Company Directors' Remuneration

– in the House of Lords at 2:49 pm on 17 October 2001.

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Photo of Lord Dormand of Easington Lord Dormand of Easington Labour 2:49, 17 October 2001

asked Her Majesty's Government:

What is the basis for the proposed legislation to control excessive salary and related payments made to private company chief executives and board members.

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary (Science and Innovation), Department of Trade and Industry, Parliamentary Under-Secretary (Department of Trade and Industry) (Science and Innovation)

My Lords, the Government are very concerned that there should be a strong linkage between directors' rewards and performance. We have already announced our intention to legislate to strengthen the disclosure requirements in that area. We have also said that we shall take a final decision on how to improve directors' accountability to shareholders in the light of the company law review's recommendations on related issues such as voting at general meetings and the enforcement of fair dealing by directors. That remains the case.

Photo of Lord Dormand of Easington Lord Dormand of Easington Labour

My Lords, I thank my noble friend for that reply, but is he aware that the number and scale of such increases are a scandal? It is deeply disappointing that a Labour Government, having been in power for four years, have done nothing to control them. Does he agree that the argument that such payments reward success is nonsense when so many of the companies concerned have failed, and in some cases have suffered huge losses? Will my noble friend add to his Answer and tell us when at least some of the recommendations in the report on modern company law will be introduced, particularly those relating to remuneration committees and accountability to shareholders?

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary (Science and Innovation), Department of Trade and Industry, Parliamentary Under-Secretary (Department of Trade and Industry) (Science and Innovation)

My Lords, I agree that the linkage between rewards and performance has not been as strong or clear as it should be. There is cause for concern on that. I think that my noble friend will be pleasantly surprised at how soon an announcement will be made about the action that the Government are taking. In this context I use the word "soon" in its colloquial sense, not its political sense of "I haven't a clue when it is going to take place".

Photo of Baroness Gardner of Parkes Baroness Gardner of Parkes Conservative

My Lords, is the Minister aware that most of the general public do not feel so strongly about rewards for someone doing a good job, but are quite upset to see people going away with a golden handshake of millions when they have failed completely? I am told that that is covered by contract law. Can anything be done on that aspect?

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary (Science and Innovation), Department of Trade and Industry, Parliamentary Under-Secretary (Department of Trade and Industry) (Science and Innovation)

My Lords, people feel strongly about those who walk away from companies with large rewards. In this case, it is for the directors of the company to come up with the best arrangements. That decision has to be taken in the light of the circumstances of the company. It is for the shareholders of the company to hold the directors to account for their actions. The role of the Government should be to make certain that there are good governance arrangements in place so that shareholders are able to hold directors to account.

Photo of Lord Marsh Lord Marsh Crossbench

My Lords, does the Minister agree that, under the present situation, institutional shareholders in most sizeable companies are perfectly capable of applying pressure to boards if they believe that companies are behaving wrongly?

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary (Science and Innovation), Department of Trade and Industry, Parliamentary Under-Secretary (Department of Trade and Industry) (Science and Innovation)

My Lords, I am not certain that that is the case. I believe that the procedures relating to this matter are rather difficult. They lead to the unfortunate situation whereby the only way in which shareholders can make their views known is by voting against the reappointment of a director to the remuneration committee. I do not believe that that is satisfactory, and I consider that there is a case for looking strongly at how we can improve the system.

Photo of Lord Razzall Lord Razzall Liberal Democrat

My Lords, does the Minister accept that the position would be a great deal clearer, and no doubt the noble Lord, Lord Dormand of Easington, would not have to continue to ask this Question, if the Government were to set out whether in principle they believe that legislation should be brought in to control what they regard as excessive increases or whether they simply believe that the legislation will deal with better disclosure?

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary (Science and Innovation), Department of Trade and Industry, Parliamentary Under-Secretary (Department of Trade and Industry) (Science and Innovation)

My Lords, I do not believe that this is a matter for the Government, and none of the reports on corporate governance has suggested that it is for the Government to take action to control salary levels. In this case we are talking about, and the Government are concerned with, the corporate governance arrangements whereby shareholders can legitimately hold directors to account in what they do.

Photo of Lord Wedderburn of Charlton Lord Wedderburn of Charlton Labour

My Lords, does my noble friend agree that this pressing problem raised by my noble friend demonstrates the importance of maintaining the legal duty placed by the Companies Act on directors since 1980? The relevant section of the Act states that they must take into consideration in the performance of their functions the interests of employees as a whole as well as the interests of shareholders.

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary (Science and Innovation), Department of Trade and Industry, Parliamentary Under-Secretary (Department of Trade and Industry) (Science and Innovation)

My Lords, I believe that that they should take account of the impact that such increases have on employee morale. That is an important issue. To reiterate the point that I made, I believe that it is appropriate for shareholders to ensure that they do so.

Photo of Lord Rotherwick Lord Rotherwick Conservative

My Lords, the number of people who live below the poverty line is increasing. Indeed, national statistics for the past five years show that the percentage of the population below the low-income thresholds, which vary with mean income, rose slightly during that period. Shall we be surprised to hear soon how the Government will reverse that trend?

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary (Science and Innovation), Department of Trade and Industry, Parliamentary Under-Secretary (Department of Trade and Industry) (Science and Innovation)

My Lords, I congratulate the noble Lord on his first appearance at the Dispatch Box. We are talking about directors' salaries. The comparisons that can be drawn between the increases that top directors receive and those that people in the economy generally receive do not make a great deal of sense. However, the improvement in low pay, on which this Government notably have taken major action in terms of minimum wage legislation, and so on, in the face of total opposition from the noble Lord's party, is a quite separate issue.

Photo of Lord Mackie of Benshie Lord Mackie of Benshie Liberal Democrat

My Lords, will the noble Lord say what is his idea of a proper salary for a competent director? Would it be fair to say that it should be rather less than that of the Lord Chancellor or the Prime Minister? Surely he has a figure in mind.

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary (Science and Innovation), Department of Trade and Industry, Parliamentary Under-Secretary (Department of Trade and Industry) (Science and Innovation)

My Lords, obviously it must be more. However, taking into consideration the range of companies and jobs done by directors, it is clear that there will be a vast range of appropriate salaries. I believe that we can all agree that, if the performance of directors is outstanding and their company is doing very well, they should be rewarded appropriately. However, most of us find it unacceptable when directors appear to be rewarded extremely well for performance which is extremely poor.

Photo of Lord Faulkner of Worcester Lord Faulkner of Worcester Labour

My Lords, in the clamour for the shareholders of Railtrack to be compensated as a consequence of the company's collapse, does my noble friend know whether Mr Gerald Corbett, who eventually had to resign due to his culpability in the causes of the crash at Hatfield, which occurred exactly one year ago today, has returned any of the £1 million pay-off that he received? What did the shareholders do to resist that payment?

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary (Science and Innovation), Department of Trade and Industry, Parliamentary Under-Secretary (Department of Trade and Industry) (Science and Innovation)

My Lords, I believe that that is exactly the type of situation on which we want to see action. Of course, people's contracts must be taken into account. As Mr Bonham made clear in the case of the salary of the noble Lord, Lord Simpson, there is very little that a chairman of a company can do in circumstances where a contract exists and where it is quite clear that, if that contract is taken to the courts, the company will lose.