Discretionary Share Option Schemes in the Privatised Utilities

Part of New clause 1 – in the House of Commons at 5:30 pm on 3rd April 1995.

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Photo of Mr Tim Smith Mr Tim Smith , Beaconsfield 5:30 pm, 3rd April 1995

The hon. Lady is a few weeks out of date, as the Government sold their remaining shareholding in those companies a few weeks ago. The Government are, of course, a unique shareholder. I am not in favour of the Government using their shareholding to achieve those objectives. The Government used to interfere in nationalised industries for all sorts of nefarious reasons that had nothing to do with providing a decent service. It is down to shareholders. After all, directors will benefit from discretionary share option schemes only if the share price rises; otherwise, they will not.

Since privatisation, electricity businesses have been far more successful in driving down costs than anyone—including the Treasury and the City—had anticipated. Nobody had understood just how inefficient the electricity companies were when they were owned by the Government. Generally, nationalised industries are inefficient. Costs have been driven down substantially. As a result, profits have risen rapidly. As a consequence, the share price has risen rapidly.

Perhaps the regulator should have taken a tougher stance; that is another issue. Management has been successful in producing more efficient companies. The share price has risen. Why should not the directors of companies benefit in those circumstances? That is what a share option scheme is about.

As I said in Committee, it is not widely appreciated that retained profits, and not money borrowed from banks or raised on the stock exchange, arc the main source of investment for companies. Those profits are important. The profitability of industry is extremely important. In any company, the principal people who can determine the profitability level are, of course, the senior management—the directors. That is why it is right that a special discretionary share options scheme should be widely available. It encourages efficiency, more investment and more profitability.

Particular cases of abuse in privatised utilities have been mentioned. We must move as quickly as we can away from their monopolistic position by injecting more competition into the system. That is what the Government are doing.