I thank my hon. Friend for that contribution, and I absolutely agree with him. Stock options will be used in different companies for different purposes. Larger companies will be concerned that executives do not have as large a financial stake in the company as in the capital. The companies will therefore want to incentivise their managers and make them feel part of the future success of the company. On the other hand, smaller companies may not be able to afford to pay the significant salaries that will enable them to recruit competitive staff, who will otherwise go to large companies. The use of stock options can be an effective way of binding such people in. It is difficult to say that one size fits all, and that is the beauty of the use of stock options. As things stand, stock options are probably the most adaptable way of incentivising staff.
Paragraphs 38 to 41 of the Select Committee's report deal with the implications for directors. I was somewhat surprised at how little time the report gave to that issue, even though the hon. Member for Dumbarton made it the centrepiece of his speech. Unfortunately, the report to some extent justified the Government's response by saying little about the implications for directors. Following the Higgs report, more will come out and I have a feeling that we will discuss the subject again. I will not dwell too much on that issue at present; instead, I will address the content of the report and particularly recommendation (q), which states:
"there is a good case for an audit committee composed of non-executive directors, rather than the board as a whole, to be responsible, in the case of quoted companies"—
I assume that that means fully listed quoted companies—
"for selecting the firm of auditors...and for fixing the auditors' remuneration."
The Government did not respond to that part of the report and I would be interested to hear the Financial Secretary's views on the matter.
The proposals should be treated with caution. They tie in directly with one of the main problems that has been identified with the Higgs report, which the hon. Member for Dumbarton addressed. Taken together, the proposals will create a split between executives and non-executives on a board. Not only does the Higgs report say that non-executives should not sit on an audit committee, but it says that the chairman should not sit on it either because, by way of that appointment, he is deemed to be non-independent. I see good reason for audit committees to review who is the right auditor and how much the auditor is to be paid, and to question boards' decisions if they feel that those decisions are wrong. However, the final decision should be a full board decision, with the board acting and answerable as one.
As with several other proposed measures coming out of Higgs and Smith, there are serious implications for non-executives. They will bear a greater responsibility and there could be negative implications, which could go against Higgs's desire to encourage people and to have a wider pool of non-executives. There could also be higher cost implications for the companies, which may have to pay more to those who are prepared to take on the extra responsibilities.
Finally, I support the Select Committee's findings that considerable improvements in the governance of companies can be brought about by greater shareholder interest in their affairs. More to the point, much more emphasis should be placed on that issue, which relates to matters such as how information is disseminated to the market, how brokers' reports are produced, how banks market their client shares and how institutions vote their shares and involve themselves in the corporate governance of the companies in which they have invested. That issue has been much more thoroughly reviewed in the Untied States, and we could usefully take a closer look at it in the UK. However, since the report was produced, the institutional shareholders committee has produced welcome new guidelines on institutional activism. That is a move in the right direction, but it is a matter on which we should concentrate further.