Second Reading

Part of Companies' Remuneration Reports Bill [HL] – in the House of Lords at 1:05 pm on 24th April 2009.

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Photo of Lord de Mauley Lord de Mauley Shadow Minister, Business, Enterprise and Regulatory Reform, Shadow Minister, Children, Schools and Families, Shadow Minister, Innovation, Universities and Skills 1:05 pm, 24th April 2009

My Lords, I thank the noble Lord, Lord Gavron, for the work he has put into producing this Bill and for raising the subject today. As my noble friend Lord Kalms said, he has a great deal of experience, among other things as head of substantial companies. I am sure that he will have discussed this with colleagues and former colleagues, and what he has to say is important.

We on these Benches—the tone of the speeches from each of my noble friends today has demonstrated this—share a mixture of anger and frustration at an incentive culture that has undoubtedly been a major contributor to the downfall of some of our major banks and financial institutions and has had such a severe knock-on effect on the wider economy. Like other noble Lords, I was proud to work in the City of London, which I was lucky enough to do from the late 1970s to the early 1990s, and it angers me to see what has now happened. We have strongly supported remuneration transparency both in the new Companies Act and in secondary legislation, not least the requirement for a remuneration report in companies' accounts. We recognise and encourage the current corporate governance reviews, which look not so much at specific salaries, but at the processes by which boards decide levels of remuneration.

The Financial Services Authority is consulting on a new code of practice on remuneration policies for the firms that it regulates. It will include calculation policies for bonus pools, non-financial performance grounds, assessing performance on longer-term criteria than purely on the current year, and so on. The noble Lord, Lord Donoughue, just referred to this. The various institutional shareholder organisations are also reviewing their codes. A key issue is whether the non-executive system works adequately and how it can be improved. Several noble Lords have spoken of this, including the noble Lords, Lord Haskel and Lord Goodhart, who both referred to corporate governance. The Financial Reporting Council has started consultation on the effectiveness of the combined code on corporate governance which sets out standards of good practice on issues such as board composition and development, remuneration, accountability and audit, and relations with shareholders. All companies incorporated in the United Kingdom and listed on the Stock Exchange are required to disclose in their annual report and accounts how they have applied the combined code. We continue to support the combined code and we encourage shareholders to take a more active interest in their companies.

The financial community is doing its best to respond to the problems we are addressing today in a measured and timely way that compares favourably with the Government's approach in their panicked management of the economy. The noble Lord, Lord Gavron, will therefore understand our reservations about this Bill. We are just a little wary of regulatory proposals that might damage the country's reputation as a financial centre and discourage bright people with high potential from working here, thus helping to bring us out of the recession. My noble friend Lord Renton spoke about bright young people from a different perspective, and his point is well taken.

Unjustified extremes of inequality are unhealthy. The noble Lord, Lord Puttnam, emphasised the word "unfairness". I mentioned a moment ago that we have some reservations about the Bill, and I will be specific. The Bill encourages a presumption that a high ratio, as calculated under the disclosure that it would require, is undesirable. The reality is that a sales or managing director who has saved his or her company, preserved jobs and enriched thousands of pensioners whose schemes hold the shares, may thoroughly deserve a substantial pay packet. My noble friend Lord Tugendhat acknowledged this.

One of several potential unintended consequences of the Bill is that the figure it would require companies to produce might draw attention to the fact that in some cases it would be cheaper to outsource the lowest 10 per cent of the workforce, for example to India. This would hardly be in the interests of those it was trying to help.

The Bill raises some technical issues, such as creating reporting and compliance red tape costs. While these may be modest for large firms, some smaller businesses nevertheless are publicly quoted and so, because the Bill includes them, would be subjected to additional time and cost burdens at a point when they are really struggling with much more immediate problems. The exact definition of pay promises some complexity and money for lawyers and, in particular—I should know because I qualified as one many years ago—for accountants.

As the noble Lord, Lord Bradshaw, pointed out, a company which outsources its most basic functions, such as the cleaning of premises, to a subcontractor would probably have a smaller gap between highest and lowest paid employees than another, otherwise identical one that does those jobs in-house, even though there may be no intrinsic difference in the fairness of the pay policies of the two companies. My noble friend Lord Kalms referred to the difficulties of comparing between different companies. This is only one example of such problems of comparison.

It is perhaps worth mentioning that the prominence that the Bill would give to the ratio concerned, which it would require to appear on the first page of the first part of the annual report in bold type, would be greater than that given to all the other information in an annual report, such as information about profitability, solvency, taxes paid and so on. Even people less analytically critical than I am might raise an eyebrow at that.

We look forward to hearing from the Minister, who has a particularly interesting and important personal perspective which he can bring to this debate if he is prepared to do so. He was chairman of a company, for which I was proud to work, which falls fair and square into the provisions of this Bill. It employs people all around the world, many in countries where wages and salaries are among the lowest in the world—for example, Bangladesh. There must be an argument that the cost of living in such countries is lower than in some others. This Bill would cover the worldwide workforce. It will be interesting to see whether he thinks that it would be appropriate to highlight the comparison of the salary which he had to pay to retain the most valuable member of his staff in his highest cost financial centre against those of the lowest 10 per cent. He may of course do so.

The noble Lord, Lord Gavron, has raised an important matter and I thank him for that. Just because we have reservations does not mean that we should not all consider carefully the transparency of information of this kind and how to encourage shareholders to take a more active interest in their companies.