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House of Lords Hansard
Companies (Directors’ Remuneration Policy and Directors’ Remuneration Report) Regulations 2019
08 May 2019
Volume 797

Motion to Approve

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That the draft Regulations laid before the House on 8 April be approved.

Relevant document: 25th Report from the Secondary Legislation Scrutiny Committee (Sub-Committee A)

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My Lords, these regulations add certain new requirements to the reporting of directors’ remuneration by publicly quoted and traded companies. The purpose of the new measures is to give shareholders more information with which to assess how rewards to directors are matched by performance—for example, by requiring companies to provide more detail about the award of company shares to directors.

The new requirements stem from a new European directive, commonly known as the revised shareholder rights directive. The directive is due to be transposed by 10 June 2019. These draft regulations would implement Articles 9a and 9b of the directive, covering the reporting of directors’ remuneration, to the extent that they are not already given effect in existing UK law. Other parts of the directive are being implemented by Her Majesty’s Treasury, the Financial Conduct Authority and the Department for Work and Pensions.

The regulations add a small number of additional requirements in respect of the directors’ remuneration policy and the directors’ remuneration report which publicly quoted companies are already required to produce under the Companies Act 2006. The main change that the draft regulations would make to the remuneration policy would be to require companies to provide additional detail about proposed share-based remuneration to directors, including arrangements under which directors can exercise their shares.

The Government believe that this will be a valuable addition to the existing framework for executive pay reporting. The award of company shares to directors is of considerable interest to shareholders since it has the potential to align the interests of directors more firmly with the long-term success of the company.

The draft regulations also provide for the remuneration policy to set out more information on directors’ service contracts, in particular their length, and to highlight the key changes introduced in a new remuneration policy compared to the previous policy.

For the remuneration report, the main new requirement proposed in the regulations is for companies to compare the annual change in directors’ remuneration to the annual change in average employee pay over a rolling five-year period. This new measure would provide greater transparency on how pay in the boardrooms of quoted companies aligned with pay and reward across the company as a whole. It would also complement a new obligation introduced by the Government last year for quoted companies to disclose and explain each year the ratio of their chief executive officer’s total annual pay to the average pay of the company’s UK employees. The regulations additionally propose that remuneration reports in future show the split between fixed and variable pay for each director in every year.

Taken as a whole, the new measures in the regulations would further strengthen confidence in the UK’s executive reporting framework as one based on transparent, consistent and accessible public reporting to shareholders.

I want to highlight two provisions in the draft regulations intended to ensure the compatibility of the new measures—which, as I have said, originate from the revised shareholder rights directive—with the UK’s existing company law framework.

The first of these concerns the scope of the companies covered by executive pay reporting. The UK’s existing executive pay regime applies to quoted companies, whereas the shareholder rights directive that these draft regulations will help implement applies to traded companies. In practice, the vast majority of traded companies are also quoted, meaning that their shares are both tradeable on a regulated market and quoted on the FCA’s official list. The draft regulations address this slight differentiation in company definitions between the directive and UK company law by providing for executive pay reporting to apply both to quoted companies and to traded companies, whether or not they are quoted on the official list.

The second provision in the draft regulations, to ensure compatibility between the new measures from the directive and existing UK law, is a small procedural change to the Companies Act to allow shareholders to retain their existing right to a binding vote on any proposed payments to directors that would otherwise be outwith the terms of the directors’ remuneration policy. The procedural change provides that shareholder approval for any payments to directors outwith the remuneration policy results in an amendment to the policy for the purpose of those payments. In this way, UK law will be compatible with a requirement in the directive that all payments to directors must be in line with a shareholder-approved remuneration policy.

Turning to the impact of the regulations, the Government believe that the additional cost to business will not be significant. The UK’s executive pay reporting framework is already one of the most robust and transparent in the world, and the draft regulations propose only targeted enhancements to the existing remuneration policy and remuneration report. The Government tested and discussed the draft regulations in advance with a wide range of interested parties, including business groups, investors and civil society representatives. No significant concerns were raised, and a small number of technical comments helped inform the final drafting of the regulations before they were laid before Parliament.

These regulations are intended to increase further the ability of shareholders to scrutinise how directors are rewarded for their performance. In doing so, the regulations will enable the UK to implement Articles 9a and 9b of the revised shareholder rights directive, covering executive pay, and I commend them to the House.

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My Lords, the content of this statutory instrument is all good stuff, in my view. Greater transparency, enhancement of shareholders’ rights to challenge around remuneration, comparators now with senior executives and average pay within organisations—I would have thought that this was something we would embrace with enthusiasm. Indeed, I hope that the UK was very much engaged in the process of encouraging the shape of this directive. However, it raises a question that I hope the Minister can answer. The directive completed its process through the European Parliament and Council two years ago. The Government expected that we would have left the European Union by this time, yet they had not taken the opportunity to bring forward this statutory instrument and these improvements. They have been forced to do so now because this directive needs to be implemented in regulation by 10 June—and we have not yet left the European Union, so that requirement remains on our shoulders.

I have heard much discussion from the Brexiteer community that Brexit will be an opportunity to set aside regulation, to reduce the burden on companies and to step away from what they consider to be a European view of director and senior executive responsibilities. Is the reason we did not see this statutory instrument earlier because the Government thought we might be able to avoid ever implementing it? I know that the Minister has praised it, but one would have thought that a Government who were enthusiastic about its content would have made sure that it was passed well before the original Brexit departure date. I hope that the Minister will address that, because it will tell us a lot about the Government’s expectation of how, in reality, they will handle regulation post any Brexit.

My second set of questions is around the parts of the directive that are not included in this statutory instrument because they are the responsibility of the Financial Conduct Authority and the Department for Work and Pensions, presumably to introduce through regulation. The Minister also mentioned the Treasury, but I noticed in the briefing we had that one series of rights is the responsibility of the Department for Business, Energy and Industrial Strategy. The other parts of the directive which are not covered by this SI are due to be transposed by 10 June 2019. Does the Minister have every expectation that that date will be met—that the FCA and the others engaged in this are on track to be able to deliver against it? What will happen with the set of shareholders’ rights that do not have to be transposed until 3 September 2020? I am not quite sure what they are, so perhaps the Minister can tell us more; I think it must be the ones that are the responsibility of BEIS. Do the Government intend to make sure that those are transposed or do they intend to discard them on the grounds that they expect that by that date we will no longer be a member of the European Union?

I hope very much that the Minister can help us through this process to enable us to understand why these regulations were not brought to us earlier to ensure that they were part of our statute book at the point of departure from the European Union. Did the Government intend to discard them if they found a way to do so, and if so, what does that tell us about their philosophy and intentions when it comes to issues such as transparency around remuneration for directors and senior executives, and the power of shareholders to be able to challenge?

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My Lords, I am grateful to the Minister for introducing this statutory instrument. I can be relatively brief, because most of my points have already been raised by the noble Baroness, Lady Kramer, and I need only add a couple more things to them. Like her, I was caught immediately by the point at paragraph 2 of the Explanatory Memorandum which explained that this statutory instrument comes from a directive passed on 17 May 2017, and I wondered about the timescale of that.

In addition to the points she made, I point out that the department has a long and distinguished record in looking at directives and regulations that come from the European Union and has always prided itself on the quality of the material brought forward in support of the changes that it wishes to make through an SI, whether it is negative or affirmative. This SI stands out as one that has not been supported by a considerable amount of consultation and debate, and nor is there an impact statement, which I find rather surprising. Perhaps I would not go quite as far as the noble Baroness, Lady Kramer, in suggesting that there is a devilish plan here behind the work done by the department to try to avoid having to do anything in the hope that it would not be necessary because exit day would be before 10 June. Even so, the department has not covered itself in glory in the sense that, although it is true that the difference between where the UK Government have already got to with legislation and this directive is relatively small, these are not unimportant issues. If the department’s heart was in the wish to ensure that shareholders and indeed wider stakeholders had good information that allowed them to assess the performance of directors and to form a view on the effectiveness or otherwise of the company’s approach to directors’ remuneration and performance, these regulations, on the back of the directive, are in fact important. In a sense, that suggests that more work on and understanding of how boards will operate it would have been useful and helpful.

In introducing this SI, the Minister tried to paint a benign picture of how this was all happening anyway and was in line with where the Government were going. But that conceals a concern which has stemmed not just from anything heard on this side of the House but which has come from the Prime Minister, no less, who said that more has to be done to improve the way in which our limited companies system operates. There has been concern from the Bank of England about the whole question of whether tomorrow’s companies will need to be significantly different in terms of powers and responsibilities: it pointed out the much wider group of people who have an interest in the success or otherwise of a company, not just the shareholders. So there is a context here which has not been addressed by the Minister and I hope that he will comment on it.

To be more specific, we could not have reasonably expected the Government on their own to have brought forward regulations to make sure that in future we require that the remuneration of persons in the role of chief executive officer and any deputy chief executive officer must be reported, even if they are not directors. That is a major change, and it will help considerably to better inform those who judge companies.

On the question of how share-based remuneration is described, detail on vesting periods, deferral and holding periods is often lacking. In future, remuneration policy will have to indicate the duration of directors’ service contracts. Again, that will be useful. The remuneration policy must also set out the decision-making process for determination of review and implementation and all significant changes. These are important matters. They may be trivial in themselves, but, taken together, they will give much more information.

The Minister mentioned the split between fixed and variable remunerations and the question of share options. Share options have been a source of long-term concern to those interested in how companies pay their staff, particularly directors. To have that nailed down now is a really important change.

So those changes in themselves are important. The context within which this happens is of political interest. There is a question about why the regulations have been delayed so that we are doing this in a rush, and there is a worry about not having the wider context around consultation and cost, which suggests that something is not quite working here. I look forward to hearing the Minister’s response on that.

Like the noble Baroness, Lady Kramer, I am concerned about the SIs that will presumably be required from DWP on disclosure by asset managers about pension funds. This is also an area of interest, but it would be wrong if the regulations were not in place by 10 June. Can the Minister give us some information on that? Like the noble Baroness, I question how the Department for Business, Energy and Industrial Strategy will take forward the provisions requiring further facilitation of shareholders’ rights. It is a longer deadline—3 September 2020—but, again, further information would be helpful.

These matters are important. The statutory instrument is of great interest and I am happy to support it.

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My Lords, as always, I thank both noble Lords for the positive side of their contributions to this debate—but thereafter it went a bit negative. The noble Baroness, Lady Kramer, supported by the noble Lord, Lord Stevenson, seemed to imply that we had been dragged kicking and screaming into bringing the regulations to the House. I assure them that that is not the case.

We were engaged in all the activity related to the EU in developing the regulations, but, as both noble Lords will know—probably far better than me, because they have been involved in BEIS matters for longer—this goes back quite a long way. Various improvements were made in 2013 and in 2018 to company reporting. So we have done quite a lot domestically, and we were involved with the EU in bringing regulations to book which, as the noble Baroness said, were produced in 2017 but do not need to come into effect until June this year. That date we will meet, and that is why we are bringing forward the regulations at this moment.

We have been preparing for a year to implement these measures. Those preparations had to take account of the new Commission guidance on the directive published last year, in 2018, and it would not have been fair to have introduced these new EU rules on UK companies two years before other companies in the EU. It is therefore quite right that we bring them forward at this stage. They form part of the Government’s wider corporate reform package that I mentioned, part of which was implemented last year and part of which was implemented earlier.

Both noble Lords asked about other government departments and the FCA. As I said, the FCA, DWP and the Treasury have to implement other parts. The Treasury will shortly be laying draft regulations. I do not know who in this House will do it; I imagine that it will be my noble friend Lord Young, as my noble friend Lord Bates is off on one of his walks. The measures in the directive are designed to increase transparency in the work of so-called proxy advisers, who advise institutional investors on the companies in which they invest.

DWP will shortly lay draft regulations to implement new measures in the directive covering how pension fund trustees carry out their stewardship roles with investee companies. The FCA will make changes to its handbook to give effect to new obligations under the directive covering asset managers and the disclosure of related party transactions by public companies, but that obviously will not need the same parliamentary scrutiny as these regulations. My department—BEIS—will also bring forward measures. I do not know whether they will be affirmative or negative, but I will advise the House in due course. We will bring forward appropriate measures to implement the final parts so that they can be brought into effect by September 2020.

Finally, the noble Lord, Lord Stevenson, asked about an impact assessment. I think that I made it pretty clear in my opening remarks that we did not think an impact assessment necessary, which is why we consulted widely with all the appropriate bodies, individuals and other parties. As a result of their comments, I am told, we made some changes and felt that an impact assessment was not necessary.

I believe that I have answered all the questions. As I said, we were not dragged kicking and screaming into doing this; we believe that the regulations are an appropriate response from the Government, partly to meet our obligations because we are still in the EU but also as part of the wider package I talked about, which came in last year and on earlier occasions.

Motion agreed.