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Public Companies: Directors’ Bonuses

Volume 701: debated on Wednesday 30 April 2008

asked Her Majesty’s Government:

Whether they will take steps to ensure that bonuses are paid to directors of publicly owned companies only on the basis of merit.

My Lords, I assume that my noble friend is referring to companies in the ownership of the Government as opposed to those publicly quoted on the Stock Exchange. The remuneration of the directors of such defined publicly owned companies is a matter for the remuneration committee of those companies, whose recommendations are submitted for approval to the Government as a shareholder. It is important to ensure that bonuses are paid on merit and that they support delivery of agreed objectives.

My Lords, I am grateful to my noble friend for his Answer, although it seems slightly at variance with the facts as I understand them. How is it possible that, in the case of Northern Rock, the chief executive gets a massive pay-off in return for the total failure of the company and, in the case of Network Rail, the directors get large bonuses at the same time as Network Rail is being fined £34 million for incompetence? These are difficult issues to understand. Most people in Britain are asking whether those people who have accepted the money have no shame.

My Lords, I am very pleased that my noble friend raised Northern Rock. The chief executive’s remuneration on termination was settled while it was a private company. It was not settled while it was in government ownership, and government ownership took over after the contractual obligation was concluded.

My Lords, following the pronouncement yesterday by the Governor of the Bank of England, will the Minister, in his typically robust way, urge the shareholders of banks, who are being asked to subscribe for new capital to rebuild the balance sheets, to examine the methodology of remuneration of the directors of those banks before they send off their cheques?

My Lords, I shall deal first with the second part of my noble friend’s supplementary question because I would not want it to be thought that I had avoided it. When bonuses have been awarded to Network Rail directors, any non-compliance or fines that have occurred in the past have been taken into account and I sincerely hope that that would happen again.

On the methodology of remuneration of banks, come the big rights issues that are currently in question, I think it is reasonable for shareholders to say, “Obviously, at this moment, we do not want to know exactly how much you are going to get, but we would like to know the methodology on which you are going to be paid”. At the end of the day, it is very difficult to say to a small businessman in Birmingham, “By the way, the bank which asks you for a lot of information when it is about to lend you some money to do something and then judges your judgments accordingly, will be seen to be remunerating its directors substantially, despite big errors of judgment having been made”. I want to live in a society which says, “The sky’s the limit; you can come to Britain and earn as much as you possibly can, but just be aware that you function in democratic capitalism because of the will of the people and if you do not deal with the perception you create you will pay a price”. I should like to think that the banks would have that at the top of their agenda.

My Lords, is my noble friend aware that in Germany the salaries of chief executives and other directors have shot up in the past 10 years in relation to average earnings within their companies? There are two political parties—one in coalition in government and one in opposition—which are seriously considering legal provisions to put a cap on such discrepancies. Will my noble friend consider such a course of action in this country?

My Lords, I am glad my noble friend is referring to Germany. I would love Germany to do that. Then I could go round the world in my job for UK trade investment and say, “Don’t invest in Germany; come to a country that does not do that”.

My Lords, given that we have talked about the carrots for directors of publicly owned companies, perhaps I can ask about the sticks. Does my noble friend agree that people who are directors of publicly owned companies, privately owned companies or, for that matter, public agencies should have some degree of personal responsibility if they preside over appalling breaches of information security?

My Lords, first, one has to understand that we in this House are all very well qualified and have PhDs in hindsight. It is extremely important that we judge boards of directors, their remuneration committees and, in the case of government-owned companies, the ultimate shareholder on the facts at the time and that we do not stand in judgment on facts that did not exist at that time. Secondly, it is extremely important with publicly owned companies that the remuneration committee, which is independently appointed—that is what independence means—reports to the Government and that the Government have the final say. If you want the best managers, you have to pay the going rate. Sometimes that is unpalatable to me and I am sure it is to my noble friends but, at the end of the day, if you want the best you have to pay for it. Thirdly, we should remember that if such people are paid the going rate, they must suffer the consequences of incompetence and errors of judgment. In that respect it is important that they are not seen to walk away with huge rewards for failure. That would not be right.

My Lords, my noble friend referred to directors suffering the consequences of their incompetence. At the very same time as Network Rail was fined £34 million by the regulator, there was an announcement of large sums of money being paid to the directors. If the Government are shareholders, why can they not stop that happening or, at least, ensure that the bonuses are used to pay the fines.

My Lords, my noble friend raised the point of methodology of remuneration. Timing is so important. You can see an announcement of something like a fine, which has probably come after two or three years of investigation, and very soon after you see the remuneration paid, but that might be in relation to a completely different period. That is a fact; it might be unpalatable, but it is true. You have to get to the essential element of when the contract was entered into and ensure that the methodology will accommodate my noble friend’s absolutely valid point. You should not judge one set of criteria against another set of news and call it a failure.

My Lords, does the Minister agree that there is perhaps not much logic in paying a bonus where the company is doing very well, there is merit, but no profit is necessarily being made? I instance the BBC. In order to stop the growth of the bonus culture there should be some investigation of any possible tax advantages and, in particular, pension advantages that may lie behind the award of bonuses in such situations.

My Lords, we are the fifth biggest economy and one of the most globally competitive nations on the planet, so it is not in the interests of this country to say that we are trying to kill the bonus culture. Believe me, these people will go to other countries. What is important is that people know that we stand for social justice and economic success at the same time. That means you get the methodology of remuneration right at the start of the contract negotiations, not on termination.