Discretionary Share Option Schemes in the Privatised Utilities

Part of New clause 1 – in the House of Commons at 6:30 pm on 3rd April 1995.

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Photo of Ian Pearson Ian Pearson , Dudley West 6:30 pm, 3rd April 1995

I extend a warm welcome to my hon. Friend the Member for Walsall, North (Mr. Winnick) and assure him, as a fellow Member of Parliament for the black country, that the anger and disgust felt about discretionary share option schemes among the private utilities is as strong and severe in Dudley, West as it is in Walsall.

Let me say at once that the directors of private utilities have done nothing illegal. All that they have done is to join the club, albeit with gathering haste in some cases. I suppose that it is the modern equivalent of the key to the executive washroom. It is the key to the executive dosh room of cosy remuneration committees, offering sybaritic salary perks to directors for what they should be doing anyway, which is acting in the best interests of their companies.

We have to draw a distinction between legislation pertaining to the privatised utilities and legislation relating to companies that are subject to the full forces of market competition, but what is basically at fault is some very lax legislation as regards Inland Revenue-approved executive share option schemes. Those schemes offer a perk because, rather than income tax, capital gains tax is payable on share options, which can be deferred almost indefinitely. Those schemes also offer an extremely generous treatment whereby share options up to the level of four times inflated salaries can be awarded to directors and senior executives.

Only the few benefit. We have heard talk about 36,000 people in British Gas who benefit from share-linked option schemes. The directors of British Gas who benefit from share-linked option schemes—they obviously have far greater schemes than any of the individual employees—have benefited to the tune of about 50,000 shares. Contrast that with their discretionary share options, whereby they have been awarded 1.3 million shares. That shows the scale of difference between properly organised share incentive schemes and executive share option schemes, which are a one-way bet and a perk to directors.

6.45 pm

One fact that has not been fully discussed in the debate but that has merit is that discretionary share option schemes can provide some benefit to consumers who have pensions that are invested in those companies, and who therefore benefit from the increase in the share price. That has been mentioned by some Conservative Members.

Hon. Members on both sides of the House must recognise that there is tension between the interests of two groups of people. On one hand, consumers whose pensions may be invested in share option schemes may benefit because directors are given an incentive and are focused on improving share performance. On the other, consumers may suffer from the consequences when certain companies are run in an aggressively short-term profit-maximising way in a deliberate attempt to boost the share price and thereby increase directors' income. That is one of the reasons why a report is very much needed, because there are potential benefits as well as the extreme costs of executive share option schemes of which we are all aware.

It is important to recognise the practical difficulties when Conservative Members speak of the need to enfranchise the people who stand behind shareholders. The shareholders of most of the private utilities are very much the shareholding institutions. I do not know how I, as a personal pension plan holder before I came to the House, could talk to the person who sold me a pension and say, "By the way, can you talk to someone who can talk to someone who can ensure that, at the next annual general meeting, you vote against those discretionary share options?" Similarly, I do not think that the House of Commons Members' pension scheme can exercise any reasonable legitimate influence on those companies at annual general meetings.

The hon. Member for Beaconsfield (Mr. Smith) has a good idea in trying to enfranchise those who stand behind shareholders, but I can envisage no practicable means by which that can be exercised.