Second Reading

Part of Companies' Remuneration Reports Bill [HL] – in the House of Lords at 1:12 pm on 24th April 2009.

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Photo of Lord Davies of Abersoch Lord Davies of Abersoch Minister of State, Department for Business, Enterprise & Regulatory Reform, Minister of State, Foreign & Commonwealth Office, Minister of State (Foreign and Commonwealth Office) (UK Trade and Investment) (also in the Department for Business, Innovation and Skills), Minister of State (Department for Business, Enterprise and Regulatory Reform) (UK Trade and Investment) (also Foreign and Commonwealth Office) 1:12 pm, 24th April 2009

My Lords, on behalf of Her Majesty's Government, I thank my noble friend Lord Gavron for explaining the background and the purpose of his Bill. In reply to my noble friend Lord Donoughue—the only career I think he has not done is estate agency—there is very little negative comment from my officials in what I am about to say. Over the past few months, unsurprisingly, in the US and Europe we have seen a good deal of debate about remuneration. There are some underlying principles on which everyone seems to agree. We should not pay for failure. We should pay for performance. We need to ensure that every employee is paid properly for their role. We must have equality, as the noble Lord, Lord Taverne, highlighted. We also need to ensure that there are the proper processes around remuneration at the board table and the proper processes between boards and the owners of the company where the company is publicly quoted.

We also need to ensure that remuneration is fully transparent. As my noble friend Lord Puttnam said, we must be fair. This does not mean that individuals should not get fully rewarded for high performance and adding real value to the business. We must not restrict the UK's ability to attract and retain bright, high-quality people. We must also not create an anti-business and anti-success culture within the UK. Having sat on two major public company boards and on the remuneration committees, it is clear to me that there has been much improvement in some areas of their policies. But it is also clear from the recent examples in the corporate world that some areas need improvement. From my own experience, a high degree of independence and a huge amount of work goes into running a remuneration committee.

In his question about my previous employer, the noble Lord, Lord De Mauley, made reference to the company we both worked for having business in 70 markets with different wage structures. That is quite a challenge when we come to the disclosures and the ratios mentioned in the Bill.

It is worth reminding the House of the action which the Government have taken over a number of years to improve the transparency of directors' remuneration, the accountability to shareholders and, ultimately, the ability of shareholders to consider the link between pay and the performance of the directors. In 2002, the Government introduced the Directors' Remuneration Report Regulations. This followed a decade of important contributions to the state of corporate governance in the UK: the Cadbury report in 1992, the Greenbury report in 1995 and the Hamper report in 1999. Following detailed consultation, the Government introduced regulations which required quoted companies to publish a report on directors' remuneration as part of their annual reporting cycles and to offer shareholders a vote on that report. I shall not repeat what quoted companies are required to publish in their annual accounts; suffice it to say that they are required to table a resolution at each AGM on the remuneration report.

Additionally, regulations made under the Companies Act 2006 have introduced a new provision which came into force for financial years beginning on or after 6 April this year that requires quoted companies to report on how pay and employment conditions of all employees were taken into account in determining directors' pay. The Government will be paying close attention to the response to this new requirement and considering how companies use it to improve disclosure in this area.

Given recent events, there is now a much wider, active debate on the following areas, some of which have been mentioned today. How can we stop shareholders driving short-term performance in corporates and showing little interest in long-term value? How should companies handle remuneration when there is a significant change, which I found personally, working in the corporate world through the introduction of hedge funds, where the owners of the company may be owning the shares for a very brief period of time? How should remuneration committees be staffed? What is the role of an AGM, given that most large shareholders, the owners of the company and the hedge funds very rarely attend? As significant numbers of companies have moved away from options to performance shares, what is the right process for dialogue between the board, the remuneration committee and the shareholders? Should there be more detail published on the top 50, or even the top 100, executives and the top 50 or 100 highest-paid employees, who are very often different? How do we get more transparency without discouraging talent from seeking to be on the boards of top-performing UK listed public companies? How do we get the right knowledge, experience, pragmatism and professionalism on to the remuneration committees?

Most boards have exercised a high degree of control; they have dealt with the issue of conflict of interest in a measured and professional way. Indeed, the debate has now moved into the wider issue of what is the right governance model, not just for banks but for other types of companies. What should chairmen, non-executives and others get paid? What is the right training and experience required for these individuals? Exactly what is the difference between a non-executive and an executive at the chairman level—something that I have personal experience of? How do we make sure that institutional shareholders in particular offer appropriate oversight, not only on a company's remuneration policies but more generally? That is something that my noble friend Lord Myners has been heavily engaged in.

This debate needs to involve management boards, shareholders and a variety of associations, including the Association of British Insurers and the National Association of Pension Funds. The Government have commissioned an independent review under Sir David Walker looking at corporate governance in the financial services sector, but it is just as relevant for corporate UK. At the same time, the Financial Reporting Council, which oversees corporate governance in the UK, is also reviewing the combined code on corporate governance. These reviews will report in the autumn. The FSA, meanwhile, is consulting on a draft code of practice on remuneration policies for financial services.

The banking industry's problems have revealed weaknesses in the balance between remuneration and shareholder value. Consequently, the whole area of disclosure and executive pay needs careful and considered evaluation, as the Government and the Financial Reporting Council recognise. To be clear: we have absolutely no problem with the principle of reporting as outlined in the Bill. Our signpost is that we will take up this cause. Our worry about the Bill is that it will distract from the wider issues that I have mentioned.

The Bill is on a topical and important subject. I therefore thank my noble friend Lord Gavron for introducing it to this House, and other noble Lords for their contribution to what has been a fascinating discussion. I also congratulate my noble friend on achieving such a high-quality list of contributors.