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Companies: Executive Remuneration

Volume 737: debated on Wednesday 13 June 2012

Question

Asked By

To ask Her Majesty’s Government whether they will give shareholders in listed companies a binding vote on senior executives’ and directors’ pay and bonuses.

My Lords, the Government have recently consulted on a new model of shareholder voting on directors’ remuneration. This proposes giving the shareholders of quoted companies binding votes on the policy for the remuneration of directors and on exit payments. We are considering the responses and will announce final proposals shortly. These reforms will require primary legislation, and we aim to introduce measures during the Committee stage of the Enterprise and Regulatory Reform Bill in another place.

My Lords, while I appreciate the Government’s proposals in the enterprise Bill, does my noble friend agree that, even after shareholders are enabled to pass a special resolution on a remuneration report to make it binding rather than advisory, they may still have great difficulties in exercising that power effectively? Should we not have an urgent review of the workings of the remuneration provisions of the Companies Act? Shareholders, especially in big companies, feel increasingly that their interests as owners, and the long-term interests of their companies, are not being given proper priority by top management, which appears to put its own interests first.

Yes, my Lords, there is broad agreement among investors and businesses that the link between top pay and performance has grown weak and that the current pattern of growth in directors’ pay is unsustainable. Binding votes will encourage companies to set out a long-term pay policy that is clearly linked to the company’s strategy. Shareholders have been showing a keen appetite for a challenge on remuneration, and it is important that we give them the tools necessary to keep up this momentum.

My Lords, given that the policy referred to by the noble Lord, Lord Roberts, is viewed with scepticism for the reasons he indicated, is it not time that the leaders of industry and commerce were brought back to planet earth and workers’ representatives put on the boards of British companies and financial institutions, as is the case in successful economies such as Sweden, Germany and Holland?

My Lords, boards need to change and we are taking measures to promote greater diversity, but we do not believe in mandating that employees should be on boards. We encourage employees to get engaged by taking up their existing rights to information and consultation arrangements.

My Lords, encouraging as the Minister’s replies are, does he not agree that this matter is now urgent? No doubt he will be aware that last year, the total remuneration of FTSE chief executives increased by a further 10%, on top of the very substantial increases of recent years. That is quite out of line with the performance of share prices, with the economic performance of the country, and with what happens to everybody else. It really is a very urgent matter because capitalism is being brought into disrepute.

My Lords, I am sympathetic to my noble friend’s view. We have to balance that against the fact that, while it is not the Government’s role to micromanage company pay, we have a role to play in addressing what is, as he says, a clear market failure. The culture has to change, too. We are pleased to see institutional investors taking a tougher stance on pay than they have in the past.

My Lords, following on from the noble Lord, Lord Tugendhat, the report produced by Manifest shows that the average UK chief executive is now paid 240 times the average earnings in this country. This is an outrageous multiple and it simply is not satisfactory for the Government to say that they are considering allowing binding resolutions on an optional basis. The time has come for the Government to get a grip on this issue and to make sure that these excessive acts of greed are stopped.

My Lords, I am not sure what binding votes on an optional basis might mean, but that is not what is proposed.

My Lords, is not one of the difficulties with the Government’s proposals that the people who act for the shareholders are the fund managers and the institutions—as the noble Lord, Lord Myners, is well aware—who are themselves paid huge sums of money, which, unlike with directors of public companies, are not disclosed?

Presumably unless they are quoted, my Lords. Institutional shareholders are showing a great deal more interest in taking action on this than they have previously, and we have every hope that they will take advantage of the tools that we propose to give them.

My Lords, what is the Government’s attitude to establishing by law a multiple of the lowest paid in a company or institution beyond which the salary of no other person in the company or institution should go?

My Lords, we will require companies to give more information about pay. We are not in favour of mandating companies to adopt a standardised set of ratios because they are not always the best measure to compare across companies. Different types of companies have different ratios because of the nature of their businesses. We also know from the United States that it is not helpful to work out the appropriate pay ratio for a UK-listed company whose business is conducted largely overseas. But I hear what the noble Lord says.

My Lords, if the chief executives of corporations do not get it, will the Government consider imposing martial law on the City?

My Lords, in answer to the question posed by the noble Lord, Lord Lea, the Minister said there were no plans to have employee representatives on management boards. Fine—but can the Minister tell the House why the Government object to workers’ representatives being on the boards?

My Lords, I am as yet unconvinced that it would contribute to the growth of those companies or of UK plc.

My Lords, can the Minister explain exactly what a worker is? What is important is that directors on boards are seen to—and do—fulfil a duty to all the stakeholders in a business, including creditors, suppliers, employees and, above all, customers. I would welcome the Minister’s illumination on what constitutes a worker.

I think that the word came from the Opposition rather than myself. We are all workers and I am delighted to have the opportunity to confirm that.