Second Reading

Part of Companies' Remuneration Reports Bill [HL] – in the House of Lords at 12:29 pm on 24th April 2009.

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Photo of Lord Goodhart Lord Goodhart Liberal Democrat 12:29 pm, 24th April 2009

My Lords, I am very pleased that the noble Lord, Lord Gavron, has introduced this Bill and I welcome the support given to it by the noble Lord, Lord Tugendhat, and my noble friend Lord Taverne. I am glad that successful arm-twisting has produced a surprising number of Members of your Lordships' House, including myself, who have turned up on a glorious Friday morning. I agree with the noble Lord, Lord Haskel, that the matters covered by the Bill are one aspect of the wider subject of corporate governance, and I want to talk about that as a whole rather than just about the aspect of it covered by the Bill.

The failures of corporate governance are at the root of many of the financial problems we face. One of the few good things about this crisis is that it will encourage a rethink of corporate governance as a whole. A lot of work is being done on this already by, for example, the Harvard Law School, which has a very effective corporate governance programme, some of the products of which I read in an e-mail that I received yesterday.

Corporations are of course at the centre of the economy. A vital element of corporate governance is the concept of the duty of those who manage the corporation. Those who run it should be recognised as owing duties to three main groups. The first is the shareholders. The managers have a duty to run their business efficiently and to protect the interest in it of the shareholders. Some businesses may be high risk; that is perfectly legitimate, provided that the shareholders are aware of and accept this. The second group to whom a duty is owed is the employees. There is a duty to pay them fairly, to provide good working conditions and to keep them in employment as far as reasonably possible. The third group is the customers. The duty is to provide goods or services which meet the standards promised by the corporation or required by law, and to abstain from cartels or monopolies which force up prices and reduce competition. There are other groups to which corporate duties are owed, such as creditors who must be paid, or the general public, who may be threatened by, for example, pollution.

The evil at which this Bill is directed is the overpayment of directors and senior staff. This arises because, as many noble Lords have said, the fixing of salaries and bonuses is usually in the hands of people who have little or no interest in limiting them. This damages the first group, the shareholders, including pension funds and insurance companies, because money is being removed which should go into dividends or reinvestment. In some cases the overpayment of directors and staff, particularly if the bonus system encourages risk-taking, may inflict damage which not only hits the shareholders but leads to cuts in employment.

Other breaches of duty have also played an important part. For example, the granting of mortgages by banks to those who cannot afford them is a breach of the duty to the customers by persuading them to take on obligations that they cannot meet. It is also a breach of duty to the shareholders by endangering their assets. It is a breach of duty to the depositors of a bank, who are creditors, by putting their repayments at risk. As the noble Lord, Lord Tugendhat, said, perhaps the worst case of this misinvestment was the collapse of Lehman Brothers, a corporation which is of some interest to me, as I am the great-grandson of one of the original brothers, although I have no financial interest in it.

This Bill, if enacted, would be a fairly small but distinct step in the right direction. It is a step towards transparency, which is part of the answer, but we need much more than transparency. We need a full study of corporate governance. Royal Commissions are out of favour but we need, if not a Royal Commission, at least a high-powered committee to report to Parliament on how we can improve corporate governance in the United Kingdom and prevent future repeats of the events at Northern Rock or the Royal Bank of Scotland. We also need a Government who are willing to accept that report.

We need to consider whether and how far existing legally enforceable duties of directors and other managers in the field of corporate governance can be extended.