Clause 61 — Members’ approval of directors’ remuneration policy

Relationship, Drug and Alcohol Education (Curriculum) – in the House of Commons at 4:14 pm on 17th October 2012.

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Photo of Iain Wright Iain Wright Shadow Minister (Business, Innovation and Skills) 4:14 pm, 17th October 2012

I beg to move amendment 93, page 51, line 23, at end insert—

‘(1A) A representative of the company’s employees must be consulted in the preparation of any such revision.’.

Photo of Lindsay Hoyle Lindsay Hoyle Deputy Speaker and Chairman of Ways and Means, Chair, Panel of Chairs, Chairman of Ways and Means, Chair, Panel of Chairs

With this it will be convenient to discuss the following:

Amendment 95, page 52, line 5, leave out ‘ordinary’ and insert ‘special’.

Government amendment 25.

Amendment 86, page 52, line 11, leave out subsection (b) and insert ‘(b) and annually thereafter.’.

Amendment 96, page 52, line 17, leave out ‘ordinary’ and insert ‘special’.

Government amendments 26 to 30.

New clause 27—Information about payments to recruitment and remuneration consultants in respect of directors’ remuneration

‘After section 413 of the Companies Act 2006 (Information about directors’ benefits: advances, credit and guarantees) insert—

“413A Information about payments to recruitment and remuneration consultants

The Secretary of State may make provision by regulations requiring information to be given in notes to a company’s annual accounts about payments made in the relevant accounting period in respect of recruitment and remuneration advice relating to directors, including information specifying any fees that have been paid in proportion to the remuneration agreed for a director.”.’.

Photo of Iain Wright Iain Wright Shadow Minister (Business, Innovation and Skills)

Amendment 93 is in my name and those of my hon. Friends. This important part of the Bill deals with directors’ pay. We rightly spent time in Committee dealing with this, and I do not want unduly to inconvenience the House by repeating the same points, but at the heart of the debate is a disconnect between executive pay and average earnings, and between executive remuneration and the performance of the companies they lead.

As I mentioned in Committee, in 1980, the median pay of the highest-paid directors in FTSE 100 companies was £63,000, and median wages were £5,400. By 2010, the median pay of FTSE 100 directors was £2.99 million, while median wages had risen to £25,900. The ratio of directors’ and employees’ median pay had risen from 11:1 to 116:1. That trend is not confined to the UK, but has been seen throughout the developed world, most notably in the US, where, by 2008, executive pay was 200 times the median household income. Despite the difficult economic times and financial misery faced by millions, average compensation for an FTSE 100 chief executive rose by 12% in 2011, while average wages rose by only 1.4%.

In that environment of growing pay, there is no meaningful correlation between high pay and high corporate performance. Empirical evidence from research carried out in 2009 concluded that companies that pay their chief executive officer in the top 10% of remuneration earn negative results of -13% in terms of both profits and share price in the next five years.

Opposition Members support some of the Government’s reforms—in the interests of cross-party agreement, I should say that they build on work done by the previous Labour Government. However, as we said in Committee, the Government could go further and be slightly bolder. That is the basis of amendment 93, which would ensure that

“a representative of the company’s employees must be consulted in the preparation of any such revision” to a director’s remuneration package. We anticipate this ensuring that an employee representative could sit on a firm’s remuneration committee in an advisory capacity.

Amendment 93 is a development of the argument that we pursued in Committee in which we pressed for a representative from the work force to be an active and full member of the company’s remuneration committee. In response to our amendments in Committee, the then Minister, Norman Lamb, stated that the Government did not believe in mandating that all companies must have employees on boards. Crucially for his argument—we reflected on this over the summer—he then said that the UK system of corporate governance involved a unitary board, whereas the likes of Germany and Sweden routinely had worker representation on boards. As he pointed out, however, that can happen there in a way that it cannot happen here, because they have a two-tier system of corporate governance, with an additional advisory board on which employees can play a part. As he also said, in the UK corporate governance system,

“we do not distinguish in law between types of director. They all have the same duties.”––[Official Report, Enterprise and Regulatory Reform Public Bill Committee, 17 July 2012; c. 691.]

That is an accurate reflection of the current situation, and as I said, we have reflected on the then Minister’s comments, which is why we have tabled amendment 93.

We have also been seduced—if that is not too strong a word—by the writing skills, positively Churchillian or Disraelian, of the new Minister, the Under-Secretary of State for Skills, Matthew Hancock. In an article written for The Sunday Times in November 2011, he wrote:

“Finally, corporate remuneration committees should be made more independent. For all the controversy the suggestion has attracted, why shouldn’t that include leaving a place on the committee for an employee representative, in an advisory capacity, if only to offer a different perspective?”

We fully agree with his sentiment. I have been seduced by those rhetorical flourishes from his Pitt-esque fountain pen, so we look forward to his supporting us through the Division Lobby.

Amendments 95 and 96 would effectively require a 75% shareholder vote. We mentioned this issue in Committee, and I reiterate the powerful arguments put forward by Dominic Rossi, the chief investment officer of equities for Fidelity Worldwide Investment, who has argued that directors’ pay is over-generous and over-complex.

Photo of Richard Fuller Richard Fuller Conservative, Bedford 4:30 pm, 17th October 2012

The hon. Gentleman is arguing for things he would like to see, but as he is well aware, it is already within the purview of corporations to put an employee on their boards, and shareholder votes can already be held on compensation and can influence that compensation even if they fall short of the 50% hurdle. What compels him to want to make it a legal requirement, rather than to use the market to make these decisions itself?

Photo of Iain Wright Iain Wright Shadow Minister (Business, Innovation and Skills)

It is because, as I tried to explain in my opening remarks, over the past 30 years we have seen market failure and a huge disconnect in the level of remuneration paid to top executives, but that has not ensured commensurate performance among the companies they lead, which is what we need. I think that the Government are onside on this. The shareholder spring and activism that we have seen, including at Trinity Mirror, has largely been the result of initiatives put in place by the previous Labour Government on annual advisory votes on directors’ pay and so on. I know that the hon. Gentleman is very familiar with these issues and will support us in ensuring that shareholders—the people who own these companies—have a proper say.

Photo of Richard Fuller Richard Fuller Conservative, Bedford

I appreciate the shadow Minister’s point, but unfortunately, as is often the case, the Opposition are like the ambulance that turns up two days too late and to the wrong address. The market is already responding to these issues, and measures are being taken to change how compensation is made, as he said. The Opposition always rush to legislate restrictive control and put a hand down on aspiration, when the market itself will solve, and is solving, these problems. I fully accept that there is an issue about employee representation in companies and about the historical lack of alignment between compensation on boards, but he is going the wrong way about resolving it.

Photo of Iain Wright Iain Wright Shadow Minister (Business, Innovation and Skills)

The purpose of the amendments, which have buy-in from Mr Rossi, Fidelity and elsewhere, is not to seek the death of aspiration, but to encourage, incentivise and try to ensure that companies achieve as much consensus as possible on directors’ pay policy—that was also the position of the Secretary of State earlier in the year—ensuring that companies start early in the process and avoid the use of what is a somewhat blunt and brittle tool, whereby the issue is discussed only at the annual general meeting or what-have-you, which can cause tension. Getting in early and talking to shareholders means that the owners and managers of a business can reach some sort of consensus. That is the purpose that amendments 95 and 96 seek to achieve. I quoted Mr Rossi in Committee, and I will do so again:

“Companies have nothing to fear if what they propose is fair and reasonable and clearly aligned to what is good for long-term shareholders.”

Richard Fuller is a strong and experienced Member of this House and a good champion of businesses. I disagree with what he says about regulation and employment legislation, but he will recognise that getting good consensus on directors’ pay and ensuring that shareholders have the tools at their disposal to hold managers to account is in all our interests.

Amendment 86 would have the effect of creating an annual binding vote on pay policy, an issue that, again, was much deliberated in Committee. I still firmly believe that an annual vote is hardly disproportionately onerous or somehow unduly bureaucratic. Shareholders are used to, and expect, annual corporate reporting on matters such as the annual accounts—whether they are a true and fair view—and the reappointment of auditors. I reiterate the point that I mentioned in Committee and throughout the passage of the Bill: I fail to see how such a proposal can be seen as onerous. In Committee I had a well-thumbed Financial Times editorial from June 2012, which said that

“the business secretary has missed a trick in not going for annual pay votes…His worthy hope is that this might encourage more medium-term thinking about pay. But an obvious worry is that such votes may degenerate into another exercise in box-ticking, with shareholders voting on boilerplate policies rather than specific deals.”

It went on:

“Executives will restrain their demands only when they perceive a real risk in flouting social norms on pay. Fund managers, who naturally shy from conflict with companies, still need to be encouraged to challenge bosses more—especially on this sensitive topic. Annual votes would at least put them firmly on the spot. Mr Cable’s triennial polls, however well-meaning and thoughtful, may not.”

That point was echoed by the head of the High Pay Commission, Deborah Hargreaves, who stated in evidence to the Committee:

“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.”

––

[

Official Report, Enterprise and Regulatory Reform Public Bill Committee,

21 June 2012; c. 137, Q294.]

Again, I cannot see how our proposal would be onerous, and I think Ministers should think again.

The final amendment in this group is new clause 27, the purpose of which is to improve transparency in the disclosure of information relating to remuneration consultants and the manner in which they are paid by companies. Evidence suggests that remuneration consultants have played a key part in hiking up directors’ pay. Work undertaken by Professor Martin Conyon found a direct correlation between higher-than-average directors’ remuneration and the use of remuneration consultants. Further studies have shown that, on average, pay for chief executive officers is 26% higher in companies that use remuneration consultants. As I mentioned in Committee, across the Atlantic, the Congress inquiry led by chairman Henry Waxman concluded that remuneration consultants to Fortune 250 companies were paid almost 11 times as much for providing other services to those companies.

Photo of Richard Fuller Richard Fuller Conservative, Bedford

The shadow Minister is making some good points. Does he believe that the Government should provide guidelines to remuneration committees on how they should set directors’ pay, and on how they should ensure that the correlation with average earnings and with shareholder value growth is maintained?

Photo of Iain Wright Iain Wright Shadow Minister (Business, Innovation and Skills)

That is a fair point. There are already guidelines in place, including discretionary guidance from the industry. We also have the combined code on corporate governance, which provides a degree of guidance. We need to determine whether the issue is sufficiently serious that it requires legislation to provide firm guidance. I shall be interested to hear the Minister’s view on that, given that there is agreement across the House on the disconnect between pay and performance, and the link—which acts almost as a catalyst—between remuneration consultants.

Speaking as a chartered accountant who used to work for a “big four” accounting firm, I see a close correlation between these problems and the crisis in the auditing profession a decade ago. That led to the disclosure of fees and to greater transparency on the audit services and non-audit services provided by the accounting firms. The perception was that in corporate scandals involving firms such as Enron, the thoroughness and accuracy of the auditors’ opinion was called into question when audit firms secured additional, often more lucrative, work away from the statutory audit.

New clause 27 would therefore increase disclosure of information relating to payments to remuneration consultants, ensuring that the Secretary of State should make a provision by regulation of notes to a company’s accounts about payments made to the consultants, including information specifying fees that have been paid as a proportion of the total remuneration package of a director. My concern is that, if a contract is so designed, a consultant has an inherent desire to inflate the package to secure a larger fee. If that is the case, shareholders should be made fully aware of it via a disclosure in the annual accounts. As I have said, we applaud the Government’s general direction of travel, but we believe that they could go further, and I will be interested to hear what the Minister has to say about this.

Photo of Jo Swinson Jo Swinson The Parliamentary Under-Secretary of State for Women and Equalities, The Parliamentary Under-Secretary of State for Business, Innovation and Skills

Directors’ pay has been very much in the news recently, for reasons that Mr Wright has outlined. Between 1998 and 2000, the average total remuneration of FTSE 100 chief executive officers increased fourfold, which was much faster than the increase in prices or in average remuneration levels across other employers. It was also much faster than the increase in the FTSE 100 itself. There was clearly an issue to be addressed, and the Government opened up the debate on directors’ pay a year ago. We drew attention to the fact that top pay in large public companies had grown rapidly without any clear connection to performance, and we asked what could be done about it. We encouraged business and investors to face up to this difficult issue.

In January, the Prime Minister and the Secretary of State committed to taking action, and in June we introduced bold measures into this Bill. I know that the Bill Committee enjoyed a thorough and engaging debate on this issue before the summer break, and I am pleased that our reforms have received such wide support inside and outside Parliament. Investors agree that this comprehensive package of reforms will help them to tackle excessive pay and to restore a clearer link between pay and long-term performance.

We have tabled six minor and technical amendments to the clauses on directors’ remuneration, which I will outline before I speak briefly in response to the other amendments that have been tabled. The technical amendments will tighten up the legislation and ensure that it is as robust and clear as possible. Business and investors support those amendments. Amendments 25 and 30 correct a technical drafting oversight. They clarify that, for the purpose of identifying when companies will be affected by the new provisions, the relevant financial year is the one beginning on or after the day on which the provisions come into force. That is to ensure that companies whose year starts on 1 October are subject to the provisions.

Amendments 26 and 29 make it clear that the definition of “quoted company” shall be the same as that which already appears in the Companies Act 2006. Amendment 27 broadens the definition of what is meant by a remuneration payment so that remuneration paid to a director in his or her capacity as an executive manager of the company or its subsidiary is also captured. Importantly, that will mean that companies cannot circumvent the new restrictions by paying someone a small fee for being a director and a large salary for being a manager.

Amendment 28 tightens up the provisions relating to payments made to former directors. This will ensure that, where former directors are allowed to benefit from long-term pay schemes that mature after they have left, the payments must be consistent with the company’s remuneration policy—and if not, approved by a separate shareholder resolution. I am sure the House will agree that these minor and technical amendments will strengthen and improve the legislation, and I hope all Members will join me in supporting them.

Opposition Members have suggested a number of areas where they would like the legislation to go further, but for the reasons that my predecessor, my hon. Friend Norman Lamb made clear in Committee, the Government do not agree that the amendments are necessary. I shall explain why.

Amendment 86 proposes that the binding vote on remuneration policy occurs annually, even if a company’s policy has not changed. The hon. Member for Hartlepool set out various objections to the provisions, saying that they were too onerous and inappropriate. We went for a three-year pay policy and, to be fair, this had nothing to do with being onerous; it was about what investors said would work. The attraction of a three-year policy is that it encourages more long-term thinking and discourages the kind of unnecessary annual tinkering that invariably leads to pay going up and getting ever more complex. That approach is backed by major investors and investor bodies such as the Association of British Insurers. Of course, there is nothing to stop companies from having an annual vote on pay policy—they have the flexibility to do so—and there is the safety net of a trigger mechanism to protect shareholders. If they are unhappy with how the pay policy is working out and they reject the annual advisory vote, a binding vote on policy at the next annual general meeting will be triggered.

The hon. Member for Hartlepool asked whether the policy will be too vague and too high-level, but the regulations that inform what happens will clearly and succinctly set out to which types of payments directors are entitled, how the pay links to company strategy, how performance will be assessed and how it will translate into awards under different scenarios. Parliament will have a chance separately to debate the regulations at a later stage. If there were any outstanding concerns, they could be put forward then.

Amendments 95 and 96 would make the vote on remuneration a special resolution, requiring 75% shareholder support to pass. Investors have made it very clear that they want an ordinary resolution, subject to a simple majority. It is important to note that we have seen this year that it is absolutely possible for the majority of shareholders to vote against pay proposals. So far this year, seven companies have lost their pay votes—real evidence that the process can work.

Amendment 93 would require companies to consult an employee representative whenever they wish to propose a revised remuneration policy. I am sympathetic to the intention of encouraging employees to be involved and consulted. We share the view that it is helpful for remuneration committees to seek employees’ views on pay—indeed, some already do—and we are encouraging them to report on how they have taken employee views and employee pay into account. I do not believe that the statutory approach set out in the amendment is the right way forward. It is worth reminding the House of the consultation that closed in September, as the Government will shortly come forward with their response. We proposed that companies should report on whether they sought the views of the work force in setting pay. There are also existing tools such as information and consultation arrangements, which can be used to make sure that employees are engaged. The Government definitely sympathise with the spirit of that intention, but we do not think that the statutory approach provides the right way forward.

Finally, the Opposition’s new clause 27 would allow the Secretary of State to make new regulations requiring companies to disclose how remuneration and recruitment consultants are paid. We do not accept the provision because the Secretary of State already has the power to require that to be part of the director’s remuneration report. We have already published draft regulations to implement that, whereby companies will have to explain how consultants have been appointed, used and remunerated.

I hope that I have provided some assurance on these matters. I thank hon. Members for engaging in the issues, but maintain that the proposed amendments—other than the Government amendments—are unnecessary, so we shall not support them.

Question put, That the amendment be made:

The House divided:

Ayes 219, Noes 277.

Division number 80 Relationship, Drug and Alcohol Education (Curriculum) — Clause 61 — Members’ approval of directors’ remuneration policy

Aye: 219 MPs

No: 277 MPs

Ayes: A-Z by last name

Tellers

Nos: A-Z by last name

Tellers

Question accordingly negatived.

Amendment made: 25, page 52, line 8, leave out from ‘begins’ to ‘or’ in line 9 and insert

‘on or after the day on which section 61 of the Enterprise and Regulatory Reform Act 2012 comes into force’.—

(Matthew Hancock.)