown too wide in recent years.

Secondly, the Green Paper asks for views on options for strengthening the connection between the boards of directors of companies and their employees, customers, and other stakeholders. All the best companies know that there are economic as well as societal benefits to be derived from maintaining strong links with interested groups. However, we need to consider what more can be done to ensure that all UK companies are equipped with an appropriate model of employee, customer, and wider engagement.

Finally, the Green Paper seeks views on whether some of the features of the corporate governance and reporting framework covering quoted companies should be extended to our largest privately held companies. Many of these companies have an economic footprint that is equal to that of listed companies. For example, there are approximately 2,500 private companies with more than 1,000 employees. In asking these questions, we want to improve the ability of UK businesses to take decisions that are informed by a wider range of views and better support long-term company performance and sustainability.

[Louise Haigh]

I absolutely support proposals to extend reporting to private companies, but will the Minister comment on how effective the current reporting regime is? Some businesses certainly report at an absolutely excellent level. However, I used to have the arduous and unenviable task of reading through some of these reports, and for many companies it is just a tick-box exercise. The FRC is not sufficiently resourced in terms of staff or sanctions properly to enforce the regime on companies that refuse to report properly and raise their standards, as she rightly said, to those of the businesses that are doing well in this area.

[Margot James]

I agree that the standard of reporting on the non-financial aspects of corporate performance is mixed and varied. One of the purposes of our Green Paper is to bring the standards of the poorer companies in terms of reporting, and indeed within other parameters, up to the standards of the best.

One option is for companies to appoint individuals to company boards to represent these stakeholder views. In the case of employees, this could be someone who works for the company—a worker representative. There is nothing in UK law to prevent unitary boards from including worker representatives as full members. Indeed, such arrangements can work well for some companies, FirstGroup plc being the best-known example. But very few UK companies have adopted it. There are undoubtedly more companies who could benefit from this approach, and the consultation period provides an opportunity for the case to be made.

Given the huge variety of UK companies, it is unrealistic to think that one size will fit all corporate requirements. For other companies a different approach to workforce engagement will work better. That is why the Green Paper makes it clear that we are not proposing to mandate the direct appointment of employees to company boards. Instead the Green Paper looks to generate a debate on the range of options that companies can choose to improve the connection between boardroom and workforce. The best companies know that there are economic benefits to be gained from understanding and maintaining healthy relationships with employees and customers. The key point is to ensure that all companies are equipped with an appropriate model of engagement to deliver a stronger voice for employees and other stakeholders in the boardroom.

The hon. Lady mentioned section 172 of the Companies Act 2006. We are not consulting on amending the wording in that section, but we are consulting on whether, and if so how, companies could provide more information on the steps that directors are taking to fulfil their duties under that section. We are also consulting on how to strengthen the connection between boardrooms and other voices, as I mentioned earlier. We would welcome comment—the hon. Lady’s views will be considered, along with those of other interested parties—on how we could get companies to report more fully on how directors are fulfilling their duties under that section.

I am very grateful to the hon. Lady for initiating this debate, which has drawn attention to the key contribution that businesses can and should make to society. It has also provided an opportunity to set out steps that the Government are taking to raise standards in responsible business practice.

Question put and agreed to.