HL Deb 28 February 1997 vol 578 cc1440-5

12.51 p.m.

Baroness Miller of Hendon rose to move, That the draft regulations laid before the House on 6th February be approved [12th Report from the Joint Committee].

The noble Baroness said: My Lords, I beg to move that the House consider the Company Accounts (Disclosure of Directors' Emoluments) Regulations 1997; and will speak to the Companies Act 1985 (Directors' Report)(Statement of Payment Practice) Regulations 1997. Both of these statutory instruments make amendments to the accounting schedules of the Companies Act 1985.

I shall deal first with the new requirement to disclose payment policies in the directors' report. Your Lordships will be aware that the problems caused by late payment continue to cause concern to a number of small businesses. Indeed it was one of the main concerns highlighted last year when we gave small firms the opportunity to shape future policies through the regional Your Business Matters Conferences.

While there are no easy answers to tackling the problems caused by late payment, the Government are committed to helping small businesses. We have consulted widely and have introduced a number of positive measures to tackle the problems associated with late payment.

Lord Haskel

My Lords, with the permission of the House, I think that the statement of payment practice regulations are the next item on the Order Paper. At the moment we are dealing with the disclosure of directors' emoluments.

Baroness Miller of Hendon

My Lords, my brief has been prepared for both items so I may have to repeat what I have said on the statement of payment practice regulations later.

I shall now turn to the second draft order which will amend the statutory disclosure requirements relating to directors' emoluments.

Companies are required to provide information on directors' emoluments under Schedule 6 of the Companies Act 1985 so that shareholders and other readers of company accounts can satisfy themselves that the directors, in setting their remuneration, are acting reasonably. The Government believe that a statutory disclosure requirement continues to be necessary for all levels of company to achieve this objective.

The purpose of the order is to lay down revised basic disclosure rules applicable to all companies. Your Lordships will know that listed companies are subject to more detailed disclosure requirements under the Listing Rules of the London Stock Exchange.

The need for the revisions stems from the recommendations of the study group on directors' remuneration chaired by Sir Richard Greenbury. Noble Lords will recall that the Greenbury group was set up in 1995 in response to public and shareholder concerns about the remuneration of company directors in the United Kingdom. The group concluded that UK companies mostly deal with directors' remuneration in a sensible and responsible way, but it felt also that there was scope to build on the progress that had already been made in improving corporate remuneration practices. Sir Richard put forward various proposals designed to ensure that directors' rewards were linked to performance and that the interests of directors and shareholders in promoting the company's progress were aligned.

One of the key Greenbury recommendations was that a report should be sent to shareholders each year explaining the company's approach to executive remuneration and providing full disclosure of all elements in the remuneration of individual directors. The London Stock Exchange incorporated this recommendation into its Listing Rules in December 1995.

The Government fully support the view that full disclosure of directors' pay by listed companies is of great importance in improving the accountability of directors to their shareholders. The Government therefore welcomed the Stock Exchange's lead in introducing new Listing Rules to require compliance with the key Greenbury recommendations, and the President of the Board of Trade gave an undertaking in another place that he would ensure that the provisions in the Companies Act relating to disclosure of directors' emoluments were consistent with the new Listing Rules. These draft regulations meet that commitment. They also implement two specific recommendations by the Greenbury group; namely, that the Government should remove from companies which make full disclosure of their directors' remuneration the obligation to show it in £5,000 bands; and that it should review the present requirements for disclosure of information on directors' pensions.

In revising the statutory disclosure requirements on directors' pay, the Government have sought to ensure that the requirements on unlisted companies are set at the minimum level necessary to ensure that directors are accountable to shareholders when setting their remuneration. The department accepts that it would not be appropriate for unlisted companies, whose shares are not publicly traded, to be subject to the same level of disclosure as listed companies. This is particularly so in the case of small companies, where, very frequently, all the shareholders are also directors of the company. The regulations therefore do not attempt to replicate the Listing Rules. Rather, they lay down a basic disclosure rule which is set at a level appropriate for unlisted companies, leaving to the Listing Rules to require more detailed disclosures by listed companies. There is a specific exemption from many of the disclosure requirements in the order for small unlisted companies.

We have been especially careful not to require information from unlisted companies which would impose additional costs on them. In particular, we have taken care not to require unlisted companies to make any disclosures which would require them to employ an accountant to make valuations of their shares or to employ an actuary to value pension entitlements.

The Government believe that the draft regulations will provide more useful information to shareholders than the current requirements without increasing the disclosure burden on companies. I would like to bring to the attention of noble Lords two examples of the way in which this has been achieved.

In the first place, they follow the Greenbury recommendation that information should be provided on each element of directors' remuneration. Companies will be asked to provide separate aggregate figures relating to basic pay, share options, long term incentive schemes and money purchase pension schemes. This will not mean extra work for companies since the individual figures are needed to compile the overall total, but it will enable readers of company accounts to see how companies structure their directors' remuneration packages.

In the second place, we have, in line with the recommendation by the Greenbury study group, reviewed the disclosure requirements relating to pension entitlements. In the case of money purchase schemes, the draft regulations require companies to disclose the value of company contributions, since this gives an accurate picture of the value to the director and the cost to the company. We do not believe, however, that the same holds true in the case of defined benefit schemes, where the level of company contributions may he misleading, if, for example, there is a contributions holiday in force or the director has received a big pay rise and is close to retirement.

The draft regulations therefore require companies to disclose the number of directors in each type of scheme as a marker to users of accounts that directors are accruing benefits under a defined benefit scheme. Companies where aggregate remuneration totals £200,000 or more are additionally required to disclose the accrued pension benefits of the highest paid director.

In summary, the aim of these draft regulations is twofold: first, to implement the recommendations of the Greenbury group to the Government and to bring the Companies Act disclosure requirements into line with the new Stock Exchange Listing Rules; and, secondly, to rationalise the disclosure requirements on unlisted companies.

I commend the regulations to the House.

Moved. That the draft regulations laid before the House on 6th February be approved [12th Report from the Joint Committee].—(Baroness Miller of Hendon.)

Lord Haskel

My Lords, I thank the Minister for explaining the statutory instrument, which, as she told us, came from the recommendation of the Greenbury Committee. It is obviously designed to clarify payments made to directors in the form of salary and bonuses, gains made by the exercise of share options or incentive schemes and contributions to money purchase pension schemes.

The Minister explained why this measure applies only to quoted companies; namely, because the value of shares in unquoted companies in unknown. But that is the nub of the problem which Greenbury was asked to solve. The Minister will remember that the Greenbury Committee was set up largely because of public disquiet over the huge salary increases and wholly unreasonable share option schemes granted to directors of newly privatised utilities and public transport companies. They were unquoted companies and the public perception was and still remains that those companies are run for the benefit of the shareholders and the directors and not for the customers who depend on them—certainly not for the success of the staff who were quickly disposed of and, in the case of South West Trains, rather too quickly.

Perhaps an estimate should be made of the value of share options given to directors in unquoted regulated companies. That would certainly help to improve the public's perception of those companies. The Minister may remember that that point was raised when we debated the report of the commission on the regulation of privatised utilities in your Lordships' House on 12th February. I feel that it is misleading of the Government to say that it is impossible to estimate the share value of unquoted regulated companies, since they are doing it all the time. Only last week at that Dispatch Box a Minister gave us an estimate of the value of London Underground. The Government must be the biggest customer of the financial consultants who specialise in that kind of work.

The utilities and transport companies are an essential part of our infrastructure. It is right that they should be high in the public's esteem, so that they will use them and our economy will benefit. More transparency will certainly help that. The Minister must also be aware that many of our basic utilities are now controlled by foreign firms quoted in different countries. Will that regulation apply to them and, if so, how?

Away from the regulated sector, this regulation is probably adequate but it could he improved. Why should firms concentrate only on the remuneration of a small group of directors? What consumers are interested in is the relative pay between directors and the shop floor. Companies serving the public need some form of social consent and that is not best served by a growing disparity in pay between the top and the bottom. Differentials and incentives work for all, not just for directors.

Let me make one final point. Is the Minister satisfied that this regulation will take care of all the tax devices thought up by the remuneration consultants? I mean such things as payments to a director's privately owned consultancy, split remuneration paid in several countries, remuneration paid to a spouse and generous allowances such as home moving costs. Also, I know that share options are not relevant where hospital trusts and quangos are concerned. But will the remaining regulations apply regarding payments made by those institutions?

In a small way this regulation touches on the difficult problems of pay determination. I hope that the Minister's department will lay down a code of best practice for that. Then companies can declare whether they are or are not following that code. Let us remember that more and better information helps to improve the operation of the capital market and the relationships between companies and stakeholders and helps everyone to make better long-term decisions. This regulation is a small but welcome start.

Lord Bruce of Donington

My Lords, I am not quite sure at the moment whether the noble Baroness has formally moved the next regulation which deals with payments to creditors. If she has done so, I should like to speak to it now. If not, I prefer to wait until she has done so.

Baroness Miller of Hendon

My Lords, I had better say that I have not done so. It was a mistake. I shall come back to that regulation afterwards and the noble Lord can ask me what he will.

The noble Lord, Lord Haskel, was rightly concerned about whether the disclosure should also cover quango board members and directors of private utilities. He was concerned with transparency, and so indeed are we. Information on the remuneration of board members and chief executives, for example, of national health service bodies or other non-departmental public bodies, is published in the Cabinet Office's annual publication Public Bodies and in the bodies' annual reports. The noble Lord is probably aware that copies are available in the House's Library.

But perhaps he was slightly more concerned with the utilities. So far as concerns the utility regulators, the salaries of the directors general are published in the 1996 Oftel and Ofgas reports. The 1996 annual report for Offer will be published later—I believe this week or next week. I am happy to tell the noble Lord that he can be reassured on that point. There is no secret. He has only to look at the Utility Weekly, which has a table of all the figures. So he can reassure himself on that point.

The noble Lord was also concerned in the case where the utility was a wholly owned subsidiary. Directors of wholly owned subsidiaries are not in the same position as directors of the parent companies, so far as concerns the ability to determine their own remuneration. The pay of directors of wholly owned subsidiaries is a matter for the parent company as the sole shareholder. The parent will have full access to relevant information without needing to rely on statutory disclosures.

The noble Lord had great concern about the different ways in which the director works perhaps as a consultant to the company, having set up his own consultancy. The draft regulations require companies to disclose directors' remuneration and pension contributions in respect of their services as directors of the company or otherwise in connection with the management of the affairs of the company. The draft regulations retain the wording in the current Companies Act provisions. The words: the management of the affairs of the company have been given a very wide interpretation by the courts in another context. In our view, they encompass amounts received by a director in connection with any or all of his services to the company, including those undertaken in a consultant capacity.

The noble Lord, Lord Haskel, can also be reassured that the existing provisions in the Companies Act which require things such as payment to wives or expense allowances to be included in figures to be disclosed in the report remain unchanged. So there is not a problem there.

The noble Lord was also concerned that directors of some United Kingdom companies are overpaid. We believe it is important to distinguish myth from reality. The Greenbury Report noted that for the most part remuneration levels of directors in the United Kingdom lie within the range of European practice and well below American levels. It is essential that British industry remains competitive. That will sometimes mean companies paying high salaries to attract or retain the very best executives. Those are decisions which can only be taken by companies and shareholders.

The noble Lord was concerned that directors' pay appears to rise more quickly than workers' pay. We believe that what is important in this matter is that United Kingdom industry remains internationally competitive. All salaries should be justified by performance and affordability. That is true for all levels.

Lord Haskel

My Lords, before the noble Baroness sits down, I was concerned about the ratio between directors' pay and shop floor pay, which is measured now by most firms trying to assess the effectiveness of a business.

Baroness Miller of Hendon

My Lords, we believe it is important that the United Kingdom remains internationally competitive. We believe that all salaries, whether directors' pay or the pay of people working on the shop floor, should be justified by performance and affordability. We would like it to be true at all levels.

On Question, Motion agreed to.