Queen's Speech — Debate (3rd Day)

Part of the debate – in the House of Lords at 5:39 pm on 8th December 2008.

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Photo of Lord Smith of Clifton Lord Smith of Clifton Spokesperson in the Lords, Ministry of Justice, Spokesperson in the Lords (Northern Ireland), Scottish and Northern Ireland Affairs 5:39 pm, 8th December 2008

My Lords, I want to raise two aspects of the operations of UK business, neither of which is adequately dealt with in the gracious Speech. The first is the critical need to improve the standards of corporate governance, while the second concerns the chronic gender imbalance as regards both the numbers and remuneration of women directors and senior managers.

Corporate governance was the subject of three separate and successive inquiries in the 1990s. The Cadbury, Greenbury and Hampel reports examined different aspects and made recommendations accordingly. With hindsight, in view of the magnitude of the crisis that has since engulfed trade and commerce both in the UK and worldwide, these inquiries were inadequate to fend off what was to come. The Enron debacle, a portent as to the future casino character of capitalism, provided a glaring warning that was not heeded. The imminent Wigley report on promoting the City of London as an international finance centre, while doubtless useful in a limited way, will not deal with the fundamentals of the problem. A much more substantial analysis is now needed and the Government should appoint a high-powered inquiry to undertake it as a matter of urgency. Codes of conduct now must have a statutory basis as voluntary self-regulation has proved useless. Furthermore, radical reforms to company law may also be necessary.

A preliminary start has been made by the Association of Chartered Certified Accountants. Its publication, Corporate Governance and the Credit Crunch, published last month, is a thoughtful and timely contribution as to the way forward. The ACCA identifies a failure in corporate governance as the underlying factor that led to the credit crunch. It makes nine proposals to help to remedy the situation. I shall not detail them all now but will highlight the main ones.

To begin with,

"boards have failed in their responsibilities", have not asked the right questions, and,

"have allowed inadequate risk management and sanctioned remuneration incentives that influenced behaviour without proper consideration of risk".

Furthermore:

"Risk management tools have not always been fit for purpose".

This has been exacerbated by the overcomplexity of products in the financial sector and poor training of both executive and non-executive directors that led to a lack of understanding of the associated risks. Crucially, boards, and particularly non-executive directors need assurance independent of management, which requires a much greater enhancement of the role of internal audit, including, in the words of Professor Andrew Chambers, the creation of a cadre of "super auditors" who can relate on even terms with board members.

Then there is the question of the effectiveness of the regulators. Clearly, the Treasury, the Bank of England and the FSA were an inadequate triumvirate of agencies. The proposed banking Bill is intended to improve regulatory oversight of the banks and this House must ensure that it does so.

Whatever the shortcomings of regulation, the fact remains that the boards of many companies, especially the banks, were guilty of gross dereliction of duty. In our debate on the British economy on 3 November, perhaps too much stress was put on regulatory failure and far too little on boardroom behaviour: however incompetent the policing may have been, that does not exonerate the wrongdoers, who should be punished.

In yesterday's Sunday Telegraph—not a left-wing newspaper—Liam Halligan wrote:

"It's not good enough to 'avoid the blame game' and 'look to the future'. For, be in no doubt, this crisis has its roots in fraud—from the mortgage brokers who sold loans they knew would fail to the investment 'professionals' who rolled-up the debts into securities and the ratings agencies that stamped them 'triple-A'.

We need tough questions and full investigations. Those most guilty must go to jail. Unless that happens, and is seen to happen, expect a repeat crisis in a few years' time".

That does not exaggerate the predicament that has to be faced.

I now turn to my second question—namely, the under-representation of women on the boards of major companies and their relative underpayment. The situation is getting worse in many respects. For example, the Office for National Statistics reported in November that the gender pay gap has widened over the past year. Men in full-time work are paid 17.1 per cent more than their female counterparts, while those engaged in part-time work earn 36.6 per cent more. Moreover, a recent study by the University of Exeter found that women directors earn smaller performance-related bonuses because they are less likely than male colleagues to be given credit for business performance.

Of even greater significance, the World Economic Forum revealed that the UK had fallen from 11th to 13th in the global gender equality league—one below Sri Lanka. In terms of overall economic participation, covering earnings and the proportion of senior managers and professionals, Britain has dropped no fewer that 10 places from its 2007-08 score to number 42 in the world rankings.

I have drawn attention before in your Lordships' House to the splendid example of Norway. In 2003, it passed legislation requiring women to hold 40 per cent of the main board seats in public companies by 2008. This year has seen that goal exceeded, with 44.2 per cent of directors being women. That is a dramatic increase, given that in 2003, when the law came into force, women directors accounted for only 6 per cent of the total. Sweden and Spain now have similar legal requirements in place, and New Zealand and Australia are actively considering adopting such affirmative action. Why is the UK so slow to follow suit?

If the Government continue to do nothing positive in this regard, and the reporting of gender pay discrepancies, as envisaged in the gracious Speech, is little more than a token gesture, one recent study estimates that gender balance in corporate board directorships will not be realised, incredible as it may seem, until 2225. The House of Lords might by then be even further reformed.

The Government insist that it is up to shareholders to initiate progressive reforms, but the present economic crisis has proved how little power they can wield, even if they were inclined to do so. The Government are now the major shareholder in many of the banks. Will they make provision in the forthcoming banking Bill, announced in the gracious Speech, for 40 per cent of the directors on their boards to be women? If not, why not? I should like to be reassured that they intend to introduce a 50 per cent rule.

We know where the pale, stale, male composition of the boards of major public companies have got us—up the creek without a paddle. The creation of greater diversity on corporate boards by the appointment of more women directors correlates with better financial performance. A 2008 study of Fortune 500 companies found that, on average, enterprises with higher percentages of women directors outperformed companies with lower ratios.

It is high time that the Government tackled the related problems of poor corporate governance and the inequality of women in senior management that currently afflict the United Kingdom.