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Companies Bill [HL]

My Lords, I beg to move that the House do agree with the Commons in their Amendments Nos. 988 to 991. These clauses would confer a power on the Secretary of State and the Treasury to make regulations requiring certain categories of institutional investor to provide information about the exercise, or non-exercise, of their voting rights. We welcome the valuable debate which this policy has attracted during the passage of the Bill, not least the detailed and thoughtful contributions from noble Lords opposite. I argue that two strong themes have emerged from this debate. The first is the near disappearance of those who oppose transparency of voting on principle. This is welcome: the case for transparency is a good one. It opens the way to a discussion of how best to achieve appropriate and cost-effective disclosures. It links also to the second theme: the strong support for an industry-led solution. This too I welcome. It is fully consistent with the Government’s intentions in promoting this power. As I made clear, the Government intend to see how market practice evolves before considering a mandatory regime. This power is a reserve power, a back-up to be used if the voluntary approach does not deliver. As I mentioned earlier, this debate has been marked by increased recognition that transparency of voting is right in principle. I think that this reflects more than just a belief that there is an entitlement to this information—it recognises the benefits of disclosure. First, greater transparency of voting can only increase the confidence of savers in the governance being exercised on their behalf by institutional investors. Secondly, disclosure will make institutional investors more accountable for the governance decisions they make on behalf of savers, providing stronger incentives to cast thoughtful votes. It has been said that disclosures will distort voting decisions, either encouraging mindless voting or discouraging informed voting. It is hard to see how both can be right. If an institution is prepared to tell the company how it votes, as it should under the industry’s best practice guidelines, I am not sure why wider disclosure would provoke such irrational behaviour. It is not obvious that the voting system in America has deteriorated in the years since it mandated disclosure. Thirdly, greater transparency helps institutional investors manage conflicts of interest from voting decisions, thus reducing the likelihood of votes that benefit the institutional investor, at the expense of the customer. Fourthly, greater transparency will enhance shareholder engagement between institutions and investee companies. More accountability and stronger incentives to cast thoughtful votes promote more focused dialogue between companies and their owners’ representatives. Again, some say that disclosure will actually harm engagement. If that is so, why are so many institutions—a dozen of the 35 largest at the last count, including major firms such as Standard Life and the Pru—moving to make voluntary disclosures? It is not just the voluntary trend. Major jurisdictions such as the US and Canada have adopted public disclosure rules, and other countries are thinking about it. Public support seems healthy; a recent survey among pension fund trustees found nine out of 10 agreeing that fund managers should publicly disclose their votes. It seems to me that the case in principle for disclosure and for taking a power to make sure it happens has clearly been made. However, I am equally clear that the case for using the power is still to be made. Any disclosure regime must be workable and practicable, and it must be cost-effective. Accordingly, we have ensured that the power is so framed as to mitigate important concerns raised in these debates. The clauses that this House is now considering are not the same as those which were taken out of the Bill by this House at Third Reading. The amended provisions make clear that the Government have the power to include the following requirements in any mandatory disclosure regime—first, they can ensure disclosure of voting instructions, as opposed to disclosure of votes cast. Secondly, they can permit parties to meet their disclosure obligations by reference to other parties’ disclosures in respect of the same investments. Finally, they can permit disclosures to be made at an aggregate level, for example, by a fund manager, where this does not conceal relevant decision-making at the level of the individual institutional investor. I agree that all those aspects may be elements of a proportionate and cost-effective disclosure regime, and they will need to be properly considered as it is being developed. One issue that will need to be considered is public versus private disclosure. Some argue that there is a fundamental distinction between disclosure to members and disclosure to the wider public. However, I presume noble Lords opposite would support public disclosure where it was in the interests of the members, for example, if there were cost advantages in maintaining a public website, rather than writing to individual members; or through the greater scrutiny of potential conflicts of interest which might arise. Those will need to be weighed against any disadvantages of wider disclosure. However, in the absence of any further arguments, we should not prejudge this issue at this stage. Another issue that will need to be considered is the risk of misuse of disclosures. In line with our approach elsewhere in the Bill, I make it clear that we do not intend regulations, should regulations be necessary, to become a vehicle for disclosure of information that would be used by, for example, animal rights activists, in a way that would harm companies’ or investors’ interests. Let me turn now to the development of a proportionate and cost-effective regime. The Government are in no rush to regulate. This is not a concession to noble Lords opposite; it is a point of agreement on principle. There are good reasons why a voluntary industry-led regime may be the first best option to meet the Government’s objectives. First, there is the evidence, ably brought out by noble Lords opposite, that a voluntary regime may be the lower cost option. A voluntary regime provides scope to build on the different mechanisms that already exist, drawing on the industry’s best practice guidelines. Effort can be put into ensuring transparency, rather than box-ticking and rules-driven compliance. Secondly, it would be more flexible. Different organisations can adapt disclosure patterns to meet the needs of their constituencies. Good faith and transparency of practice will be key to making this credible. Thirdly, a voluntary regime is a chance for the industry to show ownership and commitment, as opposed to the Government imposing the requirements. This ownership and commitment will be vital if a voluntary regime is to deliver the meaningful levels of disclosure needed to make this work. So I am greatly encouraged by the first steps that the industry is taking to put together a voluntary code. We support this and will want to talk to the industry. Industry must have a fair time to deliver a workable solution and I repeat our earlier assurances: if the decision were to be made to exercise the power, the Government will ensure that there is full consultation and a cost-benefit analysis to make sure that any final regime was proportionate and properly targeted. Any final decision would, of course, be subject to this House’s agreement through the affirmative resolution procedure, providing a further check on any precipitate rush to regulate. The case for disclosure of voting is clear. The case of doing it in a way that maximises the benefit to investors in these collective enterprises and the public at large is equally clear. Noble Lords have our commitment that we will give the industry every opportunity to adopt a voluntary approach before we consider producing regulations. I beg to move. Moved, that the House do agree with the Commons in their Amendment No. 988.—(Lord Sainsbury of Turville.)