Examination of Witnesses
Enterprise and Regulatory Reform Bill
12:15 pm
Graham Brady (Altrincham and Sale West, Conservative)
May I welcome the witnesses to the Committee? For the record, please introduce yourselves. I assume that the weight of questions in this session is likely to be on a combination of directors’ remuneration and employment rights, but if there are other aspects that you are particularly keen to comment on, you might wish to alert the Committee to that.
Graham Brady (Altrincham and Sale West, Conservative)
I propose that we take remuneration issues first and the wider issues of employment rights later.
Iain Wright (Hartlepool, Labour)
This question is to all three of you but, Sir David, I think you said in your evidence to the Treasury Committee a couple of weeks ago that there is a need for enhancement in the quality of corporate governance in all corporates, particularly with regard to the management of risk, and the need to be accountable to the providers of capital and the ultimate owners of the business. Is the Bill missing a trick by not incorporating wider points of corporate governance into legislation to ensure that we can tackle directors’ excessive remuneration?
Sir David Walker: If the question is solely about executive remuneration, the Bill needs to be looked at, obviously in the light of what the Secretary of State said yesterday. Subject to seeing the detailed drafting—as we all know, the devil is sometimes in the detail—my view is that if what he was proposing yesterday is incorporated into the Bill in some way, that is just about right for what is needed in the remuneration area.
Your question was also wider. I think that tricks are not being missed. Certainly since I produced my report, which principally focused on financial institutions, banks and life assurance companies but had wider implications, the Financial Reporting Council, which reports to the Treasury Committee and the Business, Innovation and Skills Committee, has done a lot, certainly in line with my recommendations, and I think more widely. I think it is now a time when we watch. Leaving aside the remuneration area, where there is immediately more to be done through this legislation, I think that for the rest a lot of plants have been planted and it is now time to watch them grow.
On the early signs, I can give two examples. On engagement by shareholders with the boards of the companies that are accountable to them, it is early days, but I think that shows a lot of promise. In the remuneration case, the shareholder spring is part of that, but it is a much wider thing. In the other area, certainly in financial institutions, alongside regulation, an improvement in the quality of board-level decision taking through more serious approaches to risk at board level is now palpably in place.
Deborah Hargreaves: Could I just make a point about boardroom diversity, because I think that the Bill is missing a trick in that sense and particularly with regard to remuneration committees? In some research that we did, we found that remuneration committees consisted broadly of ex-directors, serving directors and bankers. Only 10% of remuneration committee members in the FTSE 100 come from diverse backgrounds. There is evidence to show that more diverse boards make better decisions. We recommended that an employee should sit on the remuneration committee. That is important to present some sort of challenge in the making of executive pay decisions, which tend to be rubber-stamped by the remuneration committee. There is not enough challenge. The thinking tends to be very similar among people who are very comfortable with large numbers. We felt that more diversity in boards in general, and in remuneration committees in particular, would start to address some of the excesses in executive pay.
Iain Wright (Hartlepool, Labour)
Mr Beecroft, do you agree that there is somehow a bit of a cosy club in the boardroom? Is there a direct link between remuneration committees, remuneration consultants and the ratcheting up of executive pay in recent years?
Adrian Beecroft: This is not my special subject in the way that it might be for other people, but yes, I do think that there is a problem with the circular nature of directorships, with people being on other people’s boards and there not being more of an independent voice on remuneration committees.
Iain Wright (Hartlepool, Labour)
Do you agree—I will ask you this as well, Sir David, if I may—with the recommendation in the High Pay Commission report that we should have employees on remuneration committees to improve accountability and even transparency of decision making? The chief executive would need to look the worker in the eye and say, “This is why I’m worth what I want to be paid.”
Sir David Walker: No, I don’t agree with that. I hesitate to differ, but I am some distance from Deborah Hargreaves on this. I am for diversity in the general sense, but worker representation is not diversity in the normal sense of the term. When we talk about diversity, we have in mind gender, ethnicity and so on. There is an argument to be made for worker representation, but I think it is part of a much larger argument, which I would preface by asking why there should be worker representation only on the remuneration issue. If you take a financial institution, for the future of the entity and the well-being of those who are employed within it, the determination of the risk appetite or the strategy of the entity is actually for the employees a much bigger question than the remuneration of the executive board. Worker representation in remuneration committees is a proposition with much wider implications.
Deborah Hargreaves: I am of course in favour of an employee representative on the board as well. Only one FTSE 100 company has an employee on the board, and that is FirstGroup. The employee representative is a ticket collector from south Wales. When we interviewed Tim O’Toole, the chief executive of FirstGroup, he said he made a very valid and important contribution to discussions that went on at board level.
Iain Wright (Hartlepool, Labour)
Could I ask about the statement that the Secretary of State made to the House yesterday, particularly with regard to annual binding votes on future remuneration policy? I was sitting on my Front Bench when the Secretary of State made his statement, and it was very vague in respect of when an annual binding vote would be necessary. What would constitute change to the policy? He refused to answer that properly. Do you have any notion of what change would mean? Also, do you agree with the comment in the Financial Times editorial today that the Secretary of State has missed a trick when it comes to annual binding votes? Sir David, I will start with you, but I would like comments from all three of you.
Sir David Walker: There are two questions I draw from that. First, what is a change in policy? I do not expect there is a difference between Deborah Hargreaves and me on this; we will see. I have been chairman of a remuneration committee for a long time—I am no longer but I was until last year—and I am pleased to say it got awards for the best remuneration report, or something or other. I say that because I spent a lot of time on the policy. Good remuneration committees—of which there probably are not enough, so what Vince Cable is proposing will, I think, improve their quality and performance—know when a policy change is likely to be material, and they will have a lot of discussions about changing the long-term incentive plan or the bonus deferment arrangements. I think that remuneration committees know when something material is being changed, and I am totally supportive of the proposition that a binding vote should be required every three years if the policy approved two years ago is changed next year.
There is an added reason for being satisfied with what Mr Cable proposed. If a remuneration committee said that it had not changed its policy but shareholders came to the view that it had, when they vote in an advisory way on what happened in 2011 or 2010, they can reflect their dissatisfaction with what was done, and that will force, under these ingenious proposals, a binding vote on policy for the next period. I think that that is a satisfactory outcome.
Iain Wright (Hartlepool, Labour)
Deborah, what did you think of the Secretary of State’s statement yesterday? Did it go far enough?
Deborah Hargreaves: If you vote every three years on pay policy, it is important that that policy is detailed enough for you to have an effect. The danger is that it could turn into a box-ticking exercise, where you vote on general boilerplate policy recommendations, rather than nitty-gritty details and figures. I felt that an annual vote would include more figures and more detail, and give shareholders more power to make informed decisions about what is going on in relation to pay at the company. If it happened every three years, the fear is that they may be voting on something vaguer and more bland.
Adrian Beecroft: They have appointed people to run it who have a lot more internal knowledge of the business, the competition and what is happening around the world. Where I was going in my response was to say that I think it is more sensible to do it every three years, rather than every year, because people will pay more attention, focus and get more understanding if they only have to do it every three years.
Sir David Walker: I agree with Deborah Hargreaves. The concern that it might just be boilerplate and bland platitude is a real one. I do not think it will be. Having been involved in the writing of remuneration reports, I know that it is very hard to do it without being pretty specific. If people are not specific, it is up to the shareholders to say, “We are not satisfied with this and we will vote it down.” Powers are being given to the shareholders and, in the balance and perspective of all this, I think it is right that we are laying additional obligations on boards. We are also trying to lay obligations on shareholders to engage properly. To go back to your first question about the performance of boards, if this exercise is to succeed, it depends as much on the engagement of shareholders as it does on how boards behave on matters such as remuneration.
David Mowat (Warrington South, Conservative)
The Bill’s proposals on high pay focus on FTSE directors, but are we missing something, Deborah, because other highly paid groups are excluded? For some reason, we seem to be a lot less concerned about partners in accounting firms, law firms and consultancy firms, directors of American banks who work here and are not covered by the proposals, and about other types of employee, such as footballers. Are we focusing on the wrong thing? At least the people on whom we are focusing run something.
Deborah Hargreaves: The focus is specifically on executives, but do not forget that, as a group, they have huge influence in setting pay references across the board, not for footballers perhaps, but certainly for high-paid law firms and accountancy firms. The pay of FTSE 100 directors is very visible and has to be laid out in a specific form in the annual report, so there is more information available about what they get paid, which is why the focus has tended to shift towards them. They are a very influential group of people and they tend to affect pay scales in the public sector as well, given that there is some movement between the two. I think it is right to focus on executive directors in the FTSE 100, but the focus should also be broader and we should be concerned with pay levels and pay differentials within the economy as a whole.
David Mowat (Warrington South, Conservative)
So what about directors of subsidiaries of US banks, such as a director of Goldman Sachs working in London? Should that be included?
Deborah Hargreaves: We have called for broader transparency particularly at banks, in the tier below board level and for those who are taking risks where big bonuses are paid, because at the moment very little information is available. Sir David knows better than I do that there is not very much information available about who is paid what in financial services companies.
David Mowat (Warrington South, Conservative)
To paraphrase, what you are suggesting is that the thrust of this legislation on publicly quoted companies may affect remuneration at City firms of solicitors, many of whom earn far more than most directors of public companies?
David Mowat (Warrington South, Conservative)
Do you not think that we might disincentivise people from running our great companies? We would have them effectively operating in other sorts of organisations, such as the ones that I have mentioned, which might have less added value. Is there a risk of that?
Deborah Hargreaves: It is wrong to assume that everyone is motivated purely by money. Most executives have a lot of other motivations. Money is important, and it is important in terms of how they compare with their peers, but they are motivated by much more than that, including leaving a legacy and bringing on company strategy. A lot of the executives we interviewed had been approached with offers for higher paid jobs elsewhere, but they had turned them down because they were committed to that company and were keen to pursue their strategy there. I think it is wrong to say that they are all motivated by money.
David Mowat (Warrington South, Conservative)
No; I completely agree with that, although we are talking about money here, which is the reason why we have got the legislation and all that goes with it.
Chi Onwurah (Newcastle upon Tyne Central, Labour)
One of the reasons given most often for the very high pay of FTSE 100 and other executives is the necessity of attracting talent from a very small but global and very moveable talent pool. Is the supply of top talent so small? Given that it is generally drawn from a very narrow section of society—we have talked about diversity, and the lack of women and ethnic minorities on boards—do you think that that is a credible justification for such high salaries?
Deborah Hargreaves: No, I do not. It is interesting that pay at the top is seen as an investment in global talent, whereas pay for the rest of the work force is just seen as a cost. There is some justification, given that executives are in a global talent pool, but if you look at the figures such people tend to move around a lot less than they say they do. It is very seldom that a top executive from Britain, for example, will go and lead a big company in the US, where pay levels are a lot higher.
The recruitment process to the executive ranks is fairly rigid, and it is one of the reasons why there is not more competition for these jobs. Executives are encouraged to bring on their successor—grooming a successor is one of their most important jobs—but the successor often does not come from within the company, and companies always pay more to bring in an outside director. There is something about planning succession that is not going right.
The global talent pool is often cited as a reason for paying huge amounts, as is competing with other countries, but executives tend not to move. In addition, this pay debate is going on around the world; Britain is not the only country that is having such discussions. Top pay is on the agenda politically in many other countries, so it is not necessarily going to be the case that you can leave and go to a higher paying job elsewhere.
Julian Smith (Skipton and Ripon, Conservative)
Deborah, I think your organisation has raised some really important issues, particularly in the last year. But would you accept that ultimately in a capitalist system there is a real limit to what Government can do, and that those actions are largely nudges and maybe firm nudges sometimes? There has to be a clear message to populations that with globalisation and capitalism, which may not be a perfect system, there will be extremes of pay. Would you accept that?
Deborah Hargreaves: Yes. I think there is a limit to what Government can do. These businesses are obviously owned by shareholders and it is up to shareholders to take action, but we have also said that there are other stakeholders involved here and employees have just as much—if not more—at stake in a company doing well as the shareholders do. So we have said that there should be a place for employees in making these decisions, and in having their voice heard in the boardroom. And the public has a legitimate interest in some of these issues. This pay debate has become so toxic now that some chief executives have started to question whether it affects their licence to operate in the UK; I think that trust in companies has been undermined to such an extent. Therefore pay becomes a public policy issue, although I would say that if you get the structures right I think it can resolve itself.
Julian Smith (Skipton and Ripon, Conservative)
Thank you, and I refer members of the Committee to my declaration in the Register of Members’ Financial Interests.
Sir David Walker, the bank that you were involved with was competing at the epicentre of a global industry about which there has obviously been a lot of debate recently, but which was bringing huge amounts of tax revenue to this country. Could you describe a little more—I guess that it is in answer to Chi’s question—about what it is like competing for global talent?
Graham Brady (Altrincham and Sale West, Conservative)
I am sorry, but before the answers, I must say that I do not think that Mr Smith has referred to his entry in the Register of Members’ Financial Interests before this morning. I wonder if you could elucidate a little, Mr Smith.
Julian Smith (Skipton and Ripon, Conservative)
I used to run a headhunting company and I have an interest in a recruitment company; it does not do board-level work.
Sir David Walker: I preface my remarks by saying—this may surprise Deborah Hargreaves and members of the Committee—that I think these pay levels in the banking sector have been excessive, so I am in the critical end. But I will respond to your question, Mr Smith, a little bit in line with the response I made to an earlier question. As you will know in the profession that you described, the key thing in any business that is important—such as a major bank, or a major anything—is to get the best people to do the most significant jobs. So pay is an ingredient in that, but it is not where you start. You start thinking of the specification of the job and then the equipment of the individual who is being proposed to fill it, and there might be a long list.
It is the case that in the business in which I have spent much of the last 20 years, which is, widely, finance and, in particular, investment banking—but not only that—pay has been at very high levels and pay is very probably a bigger ingredient in the motivation of individuals working in that industry than it is in other industries. And I have to say that I regret that.
However, we now have a combination of initiatives that are in train that I think are bringing moderation. We have a recession, which applies to the banking industry and is having a very dampening effect, and we have much tougher financial regulation, which has now extended its tentacles—it is not the subject of this Bill, but financial regulation in respect of banks and others itself has very clear guidelines on the remuneration parameters. And now we have the pressure being brought by an initiative of this kind, not only in relation to banks.
Therefore I think the public sector initiative that is being taken is now very strong and I would be at the end of the spectrum that expects to see—over the next year or two—quite a lot of change in this space, in a direction that I think probably most of us would welcome, which is moderation.
Andrew Bridgen (North West Leicestershire, Conservative)
I would just like to get something on the record and see the response from the panel. I am slightly uncomfortable with the phrase “high pay”, because that is a very relative term. There is nothing wrong at all with high pay if it is accompanied by high performance. The problem is if you have high pay and average or poor performance; at any level, whatever high pay is, that will is always be a problem for an organisation. I would just like to see whether the panel agrees with that.
I hear what Deborah Hargreaves said about diverse boards and I am willing to think that it could be correct. However, it really does not matter what I think. Boards wish to run successful companies. If diverse boards are going to make companies more successful, they will outcompete their competitors. Market forces will take place, and market forces are completely gender-blind and colour-blind. They are not discriminatory. There is no need, therefore, for Governments to do anything because the market will sort itself out and these diverse boards will take over the marketplace. How can anyone disagree with that?
Andrew Bridgen (North West Leicestershire, Conservative)
You say that these diverse boards are outcompeting their competitors. In that case, they will, will they not, and they will take over. There is no need then for the dead hand of government to land on the chairman’s shoulder again.
Deborah Hargreaves: One of our recommendations as the High Pay Commission was that all non-executive appointments should be publicly advertised, which seems a very modest recommendation but is not the case at present. So, anyone who wants to join a board has to be known to headhunters, who then approach individuals and set up a shortlist. The shortlist is always required to have a couple of women on it. Women I know who sit on boards tell me that they have been approached time and again to go on shortlists for other boards because once you are in the system it is easier to get on to the shortlist. If you are an outsider trying to get in, it is much harder. The appointment process is not particularly open.
Andrew Bridgen (North West Leicestershire, Conservative)
Mr Beecroft, do you argue with the logic that I presented?
Graham Brady (Altrincham and Sale West, Conservative)
In that case, we can move on to the broader employment rights area.
Iain Wright (Hartlepool, Labour)
My question is to you, Mr Beecroft. After my line of questioning, you may want to call me a socialist. If you can, that would be very helpful to me, certainly in my local area.
Following No. 10’s request to you to carry out your piece of work on employment law, in compiling your report did you meet with the following people or organisations? A yes or no will suffice. The Prime Minister?
Graham Brady (Altrincham and Sale West, Conservative)
Mr Wright, I am sure that you will make the question directly pertinent to the Bill.
Iain Wright (Hartlepool, Labour)
I certainly will. Mr Beecroft, did you meet anybody who has gone through the employment tribunal procedure?
Iain Wright (Hartlepool, Labour)
My final question is, did you meet the Gangmasters Licensing Authority?
Lorely Burt (Solihull, Liberal Democrat)
My question is for Mr Beecroft as well. The Secretary of State has indicated that he will not implement the Beecroft review. Obviously, a number of the aspects of the review have been very controversial—for example, no-fault dismissal, or “fire at will” as it has been termed. I just wondered on reflection, if you could choose one or two things, what do you think we as a Committee should still be reconsidering to put into the Bill?
Adrian Beecroft: I would make the point that the Secretary of State has made it clear that something like 17 of the recommendations, which were not particularly politically contentious and which are generally viewed as sensible, are being implemented. I think the distinction between small and large businesses is important. The burden on the management of businesses employing five, 10 or 15 people of complying with large numbers of regulations distracts both from their ability to develop and grow the business and from their wish to employ more people. My suggestions for exceptions for smaller businesses are worthy of a lot of thought.
The Labour party in Australia has implemented my suggestions for businesses of less than 15, in terms of no-fault dismissal, on the basis of prior experience with a wider scheme implemented by the Conservative party there. In Germany, where they experimented with eliminating regulations for businesses of up to five people, after seeing what happened they extended that to businesses of up to 10 people.
In September 2009, 13% of businesses said that regulation was the most important thing stopping them from growing, second only to the state of the economy. I know the statistics are a bit different now, but that was the case three years ago and I am sure the problems of regulation have not moved down the list, and if they have got less it is because other things have got more important. But if so many small businesses—the SME study—feel that that is the second biggest thing stopping them from growing, it needs attention.
Lorely Burt (Solihull, Liberal Democrat)
I take your point entirely on the burden of regulation being disproportionate to small businesses. Do you think, though, that any employee should be entitled to the same employment rights, whether they happen to be working for a small or big business?
Adrian Beecroft: I think you have to balance up the rights of current employees and the rights of people who are unemployed, but who might be employed if the people running small businesses had the time left to grow the business and the enthusiasm to hire more employees. My judgment, although no doubt people will disagree, is that a modest disadvantage to a small number of people—the Lamb amendment—is strongly outweighed by the benefits there would be to growth and unemployment.
Ian Murray (Edinburgh South, Labour)
I am directing my comments to Mr Beecroft. Relating to what you have just said, did not the number of claims of unfair dismissal in Australia triple when those regulations were brought in? A BIS analysis showed that. We should get some of those figures, if we can.
Ian Murray (Edinburgh South, Labour)
We received evidence on Tuesday from Ed Sweeney at ACAS, who will be responsible for taking forward some of the major pillars of the clauses in the Bill. He said that
“good law requires good empirical”
evidence and
“Anecdotes make bad law.”––[Official Report, Enterprise and Regulatory Reform Public Bill Committee, 19 June 2012; c. 71, Q153.]
Do you agree with him?
Ian Murray (Edinburgh South, Labour)
The figures that we have been talking about are 6% for regulation—all regulation—for small businesses, in terms of the small business index.
Ian Murray (Edinburgh South, Labour)
Thank you for that clarification.
There has been a contention that there might be some compensated no-fault dismissal by the back door when we take all these issues together. In your report, you said that
“even making it easier to remove underperforming employees will in the short run not increase unemployment as they will be replaced by more competent employees.”
What is your empirical evidence and research for that?
Ian Murray (Edinburgh South, Labour)
On your recommendation on compensated no-fault dismissal, you state:
“Such a change would, in my view, produce an instant improvement in performance in a significant part of the national workforce while providing major encouragement to those contemplating increasing their workforce.”
What is your empirical evidence and research for that statement?
Adrian Beecroft: We have heard the results of the various surveys—about the fact that the current legislation discourages people from hiring people, so that half is straightforward. I should say that I was asked to do a two-month piece of work covering all employment law, so I was not able to generate new statistics. I accept the accusation that my views on whether the change would improve the efficiency of people working in businesses are based on conversations with a sample of people, which is not statistically valid.
Ian Murray (Edinburgh South, Labour)
With regard to the clauses in the Bill, your report states that
“at present many claimants who have unfortunately not found a new job have time on their hands and view a free employment tribunal as a no cost option on winning an award.”
Again, which evidence base is that taken from?
Ian Murray (Edinburgh South, Labour)
An honest lawyer? Is that a contradiction in terms? Who commissioned the report?
Ian Murray (Edinburgh South, Labour)
The Minister is, indeed, an employment lawyer.
Will you tell the Committee who commissioned the report?
Ian Murray (Edinburgh South, Labour)
Are you aware that the UK has the third most liberal employment regime in the world, whereas Germany and Australia rank in the high twenties and early thirties out of 36?
Adrian Beecroft: First, having read the bases on which those surveys of international competitiveness are drawn up, I think there are some very arbitrary weightings to different aspects of employment law. Secondly, we need to remember that we are competing with India, China and America, and not just Europe. In many cases, we are doing much better than European countries, so I am not entirely convinced that those statistics are right or that they are relevant.
Ian Murray (Edinburgh South, Labour)
So the evidence base for those statistics is wrong. Would that be a fair assessment of what you have said?
Ian Murray (Edinburgh South, Labour)
On that basis, if the UK is not third, where would you place it out of 36 countries in the world, given your experience?
Graham Evans (Weaver Vale, Conservative)
My question is aimed at Mr Beecroft—and I would really appreciate it if you did not refer to me as a socialist.
Graham Evans (Weaver Vale, Conservative)
That is very kind.
Your report created a big mailbag from particular segments of my constituency. The Bill will turn the pre-claim conciliation process from a voluntary one into a mandatory one. Are you in favour of that change, and how will it benefit businesses in the UK? Secondly, based on your considerable experience, if there was one thing that you could do to encourage growth in the UK, what would it be?
Adrian Beecroft: I think that the mandatory pre-tribunal consultation is an excellent suggestion. The latest statistics that I have seen show that 22,400 out of 50,000 employee tribunal cases were settled by consultation after the tribunal had started, which obviously takes more time and creates more cost for everyone concerned. To move that step to before having the tribunal seems extremely sensible.
As I have said before, the answer to your second question is to start to realise that you need to treat small businesses differently from large ones where regulation is concerned.
Chris Ruane (Vale of Clwyd, Labour)
This question is just to Mr Beecroft. You are a trained scientist who sponsors the Beecroft institute of particle astrophysics and cosmology. As a trained scientist, why have you failed to use empirical evidence, and research and analysis? Why have you relied on anecdotes, stories and personal perspectives from the lawyer down the road? Your report proposes policy by parable and legislation by anecdote. Two statistics that this Committee must have are: how many jobs would be created if your report was fully implemented; and how many jobs, if any, will the Bill create? It is your report, and while it is the Government’s Bill, I am sure you have a perspective on it.
Graham Brady (Altrincham and Sale West, Conservative)
I am delighted that we got to the Bill in that question. I hope that hon. Members will bear in mind the purpose of these hearings.
Chris Ruane (Vale of Clwyd, Labour)
Why are you convinced that there would be more jobs? What empirical evidence has led you to believe that?
Chris Ruane (Vale of Clwyd, Labour)
It is not whether you have studied it or even looked at it. After your report and all your analysis, you still do not know how many jobs.
Chris Ruane (Vale of Clwyd, Labour)
I am asking the questions. Do you know how many jobs—yes or no? You either know or you do not know.
Adrian Beecroft: Can I just have one more go? One of the statistics is that the introduction of pensions auto-enrolment will reduce the number of jobs in the country by 60,000, and a large proportion of those jobs will be in small businesses. That is what the official Government report on pensions auto-enrolment states.
Andrew Bingham (High Peak, Conservative)
Do you feel that the proposals on financial penalties of up to £5,000 on employers who breach workers’ rights has the potential to hit SMEs disproportionately, and particularly micro-businesses?
Adrian Beecroft: I do. Again, you have to weigh up the need to encourage people to follow the ACAS guidelines and so forth with the negative impacts that introducing this £5,000 fine would have. I am sure that a few people would be encouraged to stick to the rules more closely, but most people already know that if you do not stick to the rules, you will have to give a relatively large sum in compensation to the employee, even if the tribunal thinks that they deserved to be fired. I do not think it will have much impact on compliance, which is the objective, but I do think it will enter into the mythology of people saying, “Well, you already had all these costs associated with employing people. If it goes wrong, here’s another £5,000.” While the small print says it may be less for small businesses and so on, the small businesses will never read the small print.
Andrew Bingham (High Peak, Conservative)
That was my next question. The explanatory notes refer to aggravating features meaning that a tribunal may be less likely to find that the law has been breached, and there is a reference to micro-businesses and a limited human resources function. I suspect that I know the answer, but is that sufficient to provide reassurance to micro-business that they are not going to get—
Andrew Bingham (High Peak, Conservative)
So that should be made more obvious to reassure the micro-businesses men who do not have an HR department and are creating employment.
Adrian Beecroft: I do think it is an example of creeping regulation—it is a sort of regulation frame of mind: “We might be able to get a few people more to comply with a bit of regulation, so let’s ignore the secondary effects that it might have.” Government’s urge—more the previous Government than the current one—to regulate anything in sight is very damaging.
David Anderson (Blaydon, Labour)
I agree totally with Mr Brady that we should focus on the Bill, the point of which is to regulate employment in a different way. Mr Beecroft, the report you produced was clearly about advising the Government on how best to do that. Can I ask you specifically about a quote from the report? It states:
“Quantifying the loss of jobs arising from the burden of regulation, and the economic value of those jobs, is an impossible task.”
What empirical evidence and research did you look at to consider any connection between regulation, and economic and employment growth?
David Anderson (Blaydon, Labour)
I am asking you specifically what empirical evidence and research you looked at to arrive at any connection between regulation, and economic and employment growth.
Adrian Beecroft: No, it means that this was viewed as the second most important factor by a number of people. It does not say who thought it was the third or fourth most important. The idea put forward in the House—that just because it is not the most important thing, you should not do anything about it—seems totally fallacious. If you go to the doctor and you are ill with three things, you do not decide to treat just one of them.
David Anderson (Blaydon, Labour)
I agree, and that is why we need to get this right, because I worry that if we do not get this right, people at work will end up in a state of insecurity, and potentially at risk because of a reduction in things like health and safety. Can I ask—
Adrian Beecroft: Can I respond to that? The current suggestion, which I think we are here to discuss, of having protected conversations will help to reduce a climate of fear. At present, quite a lot of people claim constructive dismissal because they are under the impression that somebody is secretly trying to dismiss them. In future, people will be able to have open conversations with employees without the fear that they will get quoted in some tribunal down the line. It is that fear that reduces the openness of employers and does quite a lot to create uncertainty in employees.
David Anderson (Blaydon, Labour)
I have worked as a trade union activist for years with people who were in a much more protective environment than the areas you are talking about with small businesses, and they were very worried before approaching their employers about many things.
David Anderson (Blaydon, Labour)
If you wish, Mr Brady, I can find the evidence, but I shall move on.
The shadow Minister asked about who you had spoken to. When putting your report together, did you speak—
Graham Brady (Altrincham and Sale West, Conservative)
Order. I am sorry, Mr Anderson, but I did try to suggest to the shadow Minister that it should be possible to tie questions more closely to the Bill, rather than the report. I hope that you will do the same.
David Anderson (Blaydon, Labour)
That is exactly what I am doing. I am talking about what is happening in the real world.
David Anderson (Blaydon, Labour)
Absolutely; in the context of what will happen in future if we get this Bill wrong.
Let me give an example. I live in a constituency where Somerfield used to have a supermarket. It was closed as a direct result of the activities of companies that you were involved in, Mr Beecroft. People lost their jobs in that supermarket, and traders had to stop trading because people stopped using the town. Did you speak to anyone like that with real-life experience before you came forward with your proposals?
David Anderson (Blaydon, Labour)
Have you talked to anyone in the real world such as the people I mentioned—the people I represent? They are out of work because of the activities of the company you ran—a company that made a 42% profit.
Adrian Beecroft: I have talked to an awful lot of people who have been made redundant, and I assure you that if we had not taken those steps with Somerfield, a much larger number of people would have been made redundant. Somerfield might well have gone bust if we had not reduced the costs and turned it into a profitable business. Is that a bad thing?
Graham Brady (Altrincham and Sale West, Conservative)
I am sorry to interrupt, Mr Beecroft, but we do not want to be drawn into matters that are entirely outside the scope of the Bill.
Julian Smith (Skipton and Ripon, Conservative)
I have a declaration: I recently purchased two halves of lager and a bag of crisps from Mr Beecroft in order to understand his report better.
I thank you for writing this report. You have raised a number of issues for millions of entrepreneurs and people taking risks throughout the country. Some of those have been controversial, and some have been less controversial, but I thank you for the report. How many jobs have you created, or been involved in creating, during your 20 or 30-year career?
Graham Brady (Altrincham and Sale West, Conservative)
Again, I am confident that you are going to move swiftly to the point of the Bill.
Julian Smith (Skipton and Ripon, Conservative)
When you consider the evidence that the Opposition say they require, do you agree that it is difficult to get it, because one of the biggest barriers for companies is the confidence to take on staff? It is very difficult to produce evidence on that. Could you talk a little more about it?
Julian Smith (Skipton and Ripon, Conservative)
Do you agree that compromise agreements—now settlement agreements—are a good halfway house regarding some of the proposals you made and a voluntary agreement into which no one would be asked to enter without their good will, and where there would be legal representations before anything was concluded? Do you agree that that is quite a reasonable compromise?
Adrian Beecroft: I think it is a very reasonable compromise because, as I said, I think it will encourage open and free conversation. When Paul Kenny spoke to the Committee a couple days ago he said he thought the problem was that employers do not talk to employees enough. This will fix that problem.
Julian Smith (Skipton and Ripon, Conservative)
Would you agree that it is a perfect coalition conclusion—a Tory report, a Labour overreaction, a Minister with subject matter expertise, and a Liberal solution?
Adrian Beecroft: I could not have put it better myself. Could I make one detailed point? The amendment proposing this particular thing talks about the conversations not being confidential if there is any provision in the unfair dismissal legislation that would make the dismissal unfair. To a lay person—I do not know about a lawyer—that seems to say that it will be confidential unless people think they have been unfairly dismissed, in which case it will not. I now understand that it actually means that that applies only to automatic dismissal. There are a number of categories where a dismissal is automatically unfair—they mostly relate to union activity. That could made clearer, if I may dare to say so.
Chi Onwurah (Newcastle upon Tyne Central, Labour)
Mr Beecroft, you are a graduate in physics with an MBA from Harvard, and I am a graduate in electrical engineering with an MBA from Manchester, so I hope we can agree on the importance of the scientific method, by which conclusions are tested through questioning and evidence. Do you agree that decisions about the employment security of individuals should be taken using a scientific approach to evidence and analysis?
Chi Onwurah (Newcastle upon Tyne Central, Labour)
Very good. Thank you. I will take a specific example and I will refer to Mr Beecroft’s report, principally because it deals with an issue about the small business and employee approach to employment rights that I think is important for the Committee. In your report, with regard to the proposed changes on unfair dismissal, you say:
“The result of this change would be that the onus would then be squarely on the employee to perform well enough for the employer to value them as an employee.”
It strikes me that that assumes that the employee is deliberately not performing well enough to be valued, and that that change is entirely in the hands of the employee. However, you also say in your report that those in small business have very few administration skills and very few academic qualifications. Is it not the case that small businesses need to be supported and improved in management skills generally, and that to assume that leaving the employee in fear of being sacked is the only way to improve performance is to condemn employees to a life of insecurity?
Adrian Beecroft: No. I think that only a very small proportion of employees do not give their best, but I do think a small proportion are in that category. The changes that the Bill is making, which I believe will lead to greater communication between employers and employees, can only be good for employee morale.
Chi Onwurah (Newcastle upon Tyne Central, Labour)
With a small proportion of employees not giving of their best, do you agree that good management can make a real difference in employee performance?
Chi Onwurah (Newcastle upon Tyne Central, Labour)
And there will be some employers who are not able to bring out the best in their employees.
Chi Onwurah (Newcastle upon Tyne Central, Labour)
But the measures in the Bill seem mainly to change the roles and rights of employees, rather than to give more support and education skill sets to employers.
David Mowat (Warrington South, Conservative)
I guess that what we are trying to do here is increase the competitiveness of our economy—our labour force—in a way that is fair. I think that we would probably all agree with that. Therefore, the devil is in the detail as to what “fair” is. I was struck by your comment that you can be fair to existing workers and you can be fair to people who do not have jobs at the moment. I guess that I am interested in getting your view, or perhaps the views of the other panellists who have been listening to this section, on whether we wish our labour force to be more competitive and generate jobs like the US. There they can generate small businesses at a far higher rate than we can in my constituency, and I suspect the constituencies of Opposition Members. Are we progressing towards that with this Bill?
David Mowat (Warrington South, Conservative)
So you would expect small businesses to be generated in my constituency that would not have been generated had we not gone forward with the legislation.
Adrian Beecroft: Yes, I would. People may feel that this is anecdotal evidence, but I have one friend who developed his business and sold it when he was 50 and would quite like to start another, but he cannot take on the problems of employee relations that we have been talking about. If my suggestions had been implemented, he would have started a new business. I believe that a large number of people are in that camp.
David Mowat (Warrington South, Conservative)
Do you think that we will get to the state over the next decade or so where we are able to generate small businesses in our country in the way that they have been able to in America?
David Mowat (Warrington South, Conservative)
I would be interested to know whether the other panellists agree that this might help us to generate the new businesses that the country and my constituents need.
Sir David Walker: If I could make an observation very supportive of what I understand Mr Beecroft to be proposing here, I would say, sadly, that the principal block on making progress on this at the moment, as I see it, is not this regulatory stuff, on which change is no doubt needed for the sorts of reasons that Mr Beecroft mentions, but the inability of companies to get credit. The bank problem in circumstances in which the banks are deleveraging and not lending is very serious, and it needs to be put—
David Mowat (Warrington South, Conservative)
I agree with that, but two wrongs do not make a right. To that point, the credit issues also apply in the US—
David Mowat (Warrington South, Conservative)
Yet it seems to be able to generate so many more small businesses than we can. Why do you think that is?
Geraint Davies (Swansea West, Labour)
Mr Beecroft, the OECD has said:
“There appears to be little or no association between employment protection legislation strictness and overall unemployment”.
Did you take its work into account?
Geraint Davies (Swansea West, Labour)
In other words, instead of using an econometric quantitative study that has international status with a large amount of data, you relied on, as you quoted, 13% of responses to an out-of-date opinion survey, which is qualitative. It just seems to me that you have failed to look at robust empirical evidence and relied on unreliable out-of-date anecdotal evidence to come to these prejudicial conclusions—
Geraint Davies (Swansea West, Labour)
—that have led to the Bill. If you put forward proposals that you should beat workers with sticks, and end up with other proposals that you should just be allowed to poke them and intimidate them, then obviously that has a bearing on the Bill.
I just want to know why you did not look at reliable quantitative studies, and instead relied on unreliable, out-of-date opinion data that did not translate into the real world. It was just people asking, “Are you concerned about regulation?” “Yes.” From that, you came up with a load of proposals that seem to be an open door for intimidation and bullying. Do you agree?
Geraint Davies (Swansea West, Labour)
Obviously, you did not take the OECD stuff seriously into account.
Graham Brady (Altrincham and Sale West, Conservative)
We are here to investigate matters relating to the Bill.
Julian Smith (Skipton and Ripon, Conservative)
On a point of order, Mr Brady. Is stream of consciousness acceptable at Committee stage?
Graham Brady (Altrincham and Sale West, Conservative)
After a very long morning at 11 minutes past 2, I think any consciousness is probably acceptable. [ Laughter. ] I would ask Mr Davies to move quickly to his point.
Geraint Davies (Swansea West, Labour)
The Secretary of State has suggested, in relation to the Beecroft proposals for the changes, that undermining job security and consumer confidence would be crazy, and that your proposals were in danger of doing that. Did you make an assessment or an analysis on how the proposals might affect or undermine the reputation of business or consumer confidence?
Geraint Davies (Swansea West, Labour)
Why do you think that the FSB in Wales came out against your proposals, in terms of the reputation of business and consumer confidence and the reputation of their businesses, and the feeling that there was an open door to allow businesses not to have a balanced relationship with employees?
Graham Brady (Altrincham and Sale West, Conservative)
I think we probably have time for just one more crisp and relevant question.
Andrew Bridgen (North West Leicestershire, Conservative)
We have heard in Committee about the real world experience of Opposition Members. It seems more like some sort of parallel universe where ever-increasing regulation has no effect on employers. If it has no effect on employers, what is the point of bringing it in?
The importance of the Bill, Mr Beecroft, and I hope you agree with me, is immense, and is on two levels. The real rolling back of regulation—though not, perhaps, as drastically as we might like—for the first time in living memory, is, for most employers, a totemic point, a watershed.
Andrew Bridgen (North West Leicestershire, Conservative)
No. You have had your go.
It also has a symbolic and placebo effect. Most small businesses out there do not believe that regulation will ever stop, and that it is ever-increasing. This will be a demonstration that that is not the case. Both of those things, the real effect and the effect on morale—
Graham Brady (Altrincham and Sale West, Conservative)
Mr Bridgen, please leave some time for the answer.
Adrian Beecroft: I think if you look at the two countries that have done things akin to what I was suggesting, Germany and Australia, both with centre or left-wing Governments, they are both pleased that they have done it, and are happy with the results. They believe that it has been very good for consumer confidence, growth and employment.
Graham Brady (Altrincham and Sale West, Conservative)
I don’t really have time to take another question. I have seconds left.
Graham Brady (Altrincham and Sale West, Conservative)
You may ask a point of clarity, Mr Murray, but if we reach a quarter past I have to call order.
Ian Murray (Edinburgh South, Labour)
Mr Beecroft suggests that there is no evidence at all for current employment law, but I wondered whether he was aware of the three Donovan commissions from 1965 to 1968 and the International Labour Organisation recommendation 199 that took years to come to fruition?