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Executive Pay

Volume 539: debated on Monday 23 January 2012

(Urgent Question): Will the Secretary of State for Business, Innovation and Skills make a statement on the Government’s proposals on executive remuneration?

I welcome this opportunity to set out Government proposals on executive pay. Last September I published papers that explored the issues around the rapid growth in executive pay in our largest listed companies, and embarked on a call for evidence.

The evidence is clear that business and investors recognise that there is a disconnect between top pay and company performance, and that something must be done. We cannot continue to see chief executives’ pay rising at 13% a year while the performance of companies on the stock exchange languishes well behind, and we cannot accept top pay rising at five times the rate of average workers’ pay, as it did last year. It is not Government’s role to micro-manage company pay, but there are things we can do to address what is a clear market failure.

Today I can announce a package of measures that the Government will take forward to tackle the issue on four fronts: greater transparency, so that what people are paid is clear and easily understood; more shareholder powers, such as the introduction of binding votes, so that shareholders can hold companies to account; more diverse boards and remuneration committees; and best practice led by the business and investor community. No proposal on its own is a magic bullet, but together they can enable a major transformation to get under way.

Let me start with transparency. Shareholders have told us that they need clearer and more relevant information about pay, particularly the link to performance. At present many company pay reports are simply impenetrable. Through secondary legislation later this year the Government will require companies to publish more informative remuneration reports on how executives are rewarded. This will start with reports being split into two sections: one detailing proposed future policy for executive pay, and the other setting out how pay policy has been implemented in the previous year.

On future policy, remuneration committees will be expected to explain why they have used specific benchmarks and how they have taken into account employee earnings, including pay differentials, when setting pay. Companies will also have to explain how they have consulted employees and taken their views into account. UK employees in large companies already have the right to request that their employers consult them on issues relating to the organisation, including pay, through the Information and Consultation of Employees Regulations 2004. This potentially powerful mechanism for employees has been underutilised to date, so I encourage employees to use it and put executive pay on the agenda.

Shareholders say that pay policy too often appears totally disconnected from their company’s overall strategy. I want companies to state clearly and succinctly how their proposed pay policy reflects and supports company strategy, how performance will be assessed and how it will translate into rewards under different scenarios. In the backwards-looking section of the report, companies will have to provide a single figure for total pay for each director and explain how pay awards relate to the company’s performance. To provide context, companies will be mandated to produce a distribution statement outlining how executive pay compares with other disbursals, such as dividends, business investment, taxation and general staffing costs.

Alongside more information, shareholders need new powers to hold the board to account. I will consult shortly on specific proposals to reform the current voting arrangements and give shareholders a binding vote, enabling them to exert more pressure on boards. This will include a binding vote on future pay policy, including details of how performance will be judged and real numbers on the potential payouts directors could receive. Companies will have to include a statement on how they have taken into account shareholder views and the results of previous votes.

There will also be a binding vote on any director’s notice period longer than one year and on exit payments of more than one year’s salary. Shareholders will still get a vote on how the agreed policy has been implemented. I will consider whether we need further sanctions that could be applied when a significant number of shareholders dissented in the advisory vote. In addition, we will review what level of shareholder support is needed to pass pay proposals—for example, whether the threshold for a successful vote should be raised to 75% of share votes cast. By way of context, last year four FTSE 100 companies failed that test.

Let me move on to diversity in remuneration committees. Having diverse remuneration committee membership is crucial to changing the status quo on executive pay. The right way to tackle this is by having more diverse boards. I want to see more people who come from different backgrounds appointed, including people from the professions, public servants, academics, lawyers, and people who have not been directors before. For example, I would like at least two board members to have never previously been members of a board of directors.

In October a new provision in the UK corporate governance code will come into force requiring companies to report on their policy on boardroom diversity, how they propose to deliver it and what progress has been made. That sits alongside a new code of conduct for executive head-hunters and good practice guidance from the Association of British Insurers on the importance of board diversity, board evaluation and succession planning. The Government will also address fundamental conflicts of interest in the pay-setting process and require greater transparency on the role of remuneration consultants, how they are appointed, their fees, and who they advise and report to.

We have also observed that in the FTSE 350 about 6% of remuneration committee members are executives of other companies. There is a perceived conflict, as those individuals have a personal interest in maintaining the status quo in pay-setting culture and in pay levels, and we are looking at mechanisms to limit that.

In the context of such changes, we must deal with the specific issue of payments for failure. Some of our consultees have argued that all quoted companies, not just those in financial services, should have a clawback mechanism in place, and we will ask the Financial Reporting Council to revise the corporate governance code in order to require all large public companies to adopt clawbacks.

In relation to best practice, this package of measures will create a more robust framework within which executive pay is set and agreed. Moreover, lasting reform depends on active shareholders and responsible businesses accepting the need for change and pushing the agenda forward.

Deborah Hargreaves, who chairs the High Pay Commission, will launch a new project next week to monitor the state of pay at the top. The high pay centre will perform an important role in delivering the high-quality research that this area of debate badly needs. Companies have to show leadership on this issue, and in the following weeks and months I will be working with business and investor groups to build on the current momentum for reform, to agree on what best practice looks like, and to promote that more widely.

Order. I am extraordinarily grateful—[Interruption.] Order. I am extraordinary grateful to the Secretary of State, but I have been immensely—perhaps excessively—generous, because the right hon. Gentleman took precisely three times as long as he is supposed to take in answering an urgent question. I know he will understand—I listened to him with great interest and respect—that I must make allowance for that with regard to the Opposition Front Bencher’s response, but above all I make the point for the future that those on the Front Benches must stick to the limit, because my concern is to protect the rights of Back-Bench Members.

Thank you, Mr Speaker, for forcing the Secretary of State to come to the House today to set out the Government’s proposals in this area—[Interruption.] The Under-Secretary of State for Business, Innovation and Skills, the hon. Member for Kingston and Surbiton (Mr Davey) chunters from a sedentary position, but it is quite extraordinary for Ministers to demand greater accountability and transparency from people in business, and then to seek to avoid being held to account for their policies in that area in the House of Commons.

The problems of excessive executive pay and rewards for failure have grown over the past few decades; in fact it was probably 30 years ago, when the current Business Secretary was a happy and active member of the Labour party, that things were more in proportion. We agree that it is right that those who work hard, generate wealth and create jobs for our country are rewarded, but excessive pay and rewards for failure are bad for business, the economy and society at large.

I welcome much of what the Business Secretary says, but his proposals simply do not go far enough in promoting the transparency, accountability and fairness that people want to see. We support all the recommendations of the independent High Pay Commission, to which the Business Secretary referred, but why will he not do the same, particularly given that his Treasury spokesperson in the Lords is a member of the commission, and presumably supports its recommendations?

The Business Secretary and other Ministers have underlined the importance of consulting employees, so why will he not back moves for employees to sit on the remuneration committees that set pay? Employees play that type of role in Europe’s strongest economy, Germany, and on the board of one of our most successful businesses, John Lewis. We read that he would like to back the proposal but has been prevented from doing so by the Prime Minister and the Chancellor. Can he confirm that?

The right hon. Gentleman said nothing about the publication of pay ratios within businesses. Why will he not agree to that proposal? If I am wrong, I am happy to be corrected. I agree with him on the need for greater clarity about the role of remuneration consultants. They currently owe their duty to the board, as I understand it. Does he agree that there is a case for changing the situation so that, much like auditors, they owe their duty to shareholders?

Above all, I do agree that increased shareholder activism is key. Two issues have been cited as obstacles: that more of our UK stock is held by foreign investors and that it is held for a shorter period. Does the right hon. Gentleman agree that that need not be an insurmountable barrier to increased shareholder activism?

Finally, on shareholder activism, the Business Secretary, the Deputy Prime Minister and other Ministers who ultimately bear responsibility and control the public stake in the banks—RBS, in particular—have said that they are in a position to stop the chief executive of that bank receiving a large bonus while he is issuing thousands of redundancy notices to RBS employees. How and when will that happen? Does the right hon. Gentleman think that it is acceptable for the chief executive of RBS to take a bonus of the order of £1 million when thousands of company employees are being made redundant?

I start by acknowledging that the issue is, as some of the hon. Gentleman’s questions implied, complex. The best way to proceed with it for the country is to have an all-party consensus. The contributions made in recent weeks by the Prime Minister, the Deputy Prime Minister and the Leader of the Opposition have contributed in a very positive way towards that, and we can make some progress on that. I contrast that slightly with the hon. Gentleman’s somewhat carping response. I believe that today he put out a press release describing as “half-baked” proposals that he had not seen; he did not know what was coming. That was not terribly clever.

The hon. Gentleman’s central criticism was that we had not gone far enough. Let me reflect on what that means. We have emerged from 12 years of Labour government, when many of the issues could have been dealt with. That period of government started with something called the “prawn cocktail offensive”, which led to my immediate Labour predecessor saying that he was “intensely relaxed about people being filthy rich”. Those were the standards that we inherited. I remind the hon. Gentleman about what happened in that period of government. At the beginning, chief executives’ pay was 47 times average pay; at the end, it was 120 times average pay. That is the problem that we are now trying to correct. Before the hon. Gentleman lectures me any further on not going far enough, he should reflect on why so little was done when his party had the power to do it.

Let me respond specifically to the point about workers on boards. It would be very desirable if there were more workers on boards. The initiatives being promoted in respect of encouraging John Lewis-type arrangements, which by definition will get workers on boards, will take that further. We welcome worker participation in industry; that is one of the reasons why my ministerial colleague, in conducting the Royal Mail legislation through Parliament, laid such insistence on worker shareholding and giving workers a right to participate. But there is a specific set of problems around mandating companies to have workers on their boards. Consider the position of the large number of FTSE companies whose employees are predominantly overseas. How would the work force be selected? Worker participation is a good idea for many companies, but let it be done without the prescriptive route, which would simply not work.

The same applies to pay ratios. There is a lot to be said for pay ratios; the hon. Gentleman may not have heard me, but I did advocate that kind of metric as a way of assessing what is happening. But if he had reflected for a few minutes, he would have seen that there is a big difference between a company that, for example, has a large number of unskilled workers, and another company that has outsourced a lot of its unskilled labour force, producing totally meaningless figures in respect of ratios. So we welcome pay ratios, but they should not be mandated and prescribed.

The hon. Gentleman asked about the High Pay Commission, which has done excellent work; I referred to it during my contribution. I checked back on its 12 recommendations, and we are implementing 10 of them in practice or in spirit. Of the remaining two, one—about employees on boards—I have already referred to. The other was a very specific recommendation on the structure of pay, which we judged to be impractical.

On RBS, let me just say that that matter is above my pay grade. The Prime Minister has said that he will ensure that it is dealt with properly. I am sure that it will be, and that there will not be excessive bonuses.

To return to my first point, we can make progress in this important area on an all-party basis. I encourage the hon. Gentleman to revert to his usual more constructive and moderate approach, and to work with us to achieve far-reaching and overdue reforms.

I welcome anything that recognises that it is the role of shareholders and competitive markets to decide pay in companies. With that in mind, let us consider what happens where the Government are the shareholder. Will the Secretary of State remind us what deal the Labour Government signed up to for RBS top executives, explain why it was so far in excess of the dreadful results that have been delivered in public ownership, and say what this Government can do to put that right?

My right hon. Friend is right to stress the central role of shareholders and to remind us about the conditions according to which the head of RBS was appointed and the contract negotiated. Of course, the problem is not just with pay; we are now also having to consider the problem of knighthoods that were awarded for appalling behaviour in British banking.

A lot of what the Secretary of State has said will have cross-party support. The Government are backing employee share ownership, the logical outcome of which is employees on the board. In view of that, and his rejection of the automatic right of employees to be on the board, for the sole reason that a lot of companies have foreign employees, is the Secretary of State really trying to address this issue and to find a way through? Although it may be difficult in practice, it is very good in principle.

There is no logic to suggest an automatic carry-over from worker shares to representatives on boards. Those are separate issues. I simply urge the hon. Gentleman to look back on my comment about the use of information and consultation arrangements. There is a regulation that came from the European Union— one of its better ones—back in 2005, which employees in many companies could use to engage directly in conversations with their management about their pay. Far too few people have taken advantage of that. I hope that he and others will encourage them to do so.

I congratulate the Secretary of State, who, after 13 years of a Labour Government who did nothing about this issue, has persuaded our Conservative colleagues that this is the right policy for the new century. I urge him to continue to be robust and to suggest that each individual company should have a policy that reflects the differential between the highest and the lowest-paid, according to the make-up of its own work force.

Again, I do not want to be too negative. One of my Labour predecessors, Patricia Hewitt, advanced the issue by introducing advisory votes. That was a step forward but it was not enough, and we have to go further. However, that step was usefully taken. My right hon. Friend asked specifically about pay ratios. I have said that those are useful metrics, and that we should encourage their use. However, companies have very different structures, and pay ratios mean different things. Therefore, mandating them is a different matter.

Does the Secretary of State agree that it is generally undesirable for public companies to pay more out in bonuses, particularly to their senior staff, than in dividends, especially as dividends are often paid out to pension funds, which include many members of the public on low incomes?

Yes, my hon. Friend is correct. That is why one element of transparency that we have advocated is a breakdown of the different streams of payment by companies, which include payments to shareholders, payments to employees and other costs.

Does the Secretary of State agree that context, as well as contracts, matters? Whatever it says in the contracts of the top people in the banks in which the Government have a major stake, the context is pay freezes for millions of workers and the biggest squeeze in living standards since the war. Will he therefore resist the temptation to rely on the defence advocated by the right hon. Member for Wokingham (Mr Redwood) about contracts and agree that there is nothing to stop bankers exercising restraint, given the economic context?

Across the coalition, we have been very clear that we expect restraint. In some cases that has been accepted: the head of Lloyds, for example, has waived his bonus for this year. We should not trivialise the issue of contracts, which is a serious matter involving how business is conducted.

Whatever happened to the phrase, “We’re all in it together”? I listened carefully to what the right hon. Gentleman said. He talked about “we”. Does he mean himself and the Liberals, or does he mean the whole Government? The truth is that the workers will carry the can, and the bankers and executives who have got their 50% pay increases will get away with blue murder.

As my right hon. Friend the Member for Wokingham (Mr Redwood) reminded us, we are dealing with a legacy in which precisely the failings that he described were allowed to happen over a long period. We are trying to put that right. Addressing executive pay is only one means by which we deal with the fundamental injustices and inequalities in society. There are many other issues, including tax and regulation. However, this proposal will make a significant difference.

The Secretary of State mentioned ending the rewarding of failure. Has he consulted business people? Many of those to whom I speak believe that over the past few years far too many politicians have themselves been rewarded for failure, which has brought our economy down from the seventh to the eighth largest in the world. Does he accept that the vice of greed should not be replaced with the vice of envy?

I do agree with that. Of course, it is essential, in a successful economy, and particularly a successful private enterprise sector, that enterprise, entrepreneurship and good management should be properly rewarded. The issue is not envy but performance.

The Secretary of State acknowledged that he gave a fairly lame answer to the question asked by my hon. Friend the Member for Streatham (Mr Umunna) about worker representation on boards. Will he now try to give a proper answer on why the Government could not end the cosy closed shop on remuneration committees by legislating for worker representation?

Ending the cosy closed shop on remuneration committees involves wider diversity in general. Workers are part of that, but so are consumers and people who have no other connection with the company. Diversity is a much wider concept. At the moment we are promoting the idea of women on boards. I gave a considered answer to the question about workers on boards. We must remember that other issues are involved. For example, different companies have different types of labour force spread across the world. There is also the question of how to ensure that a worker representative accepts the full legal responsibilities of a director. If the hon. Gentleman looked at what those legal responsibilities are, he would find that it is not practical to employ that approach.

Incentives and rewards are fundamental to the private sector growth that we are all keen to ensure. Does my right hon. Friend accept that it is sometimes hard to distinguish between performance and failure, and that certain companies facing extremely difficult trading conditions might have to hang on to an executive through the incentive of high pay?

Yes, and that is why operational decisions must remain with the company so that it can make a judgment on the matter. Through these recommendations we are trying to ensure that investors are properly informed, and we are, through transparency, giving them the power to make the judgment that the hon. Lady described, and act accordingly.

Does the Secretary of State accept, as a number of his Back Benchers do not, that this is fundamentally a question about what type of society we want to be, and that when we see executives being paid 75 times more than the lowest-paid people in the company, that is not about economic efficiency or incentives, but immorality?

Yes, this is about different types of society, but of course there are many wider issues than the remuneration policies of public listed companies and many aspects of fairness and inequality. I simply make the point that many other private enterprise economies —Germany, the Scandinavian countries, Japan—have a much more disciplined approach to executive pay than has been the case in the UK, and many of their companies do very well commercially.

The Secretary of State will be aware of the book “The Spirit Level”, which suggests that the most successful economies and societies are those in which the gap between the richest and the poorest is the narrowest. Does he believe that the announcements that he has made today will widen or narrow that gap?

They will certainly narrow it, in contrast with the trend over the past decade that was identified in a recent OECD survey. It showed that almost uniquely in the developed world, the big disparities between the top and bottom are widening in Britain. Today’s announcement is one key element in rectifying that adverse trend, which we have seen particularly in the past decade.

The Secretary of State said that the decisions about RBS top pay were above his pay grade, but unlike the workers, he is on the board of the Government, namely the Cabinet. Will Ministers set a good example and control Stephen Hester’s bonus?

Ministers have already made it very clear that bonus restraint should be employed in that company.

I welcome the Secretary of State’s announcements today, especially those on transparency and increasing shareholder power. Does he agree that the fundamental principle must be that executive pay reflects company performance? That is a principle that the 107 bankers suing Commerzbank for £1.6 million in bonuses next week would do well to remember.

Yes, the theme of what I have been saying today has been the link between pay and performance, and as my hon. Friend knows, there are specific problems in the banking sector, not least because until the Vickers report is implemented we still have a “too big to fail” problem and an implicit Government guarantee. That is why rather stricter provisions have to apply in the sector.

Does the Secretary of State really want us to believe that those who get vast salaries, bonuses and share options and probably earn well over £1 million a year are now terrified as a result of what he has said today? The truth is, that it does not really amount to much, does it?

I do not expect them to be terrified, but I do expect them to think a little more carefully about their wider responsibilities.

I have heard some drivel in my time, but I do not think that in all my years in opposition did hear as much drivel from the Treasury Bench as I heard from the Secretary of State today. Businesses look to his Department for support and help. May I suggest that he gets off their backs and lets them create some wealth, and that he spends his time in his Department trying to sort out the massive problems of their own that the Government face without interfering in every business across the country?

May I just gently suggest that my hon. Friend reads through the responses to the consultation, which are predominantly from businesses and investors advocating measures such the ones we are implementing? He might particularly want to examine the contribution of the CBI.

It is interesting to note that the shyness and reticence that previously overcame the hon. Member for Shipley (Philip Davies) have now been successfully overcome.

A few moments ago, the Secretary of State told us that he would consider it desirable to see more employees represented on boards, but then he told us about what he considered to be insurmountable obstacles. If Germany, Austria, Finland, Sweden, Norway and Denmark can do it, why cannot we?

I have dealt with this question several times already. I am aware that those countries—[Interruption.] Yes, of course those countries have a different system that results in workers on boards, but of course that does not happen in isolation. They have completely different systems of corporate governance.

Since the hon. Member for Streatham (Mr Umunna) reminded me of my days in his party, I shall say that one of the last things that I tried to do under the 1979 Government, when I was working with John Smith, was introduce a co-determination system, but alas that Government showed very little interest in implementing it.

As shareholders already have the power to vote out of office directors who they believe are underperforming, why is there a need for any further measures that will serve only to undermine the competitiveness of British business?

As I have already explained to the hon. Member for Shipley (Philip Davies), the consensus view among business and investors is that the status quo is not supportable and is leading to damaging and perverse rewards, including rewards for failure, and that we need to reform the system comprehensively.

May I remind Government Members that they agreed with Labour for 13 years about releasing details of chief executives’ pay? Will the Secretary of State take retrospective action against any companies that try to get through the barriers before the changes come into operation?

In general, retrospective legislation is not a good thing, but I will look at the implications of the question.

As we have heard, some hon. Members argue that nothing should be done to put at risk a light-touch, risk-based regulatory regime. In my right hon. Friend’s attempts to achieve cross-party consensus on the matter, how does he hope to persuade the shadow Chancellor to abandon that position?

I was not aware of the shadow Chancellor’s wisdom on that particular subject, but his party leader has spoken constructively and I hope that that will lead to agreement between our parties on how we can proceed.

Does the Secretary of State still believe that all bankers paid more than the Prime Minister should publish details of their remuneration, as he believed when he was in opposition?

I am surprised that Labour Members keep reminding us about bankers’ pay. Bankers’ bonuses in 2008-09, when the Labour party was still in government, were something of the order of £13 billion. They have now come down to about a quarter of that.

I think they will help considerably. Many of the countries from which we attract inward investment have good corporate governance systems, in which there is considerable restraint on excessive pay, and reward for success rather than failure.

The Secretary of State will know that youth unemployment now stands at more than 1 million. Why will not the Government repeat the bankers’ bonus tax, which could create up to 100,000 jobs for young people?

This argument has been rehearsed many times. The then Chancellor of the Exchequer, who introduced the bonus tax, made it clear that it was a one-off measure and that, if it were continued, banks would simply avoid it by converting bonuses into consolidated pay. It was a good idea at the time. It worked for a year, and we now have a much more effective and credible way of taxing banks.

Rewards for failure: the old boss at ITV, where I used to be the trade union representative, slashed jobs, made a succession of poor business decisions and brought the company to its knees while picking up millions in pay, perks, bonuses and share options. Is my right hon. Friend surprised that the Leader of the Opposition has rewarded that failure with a key role in restructuring the Labour party?

I have not followed those developments, but perhaps I should retract some of the complimentary things I said about the Leader of the Opposition.

I remind the Secretary of State that he has absolutely no responsibility for restructuring the Labour party.

Here is another opportunity for the Secretary of State to clarify his views on RBS bonuses. The share price has collapsed by 35% in the past year, so will he use any powers he has to block any bonus for the chief executive, or has he really surrendered those powers to the Prime Minister and the Chancellor, who simply do not agree with him that the bonus must be stopped?

I have heard at least three different sets of recommendations on RBS bonuses, including that they should be reduced and that they should be stopped altogether. If we get a coherent, single source of advice, perhaps I can respond better to it.

Does the Secretary of State think that it is more important to have a board with diversity or a board with competence, which looks after the shareholders, the workers and the company?

I do not accept that there is a dichotomy between diversity and performance. All the evidence suggests that particularly the drive to get more women on boards has nothing to do with political correctness and everything to do with improving performance.

A few months ago the Secretary of State said that the Government could intervene to stop bankers’ bonuses if they so wished. Does he stand by that? If he does, why is he not dealing with the RBS situation?

I remind Opposition Members that the semi-publicly owned banks, including RBS, are managed on an arm’s length basis under an arrangement devised by the previous Labour Government. This Government have made it clear that we expect restraint in bonuses in the banking system and in RBS in particular, and we will see what happens.

Will the Secretary of State confirm that proposals to tackle excessive pay are just part of the Government’s plans to reconnect the principles of risk-taking, success, hard work and rewards in both the private and the public sector?

The hon. Gentleman is absolutely right, although we have of course already introduced principles governing remuneration in the public sector, including greater transparency, ratios and things of that kind. We are now extending those into the private sector where it is appropriate to do so, while recognising, as he implied, that in the private sector we need also to give incentives to entrepreneurship and good management.

The Secretary of State mentioned that he was not accepting the High Pay Commission recommendation to publish the ratio between the highest and the average earners in a company because it was too complex. Will he expand on that please?

That was not the recommendation to which I referred. The commission also made a specific recommendation about a double number between salary and top-up to salary. For a variety of reasons, we do not feel that being quite so prescriptive is appropriate, but that was the recommendation to which I referred and which we were not able to take forward.

Does the Secretary of State agree that the state should not control private sector pay, but empower shareholders with the information they need so that they can be active and committed company owners?

That is a pithy summary of what I was trying to say, on which, as Mr Speaker ruled, I took rather too long.

Apparently, the chief executive of Peacocks took a hefty pay increase just last year when clearly his company must already have been failing. I am sure that all workers facing redundancy from Peacocks would like to know how the Secretary of State’s proposals might assist people in their position in future.

The hon. Lady refers specifically to Peacocks, on which I have been approached by several concerned elected representatives. Having looked at the facts, the Government do not judge that there are any grounds for intervention in the wider public interest, but I have great sympathy for the employees, who are in a very bad position because of bad decisions made in the past by their management.

Does my right hon. Friend agree that there is an important role for lawyers to big City firms and large plcs in advising their clients on best practice when drawing up arrangements for contracts and bonuses?

In mentioning diversity, I think I included lawyers, improbable as that may seem. There is probably a dissenting view on the Opposition Front Bench.

Does the Secretary of State accept the finding of the High Pay Commission that in the year to last autumn—on his watch—the pay of FTSE 100 directors increased by 49%, whereas average incomes rose by only 2.7%? Does that not make the case for a permanent body on high pay to ensure that companies reflect the social obligations that they owe to all of us?

As I understand it, the commission is in the process of encouraging the establishment of a monitoring body of that kind. That is not governmental or Government financed, but it would be a very useful institution in helping us to understand the trends.

Does my right hon. Friend agree that crony corporatism, high taxes and high regulation are as unjust, if not more so, than some of the problems he has set out today? Will he pay as much attention to dealing with those things as he is to dealing with the issues he set out?

I am not terribly comfortable with the phrase “crony corporatism”, but my hon. Friend refers specifically to directors serving on each other’s boards. We have looked at the facts on that. There are few examples of reciprocal agreements, but there are cases— 50 out of 1,000 or something of that order—in which directors serve on the board of another company. We are looking at how we can limit that, because it creates a somewhat more incestuous environment and lacks the diversity we are seeking.

It is often not the management or those in executive roles who get the highest pay packages, particularly in the financial sector. For example, I have heard a rumour that at least one of the traders at RBS is going to get a higher bonus than Stephen Hester. Will the Minister tell us whether his proposals, particularly on transparency, will cover traders too?

The hon. Lady is quite right: there is a different pay structure in investment banks, because of the problems that she describes. The Chancellor has already initiated action, in the form of a proposed regulation through the Financial Services Authority which will require financial institutions to declare the highest pay of employees who are not on the boards of those companies.

The Secretary of State must be extremely happy. The liberal, left-wing clap-trap that he has announced today—which even Labour did not do, in 13 years—has somehow got through the coalition in the hope of a good headline. It has done nothing to increase growth or employment in this country. Is he a happy man?

I am actually. I realise that when I first raised the issue of responsible capitalism 18 months ago, I was denounced in parts of the press as a Marxist. I thought I had left that behind, but apparently not.

I am sure that my constituents will be absolutely delighted with the arrangements for more transparency and, in particular, increased shareholder power. I wonder whether the Secretary of State will consider the fact that Somerset county council has imposed a pay freeze and is making people redundant—indeed, it sends me a Christmas card, at the same time as it is shutting libraries and slashing youth services—and is now considering abandoning youth carers, to save a paltry £70,000. Will he consider applying exactly the same principles of transparency and shareholder power—or in this case taxpayer power—to councils and their pay and bonuses arrangements for senior management?

Mercifully, I am not responsible for local government, but there are certainly moves afoot, which my hon. Friend is aware of, to ensure much greater transparency in pay. Will Hutton prepared a report for Government with some good recommendations, which include those she mentioned.