Clause 57 - Directors’ remuneration: effect of remuneration report
Enterprise and Regulatory Reform Bill
Hugh Bayley (York Central, Labour)
I remind the Committee that with this we are discussing the following:
Government new clause 5—Payments to directors: members’ approval of directors’ remuneration policy—
‘(1) In section 421 of the Companies Act 2006 (contents of directors’ remuneration report) after subsection (2) insert—
“(2A) The regulations must provide that any information required to be included in the report as to the policy of the company with respect to the making of remuneration payments and payments for loss of office (within the meaning of Chapter 4A of Part 10) is to be set out in a separate part of the report.”
(2) After section 422 of that Act (approval and signing of directors’ remuneration report) insert—
“422A Revisions to directors’ remuneration policy
(1) The directors’ remuneration policy contained in a company’s directors’ remuneration report may be revised.
(2) Any such revision must be approved by the board of directors.
(3) The policy as so revised must be set out in a document signed on behalf of the board by a director or the secretary of the company.
(4) Regulations under section 421(1) may make provision as to—
(a) the information that must be contained in a document setting out a revised directors’ remuneration policy, and
(b) how information is to be set out in the document.
(5) Sections 422(2) and (3), 454, 456 and 463 apply in relation to such a document as they apply in relation to a directors’ remuneration report.
(6) In this section, “directors’ remuneration policy” means the policy of a company with respect to the matters mentioned in section 421(2A).”
(3) In section 439 of that Act (quoted companies: members’ approval of directors’ remuneration report), in subsection (1), at the end insert “other than the part containing the directors’ remuneration policy (as to which see section 439A).”.
(4) After that section insert—
“439A Quoted companies: members’ approval of directors’ remuneration policy
(1) A quoted company must give notice of the intention to move, as an ordinary resolution, a resolution approving the relevant directors’ remuneration policy—
(a) at the accounts meeting held in the first financial year which begins after the coming into force of section (Payments to directors: members’ approval of directors’ remuneration policy) of the Enterprise and Regulatory Reform Act 2012 or at an earlier general meeting, and
(b) at an accounts or other general meeting held no later than the end of the period of three financial years beginning with the first financial year after the last accounts or other general meeting in relation to which notice is given under this subsection.
(2) A quoted company must give notice of the intention to move at an accounts meeting, as an ordinary resolution, a resolution approving the relevant directors’ remuneration policy if—
(a) a resolution required to be put to the vote under section 439 was not passed at the last accounts meeting of the company, and
(b) no notice under this section was given in relation to that meeting or any other general meeting held before the next accounts meeting.
(3) A notice given under subsection (2) is to be treated as given under subsection (1) for the purpose of determining the period within which the next notice under subsection (1) must be given.
(4) Notice of the intention to move a resolution to which this section applies must be given, prior to the meeting in question, to the members of the company entitled to be sent notice of the meeting.
(5) Subsections (2) to (4) of section 439 apply for the purposes of a resolution to which this section applies as they apply for the purposes of a resolution to which section 439 applies, with the modification that, for the purposes of a resolution relating to a general meeting other than an accounts meeting, subsection (3) applies as if for “accounts meeting” there were substituted “general meeting”.
(6) For the purposes of this section, the relevant directors’ remuneration policy is—
(a) in a case where notice is given in relation to an accounts meeting, the remuneration policy contained in the directors’ remuneration report in respect of which a resolution under section 439 is required to be put to the vote at that accounts meeting;
(b) in a case where notice is given in relation to a general meeting other than an accounts meeting—
(i) the remuneration policy contained in the directors’ remuneration report in respect of which such a resolution was required to be put to the vote at the last accounts meeting to be held before that other general meeting, or
(ii) where that policy has been revised in accordance with section 422A, the policy as so revised.
(7) In this section—
(a) “accounts meeting” means a general meeting of the company before which the company’s annual accounts for a financial year are to be laid;
(b) “directors’ remuneration policy” means the policy of the company with respect to the matters mentioned in section 421(2A).”.’.
Amendment (a) to new clause 5, in subsection (1), at end insert—
‘(2B) The regulations must include information regarding the 10 highest paid employees in the company outside of the board and executive committee”.’.
Amendment (b) to new clause 5, in subsection (4), leave out new section 439A(1)(a) and (b).
Amendment (c) to new clause 5, in subsection (4), leave out new section 439A(2) and (3).
Amendment (d) to new clause 5, in subsection (4), leave out new section 439A(5).
Amendment (e) to new clause 5, in subsection (4), leave out new section 439A(6)(b) and insert—
‘(6A) The resolution under subsection (1) in respect of directors’ remuneration policy must obtain the approval of 75 per cent. of members on the share register of the quoted company.’.
Amendment (g) to new clause 5, at end add—
‘(5) In section 412 of the Companies Act 2006 (Information about directors’ benefit: remuneration), after subsection (2)(e) insert—
(f) disclosure of fees paid to recruitment consultants in respect of recruitment consultancy work and non-recruitment consultancy work for the company in the last year.”.’.
Amendment (i) to new clause 5, at end add—
‘(6) The Secretary of State shall, within three months of the passing of this Act, make provision by regulations under section 1277 of the Companies Act 2006 requiring the provision of information about the exercise of voting rights in respect of directors’ remuneration policy.’.
Amendment (j) to new clause 5, at end add—
‘(7) After section 227 of the Companies Act 2006 (Directors’ service contracts), insert the following new section—
“227A Appointment of remuneration consultants of public company
(1) Remuneration consultants may be appointed for each financial year of the company.
(2) For each financial year for which a remuneration consultant or consultants is or are to be appointed (other than the company’s first financial year), the appointment must be made before the end of the accounts meeting of the company at which the company’s annual accounts and reports for the previous financial year are laid.
(3) The directors may appoint a remuneration consultant or consultants of the company—
(a) at any time before the company’s first accounts meeting;
(b) to fill a casual vacancy in the office of remuneration consultant.
(4) The members may appoint a remuneration consultant or consultants by ordinary resolution—
(a) at an accounts meeting;
(b) if the company should have appointed a remuneration consultant or consultants at an accounts meeting but failed to do so;
(c) where the directors had power to appoint under subsection (3) but have failed to make an appointment.
(5) A remuneration consultant or consultants of a public company may only be appointed in accordance with this section.
(6) In this section a “remuneration consultant” means a person who is appointed to advise on the terms of directors’ service contracts.”.’.
Government new clause 6—Payments to directors of quoted companies.
Government new clause 7—Payments to directors: minor and consequential amendments.
Government new clause 8—Directors’ remuneration reports and payments to directors: transitional provision.
Government new clause 17—Remuneration committees and non-executive directors.
Government new clause 18—High Pay Commission.
Norman Lamb (North Norfolk, Liberal Democrat)
I start by reflecting further on the Financial Times, which the hon. Member for Hartlepool has been keen to quote from because it is the only source of support he can find for the Opposition’s position. Under the headline, “Cable to unveil revised executive pay plans” the Financial Times states:
“However, big investors praise Mr Cable for heeding the advice of shareholders, who do not want to micromanage companies with ‘overly bureaucratic’ rules…The head of equity at a leading European fund manager, which is also a top-20 shareholder of many FTSE?100 companies, said:”
Norman Lamb (North Norfolk, Liberal Democrat)
I am quoting from the Financial Times. The hon. Gentleman will have to take his complaint there. To continue:
“‘Shareholders want power when chief executives are abusing their positions, but we do not want to manage every little detail.’”
As the Labour party appear to want to do. That was an unnecessary aside from me.
“‘We are a check on companies, not their managers.’”
What matters is getting this distinction right between the role of shareholders and the role of those who manage the company. Another leading European fund manager is quoted by the Financial Times:
“It has been an encouraging process?.?.?.Vince Cable is listening. He started out as a bit dictatorial”—
He will love that—
“but he has shown he is a listener. We do not need excessive, legally binding rules.”
The Financial Times also analyses different elements of the package. On pay policy its verdict is:
“The business secretary has moved quite a way to meet company and investor concerns. He won praise for achieving a balance”.
It goes on to say that not everyone is happy.
Norman Lamb (North Norfolk, Liberal Democrat)
I have said quite enough. At least I have revealed that some were not entirely convinced. The consensus of opinion was that he had achieved the right balance. Back to where I had got to: on the specific issue of employee involvement, which was the subject of one of the Opposition’s amendments, we do not believe in mandating that all companies must have employees on boards or board committees. Indeed, it is fair to say that in 13 years in government the Labour party chose not to legislate for employees on boards. We have to see the amendment in the context of what happened with Labour in government.
Fiona O'Donnell (East Lothian, Labour)
The Minister has just said that he does not believe in mandating all companies to have employees on boards. Does that mean that he believes that some companies should?
Norman Lamb (North Norfolk, Liberal Democrat)
Absolutely. The hon. Lady may have seen that we have launched a major initiative on employee ownership. I strongly advocate employee ownership. If one can find ways of engaging employees, and if possible giving them a stake in the enterprise where they work, there can be very impressive results. Cass business school has done a thorough analysis of the performance of employee-owned companies, as against other companies. It demonstrates greater resilience in difficult economic times, more profitability, especially in smaller companies, and certainly more productivity. The benefits for companies from engaging employees are clear and apparent. I welcome any company that chooses to act in that way, but it is not for the Government to mandate companies to do that.
Lorely Burt (Solihull, Liberal Democrat)
Before we broke for lunch, the Minister was responding to my point. I was trying to get some kind of agreement that because diversity on boards is important, the Government could legislate in the future to increase diversity, for example with regard to women in boards and helping them reach the recommended quota. While I appreciate that at this stage, we certainly do not want to set on the face of the Bill any requirement, the possibility that we might do that in the future would direct the minds of board directors to accommodate what I am suggesting.
Norman Lamb (North Norfolk, Liberal Democrat)
Parties can choose to take particular positions in manifestos on how they want to see this area of policy evolve. That can be a debate within each party. My hon. Friend’s point regarding women on boards is well made.
On that point, the European Commission, through Commissioner Reding, has advocated mandatory quotas. The UK approach has been a voluntary approach. Interestingly, our approach, which Commissioner Reding has been impressed by—I have spoken to her directly about it—has delivered results. The best approach, which I would take, is always, if you can, achieve things voluntarily and take people with you. The Prime Minister himself said that we cannot rule out for ever and a day mandating quotas for women on boards, but it is not our preferred option. Sometimes there are unintended results. Norway, for example, has a firm prescriptive quota on the number of women on boards. It has ended up with a relatively small number of women serving on large numbers of boards. That does not promote the diversity that we are after. I am proud that this Government are taking steps to enable women to stay in the work force and remain economically active. The pipeline through to deliver greater diversity on boards is ultimately the most critical thing, and not enough women are getting to a senior level.
Ian Murray (Edinburgh South, Labour)
Is the Minister aware of my colleague in the Scottish Parliament, Jenny Marra, tabling a Bill to look at minimum quotas for both women and men on public sector bodies? Will that set a strong example to the private sector of where it should be going regarding its own make-up?
Norman Lamb (North Norfolk, Liberal Democrat)
I am not aware of that initiative, but I certainly think the public sector should seek to lead by example. If we are making the case that diversity is a good thing and delivers better performance, we ought to be demonstrating that.
Iain Wright (Hartlepool, Labour)
If the Minister thinks that diversity is a good thing that results in better performance, will he remind the Committee how many women are in the Cabinet?
Norman Lamb (North Norfolk, Liberal Democrat)
I would regard that as a somewhat mischievous intervention.
Norman Lamb (North Norfolk, Liberal Democrat)
Unexpected, I have to say, from the hon. Gentleman. Normally he rises above that sort of cheap shot.
I am mindful of trying the patience of the Chair somewhat. All parties have a long way to go in terms of diversity—certainly my party has. That is reflected in the Cabinet, as it has been in previous Cabinets. Political parties need to take the necessary steps, as well as bodies in the broader economy.
David Anderson (Blaydon, Labour)
I want to talk about the Bill, and I will bear in mind what the Minister said about not trying the Chair’s patience. This part of the Bill is about whether we have employees on boards, not about diversity, and the thrust of the Bill is to make our economy more successful. Employees sit on boards in Germany, and it has the most successful economy, certainly in Europe and almost in the world. Should we not follow Germany’s example?
Norman Lamb (North Norfolk, Liberal Democrat)
I personally think that we have a lot to learn from Germany in many respects. It has managed to maintain its manufacturing sector when, over the past decade under the previous Labour Government, manufacturing declined significantly as a proportion of the overall economy in the UK, and we have ended up with a heavily unbalanced economy. This Government are taking action to rebalance the economy away from an over-reliance on consumption, debt and the City of London towards a balanced economy in which exports become more important again and manufacturing plays a central role.
Although many people point to examples in other countries, as hon. Members have done, the UK system of corporate governance involves a unitary board. I make that point partly in response to my hon. Friend the Member for Solihull. Germany and Sweden both have a two-tier system with an additional advisory board, on which the employees play a part. The tradition in the UK has been to have a single unitary board, and we do not distinguish in law between types of director. They all have the same duties. In Germany, an employee on an advisory board does not have the same duty as a member of a unitary board in this country. Of course, while I welcome companies choosing to offer employees a position on the board, employees must recognise—this is sometimes a difficult issue for trade unions and others—that they then take on a director’s full responsibilities, which are quite onerous and mean that one cannot necessarily simply represent the interests of employees; one’s duty as a director is to the owners of the company. There is the potential for a slightly conflicted position, which does not occur in the advisory board system in Germany and Sweden.
While there is nothing to stop a company appointing an employee as a director, making that a requirement would be a fundamental change in our system of corporate governance and one that the Labour party chose not to make when in government. There are practical issues, too. Many of the quoted companies under discussion employ thousands of staff across the globe. Appointing somebody to the board to represent their views is simply not realistic. There is a danger of tokenism if one employee, for example, is appointed represent potentially thousands of employees. That would be difficult for them, especially given the other duties that they must meet.
However, we agree that employees have a valuable contribution to make, which is why we have encouraged employees to use their existing rights to information and consultation arrangements. Such rights have not been heavily used in this country so far. We encourage employees to take advantage of their rights and to air their views about directors’ pay and other issues.
Fiona O'Donnell (East Lothian, Labour)
The Minister is stopping just short of being patronising, but does he not see the imbalance here? The workers, who after all play a huge role in creating the wealth of a company, have to negotiate their pay and conditions with management, but they have no influence when it comes to directors and people higher up the pay scale deciding what they should be paid. The Minister really wants a change of culture, but the danger here is that when we return to the good days—possibly under a new Government—shareholders will not hold the board to account when they are getting a return on their investment. The danger is that the culture does not change.
Norman Lamb (North Norfolk, Liberal Democrat)
We have made it clear that we want the culture to change. We agree on the need for that. I am horrified by the suggestion that I am even close to being patronising, which I do not seek to be.
An employee coming on to the board of a company, under this country’s system of governance, has to take on the full responsibilities of a director, which is an onerous role that can conflict with their role as an employee representative. That role is very different from a position on an advisory board in Germany or Sweden. That is not to say that employees’ views should not be listened to. Indeed, what is happening to employee pay should be taken into account, too. That is why our draft regulations on remuneration reporting propose that companies report on whether and how they have sought employee views. We specifically propose that that should be part of the regime.
I put it to hon. Members that a range of initiatives is already forging progress on board diversity and that proposed new clause 17 is neither appropriate nor necessary.
Finally, I thank the hon. Members for proposing new clause 18. During a time of economic restraint, however, a new, publicly funded quango to examine directors’ pay is not necessary. I know quangos are dearly loved by the Opposition, and the temptation to set up a new one is too much to miss, but the task could be undertaken in other ways. That role is filled expertly by a wide range of organisations. I am confident that there will be no shortage of people keen to set out research and best practice and to tell us whether our reforms are working. The Government welcome such activity, and a wealth of good research is carried out by a range of investors and others. Indeed, we are grateful for the work of the High Pay Commission that concluded last December. The independent High Pay Centre has been established and will carry forward the important research that the commission started.
New clause 18 suggests that a permanent high pay commission would make recommendations to the Secretary of State on issues such as remuneration levels, but we are clear that it is not the Government’s role to intervene on such issues. I suspect that the hon. Member for East Lothian agrees that Governments should not determine pay levels but should set the context to ensure that shareholders can hold their companies to account. Pay levels are for companies and their shareholders, not for Government to micro-manage, which is why we are putting more information and power into the hands of shareholders. After all, their money is at risk, not that of bureaucrats in Whitehall. For those very good reasons, the proposed amendment is unnecessary.
Iain Wright (Hartlepool, Labour)
Mr Bayley, it is a pleasure to see you again for the last time.
I thank the Minister for his considered response, although he was somewhat churlish. Many of our amendments, if not all of them, move along the lines that the Government propose. There is not a huge difference between us on many things.
Let me support the Government with evidence from the now well-thumbed Financial Times of 21 June:
“Mr. Cable’s package contains some good proposals. In particular, his suggestion that companies should provide a single figure for remuneration is an excellent one.”
Julian Smith (Skipton and Ripon, Conservative)
Will the shadow Minister repeat the first sentence? I could not hear him.
Iain Wright (Hartlepool, Labour)
Yes, I will. It is good to have the hon. Gentleman back. The first sentence was:
“Mr Cable’s package contains some good proposals. In particular, his suggestion that companies should provide a single figure for remuneration is an excellent one.”
We agree. In terms of providing simplicity, transparency and accountability, a single figure for remuneration is appropriate. There are also concerns, however, about what will happen where directors receive deferred payments. If there is a remuneration package in which a director will receive £3 million in years one and two, but in year three there will be a bonus of £5 million, how will that be reported in year one to give the clearest possible view within the single remuneration figure? In general, however, we welcome the measure.
The Minister seemed to have some sympathy with amendment (a), which would insert into the new clause the words:
“The regulations must include information regarding the 10 highest paid employees in the company outside of the board”.
The Minister said that he wanted to promote transparency, but that there were potential flaws in the draft. Again, I suggest to him that if he agrees with the principle, I would be more than happy not to press the amendment to a vote and we could work on proposals to bring forward on Report. Would that be acceptable?
I certainly agree with the notion that financial services are very important, because they affect people’s livelihoods, mortgages and general living, but there are other industries in which transparency is needed. An Enterprise and Regulatory Reform Bill, in which we have a clause about director’s remuneration and, hopefully, one about improving corporate governance, is an appropriate place to look at this issue.
I can understand some of the flaws in the drafting of amendments (b), (c) and (d), for which I apologise, but the central focus is that we think that it is appropriate to have an annual binding vote. As I said this morning, we do not think that that is particularly onerous. It is in keeping with much of what the Government want to do. I am concerned that if we have a vote every three years we will see large peaks and troughs in directors’ pay. That is not stable, applicable or conducive to the best long-term running of a company. I will be more than happy not to press these amendments if the central premise that we have an annual binding vote is taken on board.
David Anderson (Blaydon, Labour)
In an earlier contribution, my hon. Friend the Member for East Lothian made a point about inequality. If an employee was underperforming to the extent that some of these companies have done over the past few years, they would be out the door in a matter of days. There would not be any chance of them saying, “We will give you a year to improve and come back.”
Iain Wright (Hartlepool, Labour)
My hon. Friend is absolutely right and the Government recognise it as well. I suspect that the Minister’s secret position is that he believes wholeheartedly in an annual binding vote.
Chi Onwurah (Newcastle upon Tyne Central, Labour)
Further to the point that my hon. Friend the Member for Blaydon made, my hon. Friend the Member for Hartlepool, the former Minister, drew a comparison between these highly paid—obscenely highly paid, in some cases—directors and Premier League footballers. Does he agree that footballers whose performance was at the level of some of these directors would soon find themselves benched, and possibly transferred?
Iain Wright (Hartlepool, Labour)
That is absolutely correct. I will quote paragraph 63 of the March consultation document, because it is significant. It states:
“Given that remuneration policies can vary year-on-year in response to changing circumstances, the Government proposes that the default position should be that remuneration policy is reported on annually and put to an annual shareholder vote. Any proposed changes to remuneration policy for the forthcoming year would be contingent on the resolution being carried.”
That seems a very clear, simple and important position, with which we would agree. We hope that the Government, notwithstanding the consultation that took place—we understand that—would agree as well. We think that it should be the position. I again stress to the Minister that it is not particularly onerous.
I will move on to the remuneration consultancy work. I was struck by what the Minister said this morning. He seemed to suggest that he agreed with virtually everything we say and that, if matters as they currently stand and what the Government propose do not work, they will bring forward legislation. My point is that we have the opportunity here and now in the Bill. Matters regarding remuneration consultancy are happening in the real world now.
I do not know when the next legislative vehicle for a Bill sponsored by the Department for Business, Innovation and Skills will come along. Why do we not take the bull by the horns and deal with it while we have the opportunity? We seem to agree on what we want to see regarding increased disclosure, transparency and reporting. Why can we not act on that now? I again make the offer to the Minister that I will happily not press the amendments if he will give a commitment to come forward with similar amendments, properly drafted, on Report, with which the whole House could agree.
I am disappointed with his stance on corporate governance, diversity in the boardroom and remuneration committees, particularly employee representation on remuneration committees. Again, he seems to agree with what we say but will not go the extra mile. Similarly, I am very disappointed, given the debate going on in the real world about fairness in executive pay, that he dismissed—not in a patronising manner—the suggestion of the High Pay Commission.
Julian Smith (Skipton and Ripon, Conservative)
I am delighted with that proposal because it is for a top-down, Russian-style quango. I will use it to promote my anti-business Labour party argument. If the Opposition are making such a proposal they are not serious about British business.
Iain Wright (Hartlepool, Labour)
The hon. Gentleman shows a profound misunderstanding, even an outdated notion, of what is going on in the real world. It is not reds under the beds who make such points; it is moderate commentators and business people. People such as the CBI say that there is no justification for some of this excessive pay, and we need to do something about it. I thought the Government agreed. The hon. Gentleman is a bit of an outlier in this regard. Mainstream opinion—politically, socially, economically and within business—says that this has gone far too far over the past 30 years or so. Something needs to be done.
Norman Lamb (North Norfolk, Liberal Democrat)
My hon. Friend the Member for Skipton and Ripon was talking about setting up a quango.
Iain Wright (Hartlepool, Labour)
Yes. Something needs to be done about inequality and the extent to which executive pay has far outpaced normal average earnings. We need to do something about that, make recommendations and have a wider public debate. We consider the High Pay Commission would be a good opportunity to allow that to happen.
Chris Ruane (Vale of Clwyd, Labour)
Does my hon. Friend agree that the hon. Member for Skipton and Ripon holds those opinions because he was not here for this morning’s session, when my hon. Friend elucidated his arguments and gave such a crisp, eloquent analysis that we all agreed with it?
Iain Wright (Hartlepool, Labour)
In the face of difficult questioning by my hon. Friend, I agree. While I am still basking in the glow, I give way again.
Fiona O'Donnell (East Lothian, Labour)
Continuing the bedroom furniture analogy, does my hon. Friend agree that it is not reds under the beds who are out of touch but the blues in the Cabinet?
Iain Wright (Hartlepool, Labour)
Very good. We may be coming to the end of the Committee’s deliberations, but my hon. Friend the Member for East Lothian has not gone downhill. She is not demob happy. In terms of pay and performance, I hope my hon. Friend gets a considerable bonus for that.
I inadvertently missed out an amendment; that is the one regarding 75% super-majority. Again, we heard a common theme from the Minister that he tends to agree but in terms of drafting and possible repercussions of the amendment he could not accept it. I understand how the wording of the amendment makes it difficult for the Government to accept it. Having said that, I want to put on record the need for a super-majority to ensure that we promote consensus on remuneration policy between shareholders and the company. I think that the Minister secretly agrees with that, and I repeat the suggestion that I made earlier not to press that amendment but to bring forward a proposal on Report requiring 75% of the votes cast. Would he accept such a proposal? It would be useful to get a definitive yes or no.
John Cryer (Leyton and Wanstead, Labour)
One point that has not been touched on is the problem of proxies. It is widely known that in a lot of big companies the boards turn up to shareholder meetings and when there is a problem they whip a few proxies out of their back pocket and defeat anything that is a problem. It remains to be seen how the Bill will work out when it has received Royal Assent, but I can imagine that that problem will raise its head again in future.
Iain Wright (Hartlepool, Labour)
That is right. One of the amendments that we tabled, which would have turned on section 1277 of the Companies Act 2006, attempted to deal with improved disclosure in how people vote, to provide that scrutiny in respect of institutional shareholding.
I want to go back to the super-majority and the 75%, because although there has been a shareholder spring in many respects, the simple fact is that shareholders are understandably concerned about the excessive level of director pay. That can also, as the Government’s consultation concedes, provide an example of poor engagement during the process of preparing the remuneration policy. Shareholders are often annoyed and concerned that their realistic and objective concerns about directors are simply ignored. The Government’s consultation demonstrates that and it provides a number of examples, such as a FTSE 250 firm, which said in response to 40% of shareholders withholding support for the remuneration report:
“We have noted the disquiet expressed by some of our shareholders and have recorded it for future reference”.
One can see why some shareholders are concerned. A FTSE 100 chief executive officer, in response to 42% of votes being cast against the remuneration report, said:
“This strikes me as being a matter of excessive micro managing.”
I am sure the Minister will agree that they simply do not get it. In the interests of trying to provide as broad and consensual a coalition as possible, I ask for the third time: if I do not press amendment (e) to new clause 5 to a vote but introduce an amendment on Report to the effect that 75% of votes cast are required to approve a remuneration policy, will the Government agree with me and vote to support that?
I hope I have made it clear that regardless of the drafting of some of the amendments, we are keen to test the Committee’s opinion. This issue is incredibly important to fairness and to the vigour of corporate life in the UK, and we need to take a very clear stance. The Government have gone some way to doing so, and we agree with them in many respects, but we think they need to go further. On that basis, I would like to test the Committee’s opinion on our amendments.
Hugh Bayley (York Central, Labour)
Just before I ask the Minister to reply, I think it would be perfectly reasonable, if the Opposition so required, to divide the Committee on the two new clauses. If the shadow Minister wants to test the view of the Committee on the amendments, perhaps while he is listening to the Minister’s response he could choose one of them as indicative. I do not think it would be reasonable to have seven or eight divisions on seven or eight separate amendments. The Minister should respond first, of course, to the invitation that the shadow Minister has just made.
Norman Lamb rose—
Norman Lamb (North Norfolk, Liberal Democrat)
May I thank hon. Members for that welcome back? Once the shadow Minister gets back into his seat, may I thank him for the very reasonable way in which he responded to what I had to say?
Norman Lamb (North Norfolk, Liberal Democrat)
It was reasonable. It is important to note the hon. Gentleman’s point that the Opposition believe we are moving along the same lines, which were his words, and that there is not a lot of disagreement between us. When, and if, Opposition Members seek in a future debate to castigate the Government for any element of the package, let us ensure that we remember the context, because there is a broad level of agreement about what we seek to achieve. There are differences between us on specific elements of the package, but overall, it seems to have broad support in this place, which reflects the broad support outside, certainly within the shareholder community, and that is very welcome. The hon. Gentleman was also generous enough to quote a comment from the Financial Times that was completely supportive of what the Government sought to do.
Let me deal with some of the hon. Gentleman’s specific points. He asked a reasonable question about how one can ensure that there is transparency on deferred payments. The methodology will be clearly set out in regulations about what is required of companies in the remuneration report, and it will reflect on the actual pay earned rather than potential pay awarded.
On the hon. Gentleman’s comments about Opposition amendments, in a sense, the difference between us there is that the Government take the view that when consulting, the responses to the consultation should be listened to and taken on board, as should the concerns raised, the experience of practitioners, and so on. It is absolutely right that we should be prepared to move from our original position or the things that we ask for opinions on, if the responses suggest that another way of cracking the nut might work better.
For instance, the point about employees outside the board is technically dodgy—to use a technical phrase—in that the main provision deals with directors and the amendment discusses people who are not directors. The Government, however, have identified that the main mischief lies in the financial services sector. That is why there is a consultation at present under the auspices of the Treasury that seeks to get clear rules about transparency. I made the point that we will become the most transparent jurisdiction of any in terms of financial services, if we implement what is being consulted on now.
On the annual binding vote, it is again a question of our listening to the consultation responses. The hon. Gentleman referred to the risk of large peaks and troughs, but investors considering a proposed pay policy will be able to see what is proposed for that three-year period and whether peaks and troughs are likely. If at any point during that time, looseness in the policy’s framing is exposed by excessive pay, they have the ability to vote down, on the advisory vote, the company’s performance in the past year, which will then trigger the vote at the next annual general meeting. A mechanism exists and “ingenious” was the description used—not just by me, but by one of the witnesses who gave evidence to the Committee—to describe how the balance has been struck.
The hon. Gentleman referred to the March consultation document on the 75% super-majority issue. He accepts that the drafting of the amendment is potentially flawed, because it would, de facto, require unanimity of those voting, which is clearly not sensible and could create complete gridlock. Again, we listened to the responses of those who were present and who voted on the idea of a 75% vote, and the view of the investor community was that that was too high a hurdle to clear.
Annual general meetings in recent weeks have shown that the 50% threshold has been reached on a number of occasions, so this is not a threshold without teeth. It has been demonstrated to work and it is a proportionate proposal based on our consultation.
On remuneration consultants, we share the concern that they have played a part in conduct that has resulted in inflated pay deals, but what we want to legislate for is a lot more transparency in relation to the amount being paid to consultants and to the people whom they have instructed to give advice. The bizarre aspect of the Opposition’s proposed new clause is that it would mandate companies to use such people, which is perverse, given the Opposition’s view that that is where the problem lies. Why mandate companies to use them? Companies should be free to use them, if they so choose, but there should be absolute transparency, for which the Bill will legislate, about the arrangement between the company and the consultant.
On diversity, we all agree about the importance of diverse boards, but the issue is what mechanism we use to get to that stage. The Labour party prefers prescription, while we prefer trying to take people with us to try to change the culture. That is working with regard to getting more women on boards—26% of new appointments to FTSE 100 boards in the past year have been women, which is an historic high. That has been achieved through the voluntary approach, not through mandation, so it can work.
On employees, it is not possible to have an employee on a remuneration sub-committee of the main board without that employee being a main director of the board. That position carries all of the onerous responsibilities to which I have referred. We prefer to allow companies to make their own judgments about engagements with staff. We are absolutely free and open to employees being allowed on and invited on to a board, but it is not the Government’s job to mandate the process.
Fiona O'Donnell (East Lothian, Labour)
I want to take the Minister back to the question of diversity on boards. The Labour party has 81 women Members of Parliament—more than all the other parties put together—as a result of all-women shortlists. Does the Minister think that shows that his and his party’s approach, and that of others, to increasing diversity in this place is better than ours?
Norman Lamb (North Norfolk, Liberal Democrat)
I will be clear: our approach has failed so far. That is a serious point and I feel strongly about it. We need more women and more minorities in this place. We need to reflect modern Britain. Political parties have not succeeded in that. All-women shortlists have some negative points, but I acknowledge that they have resulted in a significant step change. I do not seek to defend what we have achieved so far. We need to do much better.
My hon. Friend the Member for Skipton and Ripon made a point about the establishment of the commission. Whatever question is posed, it seems that the Labour party’s default position is to set up a new quango. If there is a problem in society, it proposes setting up a quango to sort it out. That is old thinking and it has resulted in vast expenditure on unelected, unaccountable bodies in this country.
Norman Lamb (North Norfolk, Liberal Democrat)
The NHS under Labour was full of unaccountable quangos, and millions of people worked for it. Labour Members were exemplars at establishing and promoting the role of quangos in the economy. The idea that the problem under discussion can be solved by establishing a quango is completely outmoded. As I have said—[ Interruption. ] Bless you.
Chris Ruane (Vale of Clwyd, Labour)
In the interests of equality and parity, will the hon. Gentleman agree with me that that “Atishoo!” should be recorded by Hansard as well?
Hugh Bayley (York Central, Labour)
Order. I am afraid that it is only hon. Members whose contributions can be recorded in Hansard. I must draw the line somewhere.
Chris Ruane (Vale of Clwyd, Labour)
On a point of order, Mr Bayley. Does “Erskine May” not say that when a Member responds to a word or a phrase, then that should be recorded?
Hugh Bayley (York Central, Labour)
The Member’s response of course will be recorded. I can assure the hon. Gentleman that his two interventions will be recorded.
Norman Lamb (North Norfolk, Liberal Democrat)
I think it is an enormous shame for the Chair to deny a moment of posterity to the official by not recording that, and I thank the hon. Member for Vale of Clwyd for his attempt to get that recorded.
I end by saying that the solution to these problems is not to set up a quango. There are plenty of bodies out there that will do the research. There will be a wealth of research undertaken. That is very much to be welcomed. We believe overall that this is a balanced package. It is a smart package because it drives behaviour change without imposing excessive bureaucratic burden on companies. That is why it has been so widely welcomed.
Iain Wright (Hartlepool, Labour)
Mr Bayley, I am mindful of your guidance about ensuring that the Committee is not gridlocked with seven or eight amendments. Let me thank the Minister for what he said. We do not think that this long-standing problem of excessive executive pay will be sorted by the establishment of a quango; of course not, but we consider that the establishment of a high pay commission could help fuel and facilitate well-argued debate about the whole subject and help to focus minds. He knows that he is distorting our position when it comes to the establishment of a high pay commission.
Our main concerns when tabling the amendments were an annual binding vote and better and improved disclosure of remuneration consultants. On that basis I give notice that we would like to test the opinion of the Committee on new clauses 17 and 18 and, given the two concerns I have just raised, amendments (b) and (j).