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 George Young George Young The Financial Secretary to the Treasury 6:30 pm, 3rd April 1995

If my hon. Friend's amendment had been in order, I would, of course, have been able to answer that question. As it is, the House will just have to guess what the answer might have been.

My hon. Friend the Member for Beaconsfield also rightly made the point that the shareholders bear the cost of executive share options. It is they who are agreeing to diluting their interest in the company by allowing others to buy shares in the company at a preferential price. He made the point that the consumers benefit. He also said that one should examine the role of competition as an extra dimension in bringing pressure to hear on prices. In the Gas Bill, which is going through the House, we are implementing that principle.

The hon. Member for Monklands, East implied that the options were transferable to a spouse. They are not. She may have been alluding to the possibility of transferring the shares after the option has been exercised, but that is not what she said.

The House will not be surprised to hear that I cannot advise hon. Members to accept the new clause. The Inland Revenue publishes annually figures of the Exchequer costs for past years of the various tax-relieved employee financial participation schemes, including executive share option schemes. The Revenue does not break those global cost figures down between particular groups of companies and I see no good policy reason why it should.

In any event, there is a considerable amount of relevant information in the public domain. Companies are required by the Companies Act 1985 to maintain a register, which anyone can inspect, in which details of directors' interests in the companies' shares must be recorded. Where the scheme involves the issue of new shares, the register must show the number of shares under option, the period during which the option is exercisable and the exercise price. When options are exercised, it must be also be recorded in the register. The company is also obliged by law to list in its annual report or accounts the interests of its directors in the company's shares.

The stock exchange listing rules require listed companies to obtain shareholder approval at an annual general meeting for any share option schemes that involve or may involve the issue of new shares. The rules also require companies to give details to the stock exchange of all directors' share option schemes and of directors' interests in the company's shares. Much of the information mentioned in the new clause is already in the public domain. In any event, I see no basis on which the Inland Revenue could be expected to estimate the future cost of those schemes, as is required in the new clause.

Share option schemes are intended to enable companies to motivate key executives and the aim is to improve company profitability and so to benefit all shareholders, including, as was made clear in the debate, pensioners. As I said when we debated this subject in Committee, we need to remember that the main cost of such schemes falls properly on those who chiefly benefit from them—the companies and their shareholders. They carry the principal cost, not the customer nor, indeed, the taxpayer.

Tax relief schemes can be designed to link the exercise of options directly with performance. I welcome the fact that it is increasingly recognised as best practice for companies to ensure that the exercise of options depends on the attainment of tough performance targets. A recent survey found that 90 per cent. of companies floated last year intend to set targets. Indeed, the institutional investors, the Association of British Insurers and the National Association of Pension Funds, insist that it is fundamental to the exercise of options that they be subject to a realistic measure of management performance, as that is in the best interests of the company, its shareholders, customers and employees.

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My right hon. Friend the Prime Minister said a few weeks ago that bonuses and share options should be based on the performance of a company, and that stricter criteria may be required for the price at which shares are issued and for the circumstances in which they are exercised. All those matters are currently being examined by Sir Richard Greenbury's committee, whose report we await.

We have no quarrel with the idea that executives should be asked to deliver enhanced performance if they are to enjoy the benefits that share options can bring, but it is as well to remember that, unless the people at the top pull their weight and achieve good results, no one wins. If the company does not do well and the share price fails to rise, options deliver no rewards to the executives who hold them.

My right hon. Friend the Prime Minister noted that the recommendations of the committee would be addressed to companies and shareholders, but he has also said that the Government would be ready to consider any proposals that might require legislative back-up. In short, we shall be considering further the whole question of executive remuneration—including share options—in the light of the committee's findings.

I conclude by reminding the House that, under the last Labour Government, electricity prices rose by 2 per cent. every six weeks. Under this Government, they have fallen. The House now needs to ask itself: under which management regime do consumers really prosper? Our case is that they prosper under ours. Consequently I invite the House to reject new clause 1.