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Finance (No. 3) Bill

I congratulate the hon. Member for Amber Valley (Nigel Mills) on moving his new clause and on the deployment of his expertise for the benefit of the whole House. He could well be a candidate for tax personality of next year, but I would advise him that it might help his prospects if he were to lay off the Reagan quotes. I wish to speak to the amendments tabled in my name. Amendment 15 deals with directors' salaries and payments, and proposes a binding vote by shareholders on such payments. Amendment 16 deals with the publication of information on the salaries and bonuses of directors in all public limited companies. Amendment 17 deals with a number of issues relating to enterprise investment schemes, and it would be helpful to receive certain information from the Government in order to assess those schemes in future. I want to deal with salaries and bonuses first, as they have been a matter of contention in the House for a number of years now. Statements have been made by leading members of all political parties expressing concern, if not outrage, at the levels of increase in the pay of company directors. The Leader of the Opposition said in a recent speech that the"““danger today is that pay and performance have become detached…Over the last 12 years, chief executive pay in Britain's top companies has quadrupled, while share prices have remained flat.””" The Secretary of State for Business, Innovation and Skills has called for greater disclosure on pay and bonuses and their link to company performance. He was reported as hitting out at the"““ethics of the wild east””" in the City. He described some directors' pay and bonus settlements as ““ridiculous””, ““outrageous”” and ““rewards for failures””. I agree wholeheartedly with the Leader of the Opposition and the Secretary of State on this matter. I believe that the Secretary of State's sentiments have been echoed by the Prime Minister himself. My amendments seek to address the fact that the present system for the control of directors' pay and bonuses by shareholders is not working. The current system for judging and rewarding remuneration in major companies is clearly not linked to performance, and evidence for that now abounds. The Business Secretary was referring to the dramatic increase in the remuneration of directors and executives of the top 100 companies. In 1998, that remuneration was 45 times the pay of the average employee in the company. By 2010, it was 145 times the average pay, and if it continues at that rate, it is predicted to reach 214 times the average salary in the company that the director or chief executive controls. At the moment, the chief executives of the FTSE 100 companies have total remuneration packages averaging £4.2 million a year. Last August, it was reported that the financial crisis had resulted in ordinary employees' salaries being frozen in at least one third of Britain's biggest companies, yet the average pay of the top directors increased by £500,000. Hewitt New Bridge Street has reported that the typical bonus has now increased from 90% to 120% of salary, and the total remuneration survey conducted by pay and reward consultants MM&K showed evidence of a total disconnect between rewards, actual performance and shareholder value. Performance-related pay has just gone through the roof, however, with extremely complex packages being devised. The average top award under share allocation schemes and incentive schemes in the FTSE 100 has risen from 174% to 328% of salary. In some instances, outrageously large awards have been agreed even before the director has demonstrated any value to the company. An example is Lloyds, which gave its new chief exec, António Horta-Osório, a welcome package worth close to £13.4 million simply for joining the bank. This is a bank that we, as taxpayers, now own. Lord Oakeshott, the Liberal Democrat peer, said that taxpayers would be ““appalled”” at paying someone"““£5,000 a day, just for turning up at the office for the next three years””." I wholeheartedly agree with him on that. Ironically, Sir Victor Blank, the former chair of the Lloyds group, described top bankers' pay in The Sunday Telegraph—not a newspaper I regularly read—as ““unconscionable”” and warned that the widening pay gap could lead to dangerous divisions in society and more strikes. I shall quote him directly. He said:"““You can't have an ongoing widening gap between the top pay and the average pay…I think we are at a time now where you have a certain amount of unrest over pensions and other issues where if we don't start early to have a degree of moderation in the levels of pay we risk more industrial unrest than we have had.””" I could not agree more. Some shareholders have echoed those concerns. It was perhaps best expressed by a woman shareholder who was disgruntled at the Cable and Wireless annual general meeting. She complained—and it was a heartfelt plea from the floor:"““All the money and all the profit seem to be going towards the salaries of the Board, and I did not necessarily think that they were worth that amount of money.””" I believe this is undermining confidence and engendering cynicism—and, of course, division and disenchantment—in the whole process. Clearly, the billowing packages of directors' pay, bonuses and overall remuneration has to be addressed. The Government have acknowledged that, as have all parties in the House. My amendments are designed to prompt action and to make action more speedy and decisive. If we are to tackle this issue, we need to understand why it is occurring. The Joseph Rowntree charitable trust funded an independent inquiry, the High Pay Commission, to which I believe a number of Members have submitted their views over the last year. It has looked at the drivers behind the trend of increases in directors' and executives' pay and remuneration. It provides some understanding of how the system operates to determine directors' remuneration and puts forward the reason for the excesses. Governments have addressed the issue over the last two decades. Legislation has been there to establish the current system of corporate governance. For publicly listed companies, it is based first on the establishment of a remuneration committee on every board to advise on appropriate remuneration; secondly, on disclosure; and, thirdly, on the shareholder having a vote on the pay and remuneration of directors. All the companies with a premium listing of shares are required on the Financial Services Authority listing rules to report on how they have applied the UK corporate governance code in their annual reports and accounts. This includes explaining how the pay was arrived at and determined. The remuneration committees that have developed since the 1990s grew up as a result of pressure from successive Governments. They aim to overcome the conflict of interest in directors setting their own salaries. The Greenbury report on corporate governance called for them to be fully independent and to comprise wholly non-executive directors. The committees agree the pay packages for top execs and produce the report that will eventually go before shareholders. The problem identified by the High Pay Commission and others is that the non-execs that sit on the remuneration committees are often executive directors in other companies, so setting benchmarks of remuneration is important for them. There have been charges of cronyism as executives and directors appoint each other to each other's remuneration committees—a relationship of incestuous self-interest—while the non-execs sit alongside executive directors supporting them and unwilling to challenge them on pay. In recent years, we have seen the emergence of remuneration consultants who advise the remuneration committees on the setting of pay, but these are unregulated and they are often working for or are commissioned by the company directors on whose salaries they are giving advice. On disclosure, quoted companies must publish directors' remuneration reports. These appear in the annual report and are put to shareholders for a vote. This information is required to be put to companies as an ordinary resolution for approval at the AGM. The problem, however, is the UK corporate governance code guidance, according to which:"““A significant proportion of executive directors' remuneration should be structured so as to link the rewards to corporate and individual performance. There should be a formal and transparent procedure for developing policy on executive remuneration and for fixing remuneration packages of individual directors.””" The Hampel report back in 1988 argued that the remuneration reports were excessively detailed and that features of the packages were"““rendered obscure to all but the expert reader.””" The situation has got worse in recent years—worse than ever before. The data produced for the reports to the shareholders are often impenetrable and the remuneration packages are extremely complicated and sophisticated. There is a real fear of shareholders gaining any understanding of the package of remuneration, including the levels, and it has been argued that the reports are less about enlightening the shareholders than camouflaging pay and bonus levels within the complex schemes proposed. Publication does not cover all companies, so it is extremely difficult for shareholders to hold the directors and executives to account, simply because the information published is too complex and impenetrable. As for the shareholder vote, international and national regulations and guidance on corporate governance place great emphasis on shareholders having the ability to express their opinions on the remuneration of directors. It is enshrined in OECD principles of corporate governance. In the European Union, the publication of remuneration levels and performance criteria is recommended, as is investors having a vote on remuneration. Within the UK, the UK corporate governance code sets out the standard of good practice on reporting to shareholders on remuneration and regulations also require shareholder votes on the total remuneration packages of company executives and directors. The vote itself, however, is purely advisory and the failure to pass the remuneration report does not invalidate the payments made. In fact, the FSA reforms of the banking sector have gone further on the basis of EU principles and those of the Basel Committee on Banking Supervision. Further help is provided on disclosure, but there is still no authoritative binding vote that will determine the acceptability of pay packages. When shareholder advisory votes were initially introduced, they had some effect. The best example is GlaxoSmithKline, as the remuneration report was defeated—but that is very rare. The average vote against the remuneration report nowadays is 5.6% on the all share index. Shareholders are limited by the amount of information available, particularly in view of diversifying portfolios that have a range of investments, making it hard to find time to study and intervene in each case. My amendments are designed to address some of these issues, particularly the weaknesses within the current governance structure. I am trying to make the existing structure work more effectively so that shareholders can begin to control the excesses of directors' pay and remuneration that have developed in recent years. Amendment 20 says simply that prior to the corporation tax changes taking effect, the Government should enact legislation to ensure that all public companies"““publish the…salaries and bonuses of their directors.””" We have the opportunity this evening to hear the Government's future plans on publication in order to tackle the complexity of the current arrangements. Amendment 15 goes further in an attempt to strengthen the hands of shareholders by making the advisory vote on remuneration packages binding. In this way, it will enable shareholders to take control of their own companies once again and ensure accountability. It will enable shareholders to hold not only directors but remuneration committees to account.