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Corporate Governance

Volume 777: debated on Tuesday 29 November 2016


My Lords, with the leave of the House, I shall repeat a Statement made by my right honourable friend the Secretary of State for Business, Energy and Industrial Strategy in another place. The Statement is as follows:

“With permission, Mr Speaker, I would like to make a Statement about the Government’s corporate governance Green Paper which was published earlier today.

Successful businesses are the backbone of our society. They are the reason why we are the fifth largest economy in the world. They create employment opportunities, and they contribute significantly to funding our country’s public services. There are many reasons why we are a reliable place to do business: our legal system and our framework of company law have long been admired around the world. This Government are proud of our thriving industries, and we want to build on these strengths and enhance our competitiveness even further.

One of our biggest strengths is our record on corporate governance, which is already highly regarded around the world, especially for its combination of flexibility and high standards. But despite this record, our strong reputation can be maintained only if government and business regularly review and upgrade those standards. We want to guarantee not only that Britain is an excellent place to do business, but that it is also where business is done best.

I am privileged, in my position as Secretary of State, to meet regularly not only those who run successful businesses, but their employees and customers, too. I have spoken with company heads about how their corporate governance is an integral part of their success. It inspires confidence among investors, loyalty among employees and trust among customers. Ordinary working people who work hard for their living deserve to have confidence that businesses act responsibly and fairly. When an individual business or businesses lose the confidence of the public, faith in business generally diminishes, to the detriment of us all.

There is no conflict between good corporate governance and profitability: indeed, poor corporate governance is usually the prelude to financial disaster. This Government are unequivocally and unashamedly pro-business, but in doing so we hold business to a high standard. It is right to ask business to play its part in building an economy that works for everyone. Over the last few years, there have been a number of proposals, from both the Government and those representing business, to update our corporate governance framework. In some cases these have been made in response to concerns about the actions of a very small number of businesses which have undermined the reputation of British business generally, whose standards are among the highest in the world. Today, we have launched a discussion paper on how corporate governance could be reformed. I will be placing a copy of the Green Paper in the Libraries of both House.

The paper considers three aspects. First, it asks for opinions on shareholder influence on executive pay. Members of the House will be aware that executive pay has grown much faster over the last two decades than pay generally and at times is not in line with corporate performance. The document seeks views on this issue, and in particular on strengthening shareholder voting rights with a view to making them binding, encouraging shareholder engagement with executive pay and promoting greater transparency over pay.

Secondly, the document asks whether there are measures that could increase the connection between boards of directors and employees and customers. It asks whether the establishment of advisory panels and the appointment of designated non-executive directors to take formal responsibility for articulating employee, customer and other perspectives is the right way forward. But we are not prescribing how this should be done; it would be whatever is most appropriate for their business.

Thirdly, our discussion paper asks for views on whether some of the features of corporate governance that have served us well in our listed companies should be extended to the largest privately held companies.

These are issues which are about competitiveness, and creating the right conditions for investment, as much as they are issues about fairness. This Green Paper is designed to frame this discussion so that we can move quickly to consider which changes are appropriate at this time. We want to hear from as many people as possible about how best we can increase confidence in big business and achieve better outcomes for our economy. This does not mean the imposition of regulation when other avenues are open. One of the strengths of our system of corporate governance has been the use of non-legislative standards adopted by business itself.

We are determined to make Britain one of the best places in the world to work and to carry out business. This review will help us achieve that aim, and the views of businesses, investors, employees, consumers and others with an interest in successful business are warmly welcomed. I commend the Statement to the House”.

My Lords, that concludes the Statement.

My Lords, we welcome the Green Paper on corporate governance. I do not think there is anyone who does not recognise the mood of the country given that, since the financial crisis, we have faced growing disparities and unfairness that are neither justifiable nor economically efficient. We also have to recognise that we have long delayed any serious action to deal with chronic issues such as short-termism, weak R&D investment, the lack of large UK businesses acquiring overseas and the problems with productivity. This is a vital debate and the Green Paper should be welcomed as an opportunity to start the long required process of change, not end it. However, this Green Paper will have as much impact on changing the issues at hand as a stick would have in changing the course of a river: it is the exercise of power without purpose and policy development designed for press releases, not practical impact.

Business and business people are also crying out for change, be they investment managers, entrepreneurs, investors or corporate leaders. However, this measure does little but protect the status quo. To set the debate in terms of shareholders’ influence on executive pay is too limited, not least when a huge underlying problem in our country concerns the investment industry. Its pay, performance and methods of charging are, in and of themselves, part of the problem. It is also instructive that BlackRock, for example, is now being criticised by its own shareholders and investors for voting against positive environmental policies despite claiming to adhere to them. Shareholders are arguably less of a problem than the boards which fail to address the normally compliant shareholders’ voting patterns when they vote against executive pay.

To extend the public company governance requirements to private companies is rubbernecking on media coverage and not a serious analysis even of the event that it purports to address. Its obvious weakness will be starkly laid out in the attempts to draft legislation, if it ever gets that far. As for the watering down of the commitment to place workers on boards, that is an illustration of the limited thinking about the effectiveness of governance on public companies. Advisory panels and non-executive advocates—this is thin stuff. No wonder we have ended up with a debate on publishing pay ratios to do with remuneration—a suggestion so limited that it does not deserve the controversy that it has generated.

The chronic problem is that the current arrangements for corporate governance enshrined in the corporate code is the problem. All you have to do is read the few paragraphs on relations with shareholders, which does not even muster a page, to understand the nature of the problem. This Green Paper is not enough. We have to admit that the road started by Cadbury has gone too far in the wrong direction and needs to be addressed.

The balance between shareholders, workers and customers has drifted too far away from the interests of the country, and nothing but a complete overhaul and review of the combined code will deal with it. The 2009 Walker review was, and should have been seen as, the drink in the last chance saloon. The glass is now empty. Will the Minister accept that the Green Paper should accept the debate on all aspects, including the code itself? Does the Minister also agree that the code itself should not be seen as the gold standard to set against private companies, and that to extend it to all private companies will require its own evaluation, given the very different nature of what a private company can be?

Executive remuneration is out of control—a point recognised in the Minister’s Statement. Will he please tell us whether this Green Paper will rein back some of the completely unjustified leaps in executive pay? Does he agree that pay itself is an example of the weakness of a second-rate code being mixed with transparency? The principal reason is that what is known as the “ratchet effect” has occurred. Remuneration consultants present a company with data comparing their executives’ pay—now that it is fully published—with others. They ask: “Does the company want to be seen as a company in the top quartiles—the top performers and payers; those who are most attractive?”. Of course, every director will want to appear in the top one or two quartiles of pay, but for every director who is inserted in the top half, another must fall to the bottom—a fact that will soon be drawn to their attention by remuneration consultants. So the ratchet clicks over and creates a natural inflationary effect, with no relationship to pay, performance or anything to do with the company. This has become a chronic problem. I urge every Member of this House to look at the reports of company accounts of companies that declare that they are in the upper quartiles. That tells you the story of unrelenting pay advances with no justification.

Remuneration consultants have done an appalling job and a great disservice to the UK economy. They represent a prophylactic for weak and lazy boards. As the noble Lord, Lord Myners, the former Trade Minister said,

“They allow the remuneration committee to say ‘this is what the consultants say, so we should do it’”.

Non-execs frequently complain that the report they have seen has been redrafted to the advantage of the executives by the executives with the remuneration advisers. Will the Minister recognise the problem with remuneration consultants and confirm that their role will be the subject of a review, whether in this Green Paper or at any other time?

It is not as if we do not have enough challenges ahead. Yes, the Government should be credited for starting a debate, but it does no credit to set it off in a manner that just feeds media headlines and is poor policy. It will inevitably lead to thin and limited proposals like this and, rather like the non-appearance of the Small Business Commissioner tackling late payments, will be delayed as the Government do not listen to the sensible suggestions, which I am sure will come from all sides of the House, that will make this work.

This Green Paper is a new type of dangerous dogs debate. We should be wary of the bark being worse than the bite.

My Lords, we on these Benches acknowledge that we have many excellent businesses with high standards of corporate governance. However, following the appalling cases of BHS and Sports Direct, it was hardly surprising that the Investment Association and many others said that big business needed to rebuild trust. When the public see that executive pay has grown much faster than employee pay, with FTSE 100 CEOs earning 128 times more than average pay, they too want reform.

This Statement and the accompanying Green Paper offer some proposals that will help rebuild trust, and we offer a cautious welcome to them. They include strengthening shareholder voting rights and requiring larger, privately owned businesses to meet higher corporate governance and reporting standards. I single out for special mention the welcome proposal for large companies to have a dedicated non-executive director on the board to give small suppliers a voice, improve prompt payment and challenge supply-chain bullying. This measure is vital to help our SMEs and start-ups.

However, we also have disappointments. When the Prime Minister said,

“we’re going to have not just consumers represented on company boards, but workers as well”,

it was widely believed that she meant that elected employees would be on boards, emulating the practice in many countries and in many of our own successful start-up businesses, but now we learn that she has bowed to industry pressure. So I want to ask the Minister a very clear question. Will the proposed representatives of employees who serve on boards in the future be elected by the workforce or just be allocated the job from among existing board members? After all, the public have a right to choose their representatives in Parliament, so should employees not have the right to choose their board representatives? Better still, why do the Government not do what more than 60% of the public want, which is to put workers on boards?

Why is there nothing in this Statement or the Green Paper about increasing board diversity? Only three weeks ago, the Business Minister, Margot James, said:

“It is not right that boardrooms in 2016 can still be predominantly male and exclusively white”.

What plans do the Government have to ensure a diversity of voices on boards?

Although we welcome the Government’s intention to consult on improving the transparency of executive pay, we acknowledge that they are right to accept that a simple ratio of CEO pay to median salary could produce misleading results. Does the Minister agree that, as part of avoiding that problem, there would be considerable merit in ensuring that companies report on the total remuneration of both executives and employees? Is it not important that companies that provide, for example, enhanced childcare facilities or in-work training for employees, have that acknowledged and thereby, it is hoped, encourage others to do the same?

Reference is made in the Statement to the role of shareholder influence on executive pay. Does the Minister agree that there would be a real impact on this from a massive expansion of employee share ownership—not the disastrous George Osborne model, where shares are traded for basic employment rights, but with shares forming part of everyday remuneration for all workers, not just those at the top—giving everyone a stake in the company and a vote on how to run it?

Similarly, why are there not proposals to encourage more companies to mutualise? Some of the best examples of British companies—John Lewis being the obvious one—are run on alternative business models such as the mutual. Does the Minister agree that there is great merit in having a diversity of types of companies, rather than simply relying on listed and private company models?

The vast majority of businesses in this country act responsibly, but if we want to restore faith in business we should go even further. We should put workers on the boards, as happens in other countries, improve share ownership schemes and ensure that support made available to workers, such as training and skill development, is highlighted, alongside information on pay, as part of any reporting system.

My Lords, I start by thanking both the noble Lord, Lord Mendelsohn, for his initial welcome for the Green Paper—he seemed to go off a bit after that when he compared this to a dangerous dogs debate—and the possibly slightly more generous welcome we heard from the noble Lord, Lord Foster. However, that too went a bit off as he went through his various disappointments. I hope I can deal with a number of those points in my response.

The first thing I must make absolutely clear to both noble Lords is that this is a Green Paper and therefore it is out for consultation. We are not, at this stage, telling people what our plans are. We are looking for views from noble Lords, including the noble Lords, Lord Mendelsohn and Lord Foster, and we are reaching out to people throughout the country to give us their views on how we should proceed It is important to remember that this is collaborative in its intent. We are not seeking to impose solutions. As I said, we are seeking consultation and high standards with low burdens.

The noble Lord, Lord Mendelsohn, claimed that the proposals have been designed purely to protect the status quo and watered down from earlier ideas. I completely refute that. As I said, this is a Green Paper designed to seek the views of noble Lords and people throughout the country as to what they want to do. We want to make this country one of the best places in the world to work. We want to invest and do business, and to seek the means to continue to have the right corporate governance framework, as is currently admired across the world—we have to look only at the amount of inward investment into this country to see evidence of that. We also seek further improvements that will receive the support of industry and of all others, including trade unions, who might have an interest in this.

The noble Lord, Lord Foster, asked what we are going to do to improve board diversity. It is not for us to impose solutions but we will certainly support the Hampton-Alexander review and its call to increase gender diversity in the boardroom—something I would like to see more of from boards. The noble Lord also mentioned small suppliers. It is very important that, as a constituency, small suppliers, which sometimes have problems with larger companies, be appropriately consulted and their voice better heard, whether in board decision-making or other fields.

The range of the consultation is obviously important and, as I said, we want to reach out to and hear the views of all concerned. For that reason, the Green Paper will focus on ensuring that executive pay is properly aligned to long-term performance, giving a greater voice to employees and consumers in the boardroom, and raising the bar for governance standards in the largest companies, whether privately owned or otherwise. Obviously, there will be other opportunities for noble Lords and others to put their views forward as we discuss the Green Paper. The consultation period will continue until 17 February next year. I will certainly welcome the views put forward by both noble Lords who have spoken and others, and I am sure the department will as well.

My Lords, the noble Lord argued that the remark made by my noble friend Lord Mendelsohn could be refuted on the grounds that there had been no back-pedalling by the Prime Minister since her original speech on this subject. But you have only to read her speech about putting workers on the board, and then look at the Green Paper, to find that my noble friend’s statement is absolutely accurate. Perhaps the noble Lord would consider that.

I have two questions. One arises from the complacent tone of the first section of the Statement, which states that,

“our framework of company law has long been admired around the world”.

That may have been true 200 years ago. It was certainly in the Victorian era that we put together the basis of company law that exists to this day—which is that the company is the shareholders. It has nothing to do with other stakeholders. Is the Minister aware that the issue that arises from that is that there is no priority for the involvement of the workforce in the policy-making of the company?

The Minister referred to competitiveness and so forth. In Scandinavia, where there are board representatives and works councils, people go to these companies when there is a merger or something and the first question—a friend of mine had this experience—of the chairman of the works council is, “Mr Struthers, if you take over our company, how will that improve our world market share?” When he got home he said, “No one has ever asked me that question in this company”. So the value of the involvement of workers’ representatives is not the flavour of this Green Paper. Will the Minister acknowledge that that is a defect in it?

My Lords, I completely reject what the noble Lord, Lord Lea, said. He said that that is not the flavour of this Green Paper. But the Green Paper makes it quite clear that a number of options are being put forward. We are seeking views on a range of options that companies could take up to improve the connection between the boardroom and the workforce and other interests. It looks at the idea of creating advisory panels and of the designation of non-executive directors to take formal responsibility for articulating a particular perspective. It looks at appointing more individual representatives at board level to take forward a particular perspective. It looks at strengthening reporting requirements around the duties of company directors to have regard to the interests of employees, customers and others. It is quite clear that we are inviting views on all subjects. I will take note of what the noble Lord, Lord Lea, said—as will others, I am sure. That is the point of a Green Paper and that is the point of the Green Paper before us.

My Lords, it was argued that the regulation we had before the financial crisis was light touch and should have been the right touch. On the other hand, with corporate governance, starting with Cadbury, Greenbury and Hampel and leading to the combined code and Higgs, the UK is respected around the world for our excellent governance, which is principle based. But some of the rhetoric that came from the Prime Minister and the Home Secretary at the Conservative Party conference appeared to be anti-business in terms of tarring all business with the same brush as some of the bad eggs that sadly exist. Surely we should be working towards increasing our principles-based corporate governance system and increasing transparency. When it comes to disclosing workers’ pay, will the Minister acknowledge that it is not as simple as disclosing ratios, because the ratio between the chief executive and the lowest paid in a supermarket is very different from that in an investment bank. The original reason for the Cadbury code was that companies faced with minimum standards in law would just comply with the law and not the spirit of the rules.

My Lords, there is much that I can agree with in the noble Lord’s response to the Green Paper. He is right to say that we should keep a light touch in these matters and that there are inherent dangers in any statutory approach that one might take in that people then feel that they must simply obey the law and nothing but the law and go no further. It is right therefore that one should offer guidance and encouragement to take the right approach. That is why I sought to make it quite clear in my initial response that we are looking for a collaborative approach as we move along so that all parties, in business or wherever, feel that they can play a part in putting this together and thus achieve the right level of guidance in a code of corporate governance that everyone feels they can live with. As I say, I agree with much of what the noble Lord said.

My Lords, is my noble friend aware that the payments problem is much more urgent than any White Paper? Large companies are now pushing back the dates by which they pay smaller companies and the problem has never been as bad as it is today. Will the Government look at that separately from the Green Paper, because in the meantime many companies will go to the wall if we do not?

I take it that my noble friend is referring to the problem relating to payments made by big companies to their suppliers down the line. He is right to draw attention to this issue and it is certainly something that I would want to pass on to my right honourable friend because, as he says, it can be a cause of major concern for those in the supply chain if they are not being paid in good time. As I say, I will pass that on.

My Lords, the Minister said that the Government were looking for suggestions. As someone who has been the chair of the remuneration committee of a number of public companies, let me say that it is a very lonely place to be. A great deal could be done by the Government to align more clearly and unambiguously the responsibilities of the remuneration committee with the interests of shareholders. It may look simple—but, believe me, if you are in the hot seat trying to deal with these situations, it can be very difficult indeed. It would be very helpful to be able to rely on statute so that the pressures that need to be brought to bear could be brought to bear.

I think that the noble Lord has it absolutely right when he says that being the chair of the remuneration committee can be a lonely place to be. That is something which all those in business, and the rest of the board, ought to take into account when listening to the chair of that committee.

My Lords, I welcome the Green Paper because it gives us the opportunity to discuss some very important issues indeed. I equally welcome the fact that the Minister mentioned trade unions in his answer to one question. Only one mention is made of trade unions in the Green Paper. I would like to ask for an assurance from the noble Lord that, given that most successful companies in the UK are highly unionised with skilled workers, they will recognise the importance of the trade union contribution to all the subjects contained in the Green Paper. Will the Government ensure that trade union views are taken fully into consideration?

My Lords, I think that I can give that assurance to the noble Baroness. I can also say that, as far as I am aware, my right honourable friend has had discussions with the head of the TUC and others, and certainly those discussions will continue over the period of the consultation relating to this Green Paper.

My Lords, I, too, welcome the Statement and the Green Paper because we urgently need some fresh thinking in this area. Those of us who have been following the issues concerning banking standards can see that it is really quite complex. There is a delicate and difficult relationship between legal regulation on the one hand and values and social responsibility on the other. We face a number of problems. We have a disconnect between shareholders and corporations that has become ever more complex and further apart. How can we encourage shareholder engagement in long-term, sustainable business rather than short-term gains? How are we going to align more closely the remuneration of senior management to reward long-term growth and sustainability, and how can we reboot some of the social responsibility which is fundamental to this long-term success? The Statement mentions our legal system, our framework of company law and so on, and of course many of the multinationals rely on our social structures, including our education and health services. They take advantage of them but do not necessarily respond by taking their full responsibilities. I hope that the Green Paper will spark a wider debate about values as well as about law and regulation.

I am very grateful indeed for the right reverend Prelate’s intervention. I am grateful that he recognises that this is a Green Paper and is therefore designed to initiate discussion on these matters. I do not know whether it will lead on to a White Paper—it might or might not—but it will certainly allow the Government to collect the views of all those who have an interest in these matters. The very idea that it is a Green Paper is the most important aspect of it. That is why we welcome views from the right reverend Prelate on this matter and from all sides of the House—even from the noble Lord, Lord Mendelsohn, and others. We will take note of all those as this process goes forward.