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Financial Services: Shareholder Engagement

Volume 724: debated on Wednesday 19 January 2011


Asked By

To ask Her Majesty’s Government what discussions they have had with the financial services industry on shareholder engagement.

My Lords, the Government are committed to improving shareholder engagement and have already taken significant steps, including the new remuneration disclosure rules, the FRC stewardship code and the revised corporate governance code. We have also issued a call for evidence on governance and short-termism. This will establish whether there are issues affecting the functioning of capital markets, including questions about shareholder engagement. Ministers and officials have had meetings with a variety of organisations as part of the process of policy development and delivery in this area.

The concept of ownerless corporations was reinforced last week at the Treasury Committee when Bob Diamond admitted that there had been no engagement between institutional shareholders and Barclays regarding remuneration and risk structure. Does not this absence of stewardship and judgment only exacerbate a situation where, when companies are in trouble, the taxpayer has unlimited liability whereas the executives have very limited or no liability? Will the Government, therefore, reinvigorate the debate so that risk is understood and properly monitored to ensure that bond-holders take some of the pain, which they do not at the moment, and will there be minimum structural change to ensure that in future no bank is ever too big to fail?

My Lords, the noble Lord, Lord McFall of Alcluith, ranges over some big questions there. To start with the remuneration issues, the introduction of the new FSA code of disclosure from 1 January will contribute to making shareholders better informed. My right honourable friend the Chancellor has taken note of Sir David Walker’s suggestion that there needs to be further international agreement in this area so the Chancellor has written to his EU counterparts to see what can be done to further drive forward aspects of disclosure. There is certainly a lot of activity going on there. As to some of the bigger questions about “too big to fail” and bond-holders and so on, I look forward to the light that the Independent Commission on Banking will doubtless shed on these important issues and I note that the chairman of the commission is scheduled to be making a speech in the next few days on this topic.

My Lords, I am sure the Minister is aware that, in hostile takeovers, the result is often determined by hedge funds which have simply acquired or borrowed stock short-term in order to make a short-term profit, irrespective of other interests. Is this an issue that the Government are prepared to discuss with the financial services industry?

My Lords, the takeover panel operating independently keeps that issue and all other issues related to the good working of the takeover market under regular review. The department of business consultation, A Long-term Focus on Corporate Britain, which is currently calling for evidence, will be interested to hear what people have to say on that very topic.

Has my noble friend noted the recent statement from the Financial Reporting Council suggesting that annual reports shall no longer be printed? How does he think that will improve small shareholder engagement?

My Lords, there is a fine balance to be struck between making sure that shareholders get all the information they require on the one hand, and on the other hand allowing companies to take advantage of electronic and other media to disseminate information in a way in which an increasing proportion of shareholders wish to receive that information and which may be environmentally friendly if it does not require large amounts of paper to be used. I am glad that the FRC is grappling with that issue.

Does the Minister agree that many shareholders have no voice in this at all because they are shareholders through pension schemes or through owning PEPs? These shareholders can exercise no influence. Can the Government think of doing something about that?

My Lords, this is an ongoing challenge but institutional shareholders over the last few years—under considerable pressure from the previous Government, I am happy to say—have taken steps to make sure that, where they are representatives of pension funds or other representatives, they are more active in exercising proper stewardship in the votes of the underlying shareholders they represent. I recognise that it is an important issue.

My Lords, does my noble friend agree that one of the problems of shareholder involvement in so far as the banks are concerned is that auditors are reluctant to qualify the accounts of a bank in any way whatsoever, even if they have reservations, because this might lead to a run on the bank? Does he agree that the answer is what I put in the Banking Act 1987—to have a mandatory dialogue between the regulators and the auditors of banks so that there can be two-way communication, which unfortunately went largely by the board with the changes in legislation under the previous Government?

I am grateful to my noble friend for reminding us of the importance of audit, particularly in relation to banks. It enables me to remind us all that the Economic Affairs Committee of your Lordships’ House will, I hope, play an important part in the broader ongoing debate about stewardship when it comes up with its current report into the role of auditors.

When thousands of our fellow citizens are losing their jobs and millions are subject to a pay freeze and the bosses of industry are rewarding themselves very high increases indeed, is it not time that institutional and all shareholders had votes on the remuneration of executives and that the votes should be binding?

My Lords, these are important issues and they are precisely why my right honourable friend the Business Secretary has a current consultation out to look at the question of shareholder engagement in relation to the effective running of the capital markets.