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House of Lords Hansard
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Public Services: Corporate Governance of Businesses
13 March 2018
Volume 789

Question

Asked by

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To ask Her Majesty’s Government what steps they are taking to ensure a high standard of corporate governance at businesses that provide essential public services.

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My Lords, the Government’s corporate governance reform package will strengthen the United Kingdom’s corporate governance framework. Secondary legislation to be brought forward will require reporting on how company directors take their employee, supplier, customer and other stakeholder interests into account when carrying out their duties. It will also require quoted companies to publish and explain the ratio of their CEOs’ pay to the average of their United Kingdom employees.

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My Lords, I hear what the Minister says but this is the second Question we have had this afternoon about public services. Does this not indicate that the system of fines and regulation is just not working? Will the Government introduce a new purpose-driven classification to be adopted by companies which are privately owned but publicly guaranteed, because we have to ensure continuity of their essential public services? It must be a classification that ensures a standard of behaviour that is responsive to the public and ensures that company policy and company metrics are aligned to the public interest and not just to shareholder value.

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My Lords, we have always made it quite clear that the importance of public services will come first. In terms of the affair of Carillion, which I think the noble Lord was alluding to without mentioning its name, my right honourable friend the Secretary of State made the situation clear in his initial responses. We have also made it clear that we need to see some degree of reform of corporate governance. That is why we brought forward that reform package and why the Financial Reporting Council has been consulting on its revisions to the code; when those come forward we will take that on further.

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Is my noble friend aware that the current Lord Mayor of London has launched a campaign to restore trust in corporate governance and businesses throughout the United Kingdom? In that context, will he join the Lord Mayor of London and extend it beyond that franchise to possibly involve the Institute of Directors, the CBI, the TUC and trade bodies throughout the United Kingdom? As I am sure my noble friend is aware, there is a problem with public trust in the corporate world. Will he make sure that Her Majesty’s Government are absolutely in the vanguard of ensuring that that trust is restored?

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I am grateful to my noble friend for that response and I am aware of the Lord Mayor’s campaign. In fact, I was present—if I remember the precise event—at the launch of that campaign by the Lord Mayor. My right honourable friend the Prime Minister has also always made her views clear about the importance of corporate governance and reforms thereof. That is why we have brought forward this package and why, as I said, the Financial Reporting Council is consulting on it.

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My Lords, the role of the shareholder is very important in maintaining corporate governance, but increasingly the share registers of Britain’s companies are dominated by passive shareholders who do not have the capacity to oversee the corporate governance of the companies they own. Will the Minister explain who, in the absence of the shareholder, is the prime overseer of the board to maintain corporate governance?

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My Lords, as I said, the code and its revisions will be important, but it is also important that shareholders play their part in this process. We have considered that and it is why we have already brought forward certain reforms to increase shareholders’ knowledge. For example, shareholders can now see when companies have significant shareholder opposition to directors’ pay. The Investment Association’s public register was launched in December and a number of investors—that is, shareholders—are already using this information as a tool to inform their voting in the upcoming reporting season. If we can improve shareholders’ knowledge, that will improve what they can do in controlling their companies.

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My Lords, would it not be a good idea to have representatives from the workforce on these boards to break up the old boys’ network that exists on a lot of boards? That way we would get some proper public accountability.

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My Lords, we think it is very important that the voice of those working for companies should be heard on the board. In the Corporate Governance Reform Green Paper we made it clear that companies should have flexibility to choose how best to engage with their employees, and there are a number of different ways they can do that. They can have an independent director who represents employee views, an employee advisory council or a director directly from the workforce. There are a number of options. It is certainly something that should be looked at.

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Does the Minister agree that one of the reasons we are now experiencing a bit of a run of scandals on outsourced public services is the lack of information available to public authorities which have to control them? Will the corporate governance changes which the Minister responded to give the Financial Reporting Council greater powers to regulate companies and to take action before things go badly wrong? It asked for those powers after the BHS collapse two years ago. When will we see the results of the lessons learned exercise on Carillion and the actions required by government, according to the Secretary of State, to strengthen,

“the oversight … of the public sector in terms of contractors”?—[Official Report, Commons, 30/1/18; col. 657.]

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The noble Lord is right to draw attention to the role of the Financial Reporting Council. We believe it has a range of powers that allow it to sanction, for example, individual auditors and accountants and to audit firms. In implementing our reforms, we certainly want to give further consideration to whether the FRC has the appropriate powers, resources and status to operate effectively.