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Business: Corporate Governance and Ethics

Volume 708: debated on Wednesday 25 February 2009


Asked By

To ask Her Majesty’s Government what steps they are taking to improve the standards of corporate governance and ethical behaviour in United Kingdom business, especially in the financial services sector.

My Lords, the Government are committed to promoting high standards of corporate governance and ethical behaviour. Therefore, as part of our review of the supervision of financial institutions, Sir David Walker has been commissioned to undertake a review of corporate governance of UK banks. Sir David’s review will examine board management of risk, incentives to manage risk in bank remuneration policies, the competences needed on bank boards, board practices and structures, and the role played by institutional investors.

My Lords, I am grateful for that Answer, but of course Sir David will report at the end of the year and, in the mean time, I ask for the Minister’s views. Given that the Companies Act 2006 further specified duties on directors and that Sir Ken Macdonald, the former DPP, this week called for the prosecution of directors who have ignored those rules, how many prosecutions are under way? Secondly, what are the Government doing to enhance the role of internal management on the boards of major companies so that there is direct access to the board, particularly the non-executive directors? Finally, will the Minister provide funds for a special cadre of speech therapists to teach bankers how to pronounce the word “sorry”?

My Lords, there were three questions. I cannot answer the noble Lord’s first question about the number of directors who are being prosecuted for breach of the Companies Act, but I shall obtain that information and write to him. I should make it clear that, to the extent that there have been breaches of legislation in respect of the management of banks, or indeed any other form of incorporated body, I wholly endorse and support pursuing the correct procedure of such matters through the courts. That would be a matter for the prosecuting authorities, the Financial Services Authority or whichever agency it fell under. Securing broader access for employees to boards is, in part, up to the boards. If boards rely on the information that they receive from a small number of executive directors and do not make appropriate inquiry elsewhere in the company, do not visit the factory floor, do not sit in the canteen and do not listen to what is said, they will not be as informed as they otherwise could have been. I do not think that this is a matter for law; it could be a matter for code, and David Walker will look at that. I am hopeful that he will produce an earlier report of some of his conclusions, perhaps in interim form. I have no comment to make on speech therapy.

My Lords, does my noble friend accept that it is unethical behaviour for banks to pay bonuses in current circumstances? Is it true, as reported in the Financial Times yesterday, that some of the companies that are 100 per cent controlled and some that are virtually 100 per cent controlled by the taxpayer are planning to evade the issue by approving bonuses to be paid in cash in a year or two? If that is true, will he try to stop it under his own provisions?

My Lords, a wide range of people employed in the private and public sectors are given rewards for performance. We must be careful not to demonise this concept. It is a matter of proportionality and of correctly rewarding the right type of performance. What went wrong with the banks was that bonuses were frequently paid for illusory gains. I was told the famous story about a transaction between two banks, which both banks booked as an immediate profit on execution of the transaction and presumably paid bonuses for. We need to stop that sort of thing. It is not a question of evading restrictions on bonuses by deferring payment. Part of this is good process to ensure that an early indication of bonus can be subject to clawback in the event that subsequent information suggests that the original gains were not as first realised. The answer is well designed schemes that are alert to unintended consequences, transparent and clearly explained to the owners of businesses.

My Lords, does the Minister accept that those bankers who have recklessly exposed their investors’ money have come very near to committing moral theft? In so far as the criminal law boundary is concerned, Section 6 of the Theft Act 1968 stipulates that a person who intends to deal with the property of another as if it were his own to dispose of, regardless of that person’s rights, commits an act that is tantamount to theft.

My Lords, I have said in the past that a small number of banks globally have acted in a reckless, witless and feckless manner. Whether there has been a breach of criminal or company legislation will be a matter for prosecuting authorities and for subsequent directors of those organisations. I am sure that, given the extent to which there have been significant changes in boards of directors, they will be looking at past matters to determine whether any action is required.

My Lords, to return to Sir David Walker’s inquiry into corporate governance, will the Minister suggest to Sir David that one thing that he might look at is the current rule that ensures that anybody who has sufficient years of experience to have seen an economic cycle round is far too old to be a member of a board?

My Lords, I think that there is a particular rule that defines independence as ceasing to exist after the ninth year of service on a board. I have always thought that that was poppycock. With experience comes knowledge and a capacity to challenge in a constructive and informed way. I am sure that David Walker will look at that, along with many other factors. What we have clearly seen in the boards of some of our major banks is inadequate challenge and inadequate persistency, as has come out of some of the evidence that was given to the Treasury Select Committee.

My Lords, does the Minister still read the Guardian as carefully as he used to when he was chairman? In particular, did he see in its excellent series on tax avoidance the report about Barclays Bank, whose head of tax avoidance, Roger Jenkins, received a bonus of £40 million last year for highly aggressive and I would say abusive tax avoidance? What is the Treasury going to do about it? Does the Treasury regard tax avoidance of that type as unethical behaviour?

My Lords, the dividing line between tax avoidance and tax evasion is always a difficult one. The excellent articles in the Guardian, which were up to the highest standards of journalism that I have come to associate with that paper over many years, have stimulated greater debate and knowledge.