Second Reading

Part of Companies' Remuneration Reports Bill [HL] – in the House of Lords at 11:33 am on 24th April 2009.

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Photo of Lord Tugendhat Lord Tugendhat Conservative 11:33 am, 24th April 2009

My Lords, I congratulate the noble Lord, Lord Gavron, on introducing this Bill and I am delighted that he should have asked me to join him and the noble Lord, Lord Taverne, in promoting it. I am also glad that the noble Lord, Lord Davies, is on the Front Bench to answer for the Government and that the noble Lord, Lord Myners, is there, too. It is very rare for a Government in this country to contain people with the degree of business experience of those two noble Lords and I feel sure that, from their own experience, they will understand the importance of the principle that the noble Lord, Lord Gavron, is putting forward.

The Bill is a practical suggestion, with no complex rules or box-ticking, for addressing the excessive remuneration that disfigures some sectors of our business. I am all in favour of high rewards for high achievers. Those who create great wealth for shareholders and the economy, as well as jobs for their fellow citizens, deserve to be highly rewarded for that. But those in control of companies should not abuse their position by taking too much for themselves out of a business; they should not create divisive feelings of distrust among those who see that they are taking disproportionate rewards; and they should not allow their judgments to be warped by the pursuit of short-term gain at the expense of long-term interests. Those are the issues that this modest measure is designed to rectify. Whether this Bill in its present form or an adaptation of it is taken forward, it would be very good if the Government could take up the cause.

Many years ago, low rewards for British top management, in absolute and internationally comparative terms, did great harm to this country's economic performance. They acted as a disincentive, stifled initiative and encouraged emigration. I hope that we will see no return to those days. But now the problem is at the opposite end of the scale. Recent events in the banking industry, in which I have spent some years, show how bonus schemes and the life-transforming sums that they can yield have distorted judgments by encouraging a concentration on short-term gain to the jeopardy of long-term viability.

This phenomenon has been most blatant in the financial services industry but by no means confined to it, as the noble Lord, Lord Gavron, pointed out. The problems that I have mentioned so far are only a part of the overall problem. The very high rewards that sometimes go to executives also go to their heads and can warp their judgment. For some, being paid like supermen leads them to believe that they are perhaps supermen—I think that all of us have seen that phenomenon in practice. For others, being paid very large amounts puts great pressure on them to justify to themselves the great rewards that they are seeking and can lead them into unwise actions. And then there is a third category, where people see the chance of fattening up a company so that it can be sold at the top of the market and yield them a great return so that they can then live happily ever after.

All these reactions have been on display in recent years and have led to many ill advised takeovers. Sometimes, one has had supermen who, after initial successes in takeovers and acquisitions, get carried away and, like Napoleon, cannot stop until eventually they reach their Waterloo. Perhaps the most celebrated recent example of that is Sir Fred Goodwin at the Royal Bank of Scotland. However, not so very long ago, in another industry, a perhaps similar example was the noble Lord, Lord Simpson, at Marconi, the former GEC, where one saw a great company built up over many years by Lord Weinstock and then brought to its knees—although it would be truer to say "laid absolutely flat"—within a short time as a result of the phenomenon about which I am talking.

These very large rewards and excessive packages can also serve to insulate their recipients from the world around them and from normal life. There have been some particularly spectacular examples of that in the recent past in the United States. Perhaps the most blatant in a way was John Thain of Merrill Lynch, with his $1 million makeover of his office. Another example was when the heads of the great motor companies in Detroit all flew in their corporate jets to Washington to beg for taxpayer handouts. Of course, Congressmen pointed out the inconsistency of that. Perhaps most tragic, and most far reaching of all, was the case of Dick Fuld at Lehman Brothers, a company for which I worked for a number of years.

It is hard to lay down hard and fast rules about top executive pay. So much depends on the circumstances of a business and the role of individuals. Like the noble Lord, Lord Gavron, I would draw a clear distinction between, on the one hand, entrepreneurs whose own fortunes are at risk and who have created the companies that they manage and, on the other hand, those who have nothing at risk and are managing a company on behalf of others. I am aware, too, that of course some people fall some way between those two categories.

The word "excessive" in this sphere is rather like the old conundrum about how to describe an elephant. It is very hard to do but you know it when you see it. The purpose of this Bill is to help us to see it—to draw back the veils that sometimes hide and camouflage excessive rewards so that these can be more clearly seen and more clearly judged. Other measures, such as the publication of salaries in the annual report and the votes that take place at annual general meetings, although they are not always to great effect, go in the same direction.

As the noble Lord, Lord Gavron, says, this is a modest measure. It will not transform the situation but it will serve to bring about an improvement and make it easier to recognise abuse. It will put pressure on those who are taking too much out of the system to justify what they are doing—or put pressure on them not to do it. I believe that it will help to improve the whole climate of corporate activity in this country. It gives me very great pleasure to support the noble Lord, Lord Gavron, in conjunction with the noble Lord, Lord Taverne.