Second Reading

Part of Companies' Remuneration Reports Bill [HL] – in the House of Lords at 11:41 am on 24th April 2009.

Alert me about debates like this

Photo of Lord Taverne Lord Taverne Liberal Democrat 11:41 am, 24th April 2009

My Lords, first, let me say that the noble Lord, Lord Gavron, has done the spade work on this Bill. It is strongly supported by the noble Lord, Lord Tugendhat, and me, but he deserves the credit. Indeed, his impressive speech in introducing the Bill will, I hope, persuade the Government that it should have their enthusiastic support.

I want to talk about inequality more generally. One of the main sources of inequality is the workplace and, in the past few years, the differences in pay between top executives and the average employee in industry have grown at a rate which is quite astonishing. I cite some figures from an important book, The Spirit Level, by Richard Wilkinson and Kate Pickett. The book says that boardroom pay in the FTSE 100 companies rose annually between 2003 and 2007, at a time when inflation was rarely above 2 per cent, by 16 per cent, 13 per cent, 28 per cent and in 2006-07 by 37 per cent. Average pay, including bonuses, for chief executive officers in the top companies a year ago was just under £2.7 million. In manufacturing as a whole, where top earnings are generally are not as high as in many financial companies, the best comparison suggests that the ratio between the pay of CEOs and the average employee is 16.1 times in Japan, 21.1 times in Sweden, 31.1 times in the UK and 44.1 times in the US.

It is often argued that we should not be obsessed by inequalities and that what matters is creating wealth, because everyone benefits in the end, and that high pay for top executives improves corporate performance and thereby increases wealth, so we all benefit. This a fallacy, based on no evidence whatever. There is no evidence that I am aware of that performance is improved by greater inequalities, but there is a wealth of statistical evidence that greater inequalities make society more dysfunctional. Significant comparisons have and can be made between countries in the developed world. We can compare the rate of homicide, suicide, mental health problems and stress, teenage pregnancies and abortions, infant mortality, child violence, obesity, social mobility and numbers in prison. Another important criterion is trust between citizens. I am sure everyone will agree that these are not unreasonable tests by which to judge the effective functioning of a society.

Unfortunately, in a short speech, I cannot give the detailed figures, which is a pity because they are devastating. Overall, the picture is clear: of 21 countries in the developed world, those with the lowest inequalities are Japan and the Scandinavian countries, and they come out top on pretty well every score in terms of health, social problems and the degree of trust between citizens. Countries with the greatest inequalities, led by the United States and Portugal and followed by the UK, come out worst. It can be argued that more equal societies, such as Japan and Scandinavian countries, are more homogeneous and this explains their social success. But, the authors of The Spirit Level and others have analysed the differences not only between countries but between various states within one country—for example, in the United States. This confirms the pattern between countries. The political scientist, Robert Putnam, has reached similar conclusions about inequality and dysfunctionality. In North Dakota, for example, where inequalities are relatively low, people who say they trust each other outnumber by over four to one those in Mississippi, where inequalities are high.

The case is very strong indeed that great inequalities make society as a whole less contented and more dysfunctional. That is what this Bill is about; it should, to some extent help. It does not seek to legislate for limits on pay. That would be oppressive, anti-libertarian, counter-productive and impractical. It seeks to shame into a greater sense of responsibility those ineffective corporate remuneration committees, to which the noble Lord, Lord Gavron, referred, which are composed of other senior executives who stand to gain from hiking up the general level of executive pay. These committees have done a great disservice to British industry and our society as a whole. They should be exposed, and this Bill is a perfectly reasonable and practical measure. Who on earth can really argue against it? I hope, therefore, that the Government will give it their full support.