Public Limited Companies (Financial Regulation)

Part of the debate – in Westminster Hall at 2:30 pm on 13th March 2003.

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Photo of John McFall John McFall Chair, Treasury Committee 2:30 pm, 13th March 2003

I entirely agree. Only today, The Times business section carries an article by Chris Quick, the finance and accountancy correspondent, who is also the editor of Accountancy magazine. He states:

"In a recent survey carried out by Accountancy magazine, we found that 53 of the 59 chartered accountant finance directors of the FTSE 100 are alumni of the big four accountancy firms—PricewaterhouseCoopers, Deloitte and Touche, KPMG and Ernst and Young. The survey also found that 18 FTSE 100 companies used the old firm of a chartered accountant director as their auditor."

The notion of old boy networks, as the article calls them, is alive and kicking in spite of the new rules. Those companies have to come up to scratch, and if they do not, legislation should be introduced.

The Committee looked at the big four firms. The chief executive of the Financial Services Authority, Sir Howard Davies, said that certain specialised work is left to one or two of the big firms, the result of which is that there is no competition in the industry. The Minister will note that in our report we ask the Government to refer the big four to the Competition Commission. I fear that that sent a shiver down Ministers' spines, but they should stiffen them. There is insufficient competition in the industry, which does not serve it well.

Sir David Tweedie, who is the president of the International Accounting Standards Board, gave evidence to the Committee. My colleagues and I commend Sir David for his expertise, competence and honesty. He stated that a review of accountancy on the issue of stock options was being held back in the United States by a number of chief executives. He gave us a stark warning: the chief executives of 70 per cent. of the listed companies in America use stock options, largely to inflate share prices so that they, their sons and daughters and their grandchildren can live a life of luxury. Stock options are used at the expense of the company. Those are not my words, but those of Sir David Tweedie—hon. Members can read them in the transcript of the Committee. He suggests that the issue of stock options should be firmly addressed in the United Kingdom. Stock options should be written down as an expense; if they are not, the well-being and long-term future of companies will be at risk. Such a warning to the Minister from someone so eminent is important.

The Select Committee also touched on corporate governance. Sir John Bourn, the Comptroller and Auditor General, suggested that non-executive directors should report on a range of matters relating to the audit. He added that

"the external auditor should know that this discussion with the non-executive directors is an important part of his work, and that his ability to satisfy the non-executive directors is crucial in the determination of whether he stays the external auditor."

Sir John's comments take us into the wider area of corporate governance and the Higgs report. Derek Higgs opens his report by quoting from what Walter Bagehot said in 1867.

"We must not let daylight in upon the magic".

Higgs continues:

"In the corporate boardroom, the importance of non-executive directors should be recognised, but their role, perhaps like that of the monarchy of old, is largely invisible and poorly understood."

That should be the starting point for our Committee. Perhaps the role of non-executive directors is largely invisible and poorly understood.

Warren Buffet, the second richest man in the world, made some critical remarks the other day. During the past 37 years, Warren Buffet's company has delivered an annual return of 22.6 per cent., and its book value has increased by 194,000 per cent., He is someone in the financial markets who knows what he is talking about. He was very scathing about the broad sweep of boardroom behaviour, saying:

"It is almost impossible in a boardroom populated by well-mannered people to raise the question of whether the CEO should be replaced. It's equally awkward to question a proposed acquisition that has been endorsed by the CEO, particularly when his inside staff and outside advisers are present and unanimously support his decision. (They wouldn't be in the room if they didn't.) Finally, when the compensation committee, armed, as always, with support from a high-paid consultant reports on a mega-grant of options to the CEO, it would be like belching at the dinner table for a director to suggest that the committee reconsider."

When Warren Buffet says that directors should be independent, but far too few are business-savvy, interested and shareholder orientated, it is time for reflection, which is where Higgs comes in. He advocates that FTSE 100 executives should not hold more than one additional non-executive position, that chief executives should not step up to being chairman of the same company, that a new post of senior independent director should be established—a non-executive director who would be readily available to meet shareholders—and that more than half of the board should be independent.

Higgs mentions several other areas of concern and asks British business to take this opportunity to change voluntarily. That is the key. His suggestions are not mandatory, but come from an individual who has spent a lifetime in business. Sadly, the business community does not seem to have taken the opportunity. I picked up my copy of The Sunday Telegraph a few weeks ago, and read the headlines: "FTSE 100 chairmen fight back against Higgs" and "The revolting chairmen". A survey in The Sunday Telegraph found that 90 per cent. of chairmen did not want their senior non-executive directors to play an increased role in liaising with shareholders.

I was interested to see a quote by Gerry Robinson, the chairman of Allied Domecq, a whisky company based in my constituency. I have served the company's interests well in my 16 years in Parliament, working alongside its management and workers and the surrounding community. Gerry Robinson is quoted as saying:

"Higgs increases the separation and isolation of non-execs and execs on a board. I don't believe for one moment it stops those people determined to feather their own nests or behave improperly. The whole issue of trying to get corporate governance bolted down is illusory."

That comment comes from the eminent chairman of a FTSE 100 company, so goodness help us. We need corporate governance to be bolted down for the sake of the economy, business and our prosperity. It makes me think that some of these chief executives live in a world of their own. That reminded me of the opposition from business, which echoed previous criticisms of Cadbury, Greenbury and Hampel's reviews of corporate governance. Those reviews led to reforms that are now widely accepted and are in practice. There is no problem with them.

In order to find out Gerry Robinson's full views on the issue, I wrote to him on 17 September. I included a copy of our report and asked for his comments. On 7 March, I asked my secretary whether she had had any reply, and she said no. I told her to telephone him again, so she called the head office in London, and was told that she would have to direct anything through a Mrs. Vivian Kray, the secretary to the chief executive, Philip Bowman. No one would give us a contact number or address for the chairman of the company. Realising that Mr. Robinson was, in his own words, both "separated and isolated", I asked my secretary to give him my London address and my e-mail address, but sadly I have had no response from the FTSE 100 company chairman. I will send him a copy of today's Hansard and see whether that elicits a response. I have here a newspaper article in which FTSE 100 chairmen are being vitriolic about the voluntary system and say that they cannot engage in the debate. That ain't fair play. We need to ensure that they can.

Certainly, Mr. Digby Jones of the Confederation of British Industry tried to engage in the debate; he sent around a questionnaire that involved box-ticking. By the way, he once commented that as the Higgs report was all about box-ticking, he did not want it. However, I have the CBI survey here, and it involves fully coloured box-ticking, as hon. Members can see. Digby sometimes reminds me of something we say in Scotland—sometimes he lets his belly rumble, and then he talks. This is a classic example of that.

Martin Dickson, in the Financial Times, said that the value of the CBI survey was undermined by the fact that Digby Jones was either misreading what Higgs proposed or, God forbid, mischievously twisting it for his own political ammunition. Where does the balance lie with Higgs, and what is it that the CBI and the FTSE 100 directors fear? Martin Dickson says that Mr. Jones thundered that

"only in exceptional circumstances, when normal channels of communication have broken down, should the Sid"— that is, a senior director—

"be available privately for shareholders to voice concerns."

The message for Digby is:

"This is how the governance of modern major companies already operates", and that is how Higgs proposes that it should continue.

The report says that the senior director should be available to shareholders

"if they have reason for concern that contact through the normal channels of chairman or chief executive has failed to resolve".

In other words, the senior director post remains a long stop. Digby Jones says that the senior director

"should not open up a separate and potentially divisive channel of communication with shareholders or have responsibility for reporting back to the other non executives on an exclusive basis" but the Higgs report does not suggest that senior directors should be a separate channel. He merely proposes that they attend enough management meetings with shareholders to understand their concerns. The role is clearly passive and involves listening; that is eminently sensible. That is the point of the senior director, both now and as stated in the Higgs framework.

The senior director's other two proposed functions are hardly revolutionary. One function is to chair a meeting of independent directors without the chairman once a year, and the other is to report to other non-executive directors on what shareholders are thinking. Some CBI members fear that that could undermine the chairman, but there is a perfectly respectable view that some chairmen are undermining their own companies because of the present lack of scrutiny. We need not think further back than Marconi. Lord Simpson and John Mayo took nearly £4 million when they left, and both later challenged Marconi for increased pension rights. Those individuals—and Lord Simpson was chief executive of Marconi—went on a spending spree of £4 billion and ended up reducing the value of the company from £34 billion to £66 million, a fall equivalent to a pukka blue-chip company turning into a scrap yard. That is what happened to Marconi, yet its executives left with enhanced pay. That is now a big issue, and perhaps it is what the FTSE 100 directors are afraid of. However, they should express their concerns much more explicitly. The issue of executive pay and fair remuneration is at the heart of the debate.

I have taken a look at the statistics for top executives' pay. In 2001 it rose by 17 per cent., which was six times the national average. That followed increases of 28 per cent. in 2000, and 16.5 per cent. the previous year. Those directors could validly be charged with living in a world of their own, divorced from the rest of society.

That explosion of top pay has social effects. The message that it sends is that one gets handsomely compensated for failing as well as for succeeding, because during the period when top executive pay increased to that extent, the FTSE 100 index lost nearly one third of its value and inflation and earnings growth were running at an all-time low. Earnings growth fell from 5 per cent. in December 2000 to 3.4 per cent. a year later, which was the lowest figure for 35 years.