§ 6.5 pm
The Minister for Competition and Consumer Affairs (Mr. John M. Taylor)
I beg to move,That the draft Company Accounts (Disclosure of Directors' Emoluments) Regulations 1997, which were laid before this House on 6th February, be approved.The Companies Act 1985 requires all companies registered in Great Britain to provide information on directors' remuneration in the notes to their annual accounts. The information that companies are required to provide is set out in schedule 6 to the Act. The purpose of the disclosure is to permit shareholders and other users of the accounts to 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 companies to safeguard the interests of shareholders. The purpose of the regulations is to bring the schedule 6 requirements into line with best practice in this sector, as set out in the recommendations of the study group on directors' remuneration chaired by Sir Richard Greenbury.
Hon. Members will recall that the Greenbury study group was asked to make recommendations on the determination and disclosure of directors' remuneration and to prepare a code of practice for use by the United Kingdom's larger listed companies. When the report was published in July 1995, it was welcomed by the Government as a very helpful contribution towards improving the accountability of directors to their shareholders. We particularly welcomed the report's emphasis on aligning the interests of directors and shareholders by linking pay to performance.
The Greenbury report focused on listed companies and its main recommendations were aimed at listed companies, investor institutions and the London stock exchange. Its key recommendation on disclosure of directors' remuneration 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 that recommendation into its listing rules in December 1995.
The Greenbury report also made two specific recommendations to the Government on disclosure of directors' remuneration: that the Government should remove from companies that make full disclosure of their directors' remuneration the obligation to show it in £5,000 bands and that the Government should review the present requirements for disclosure of information on directors' pensions. The regulations implement both recommendations. They also meet the commitment given to the House by my right hon. Friend the President of the Board of Trade that the provisions in the Companies Act relating to disclosure of directors' remuneration would be amended so that they were consistent with the listing rules.
The regulations lay down a basic disclosure rule, which is set at a level appropriate for unlisted companies, leaving it to the listing rules to require more detailed disclosures by listed companies. For example, the regulations require disclosure of aggregate emoluments and those of the highest-paid director, whereas the listing rules require disclosure of the remuneration of each director.
666 The Government accept that it would not be appropriate for unlisted companies, whose shares are not publicly traded, to be subject to the very detailed disclosure recommended for listed companies by the Greenbury report. This applies particularly to very small companies, where frequently all the shareholders are also directors of the company; indeed, the regulations propose a specific exemption from many of the disclosure requirements for such companies.
I deal now with the details of the new disclosure requirements in the regulations. The first substantive regulation covers the aggregate emoluments of directors. The new provisions retain the present requirement on all companies to show the aggregate amount of directors' remuneration, but they follow the Greenbury recommendations by requiring companies to provide information on each element of directors' remuneration.
Companies are therefore required to disclose figures on basic pay, annual bonuses, share options, long-term incentive schemes and company contributions to money purchase pension schemes. This will provide more useful information to readers of company accounts by allowing them to see how companies structure their directors' remuneration packages, but should not mean extra work for companies since the individual figures are needed to compile the overall total.
The second substantive regulation relates to the disclosure of the emoluments of the highest-paid director. The regulations raise the aggregate emoluments threshold for disclosure from £60,000 to £200,000. The threshold of £200,000 relates not to the pay of the highest-paid director but to the pay of the board as a whole. Nevertheless, such an increase will be welcome to many private businesses whose directors do not earn huge amounts, while continuing to catch the very highly paid.
Companies in which aggregate emoluments total £200,000 or more will be required to provide a breakdown of the highest-paid director's remuneration. We have, however, dropped the requirement to show the emoluments of the chairman when he is not the highest-paid director and the requirement to show the number of directors within each pay band of £5,000 since we do not believe that these disclosures provide users of the accounts with important information.
§ Mr. Jim Cousins (Newcastle upon Tyne, Central)
Why has the Minister reached that conclusion? It is extremely important that shareholders in larger companies and the wider public are fully informed about the entire structure of directors' remuneration. The Minister's proposal means that only in the case of the highest-paid director, where the aggregate emoluments exceed £200,000, will there be an individual disclosure. That individual disclosure could be vital in the case of company chairmen and, indeed, all company directors. That surely is the purpose of the stock exchange's insistence on such disclosures.
As the hon. Gentleman rightly said, the stock exchange asked for far more in relation to listed companies. Under the regulations, we try to achieve a disclosure requirement that is manageable for all corporations. The Companies Act and schedule 6 apply to all companies, and we want the general requirement to be appropriate to a small company and the stock exchange listing rules to be appropriate for listed companies. That seems to be the proper balance.
667 The general domestic law that we are debating goes further than European law. With regard to listed companies, Greenbury goes further than either and is to be implemented by the stock exchange to the extent that it goes further than the domestic law.
We do not believe that small companies should be put to a great deal of trouble in evaluating, say, a share option scheme where there is no trade in the share, but at least a reader of the accounts will be put on notice. In a case such as that to which the hon. Gentleman referred, if a shareholder reads the accounts and is startled by or dissatisfied with the emoluments of the highest-paid director, it is open to him to attend the annual general meeting and call for the chairman of the remuneration committee—this is also a requirement—to give information about others, too. I am sure that, in a well-ordered company, the chairman of that committee would do just that at the AGM.
§ Mr. Cousins
I am following the Minister's arguments extremely closely, but how many individual shareholders find their way to companies' AGMs, be those companies large or small? If a significant proportion of individual shareholders—leaving aside the institutional ones—were to find their way to companies' AGMs, those meetings would all have to be held in the Birmingham exhibition centre.
It is not for me to give a general instruction or warning to or in any way coerce shareholders to attend AGMs; many will probably read the annual report and accounts and find that nothing in them motivates them to attend. However, if they are concerned and wish to ask a question, they can do so.
One of the most important improvements made by the regulations will be the disclosure of information on directors' pensions. The current disclosure rules require companies to include contributions paid in respect of directors under any pension scheme in their disclosure of directors' emoluments. Disclosing company contributions to money purchase schemes gives an accurate picture of the value to the director and the cost to the company of the benefits accrued. We have therefore retained the use of this figure in the regulations although, in line with our general policy that companies should disclose each element of directors' remuneration, we have required companies to disclose such contributions separately.
We do not believe, however, that the present disclosures are always meaningful in the case of defined benefit schemes—pension schemes—where the level of company contributions may be misleading if, for example, a contributions holiday is in force or the director has received a big pay rise and is close to retirement.
The regulations therefore simply require companies to disclose the number of directors who are accruing benefits under defined benefit schemes as a marker to users of the accounts. Companies where aggregate emoluments for the board total £200,000 or more are additionally required to disclose the accrued pension benefits of the highest-paid director.
The regulations underpin the listing rules on listed companies by setting out a basic rule that uses compatible definitions. With minor exceptions, listed companies will have to make only a single set of disclosures to comply with the Companies Act and the current stock exchange listing rules. The pension disclosure rules are a case in point.
668 The regulations and the listing rules will adopt a common policy in their treatment of the two types of pension scheme and will use compatible definitions. The listing rules will, however, build on the regulations by requiring listed companies to provide, in respect of defined benefit schemes, the amount of the increase over the financial year in each director's accrued benefit and either the transfer value of that increase or sufficient information to enable a reasonable assessment of the transfer value to be made. We believe that this is important information in respect of listed companies, but that it would not be appropriate in the case of unlisted companies. The shares of such companies are not widely held by the general public and it would be unreasonable to require them to employ an actuary to value pension entitlements for the purpose of the annual accounts.
The draft regulations follow the current statutory rules in requiring very small companies to provide information only to shareholders and not also to Companies House. In the case of the disclosure of directors' aggregate emoluments, small companies will be permitted to provide a single figure covering all types of remuneration, and will not be required to provide a breakdown by type of remuneration. Small companies do not have to provide information relating to the emoluments of the highest-paid director.
The regulations meet the Government's commitment to make the statutory disclosure rules on directors' remuneration consistent with the Greenbury recommendations. In doing so, they will provide more useful information to shareholders than is currently required without increasing the disclosure burden on companies. They deserve the support of the whole House.
§ Mr. Stuart Bell (Middlesbrough)
I am sure that the regulations will receive the support of the whole House, and that the serried ranks around us will, if need be, pour into the Division Lobby to support the Minister. I congratulate him on having mastered a complex measure, on giving the House the benefit of his knowledge and on the concise way in which he put his views to the House.
The Minister touched only briefly on the Greenbury report. The regulations are an attempt to remove the so-called overlaps between the Companies Act 1985 and the stock exchange's requirements, caused by its adoption of the Greenbury recommendations. However, according to a press release from the office of the President of the Board of Trade, dated 30 April 1996, the statutory instrument is designed to amend the Companies Act 1985 disclosure rules on directors' pay and pensions. Therefore, it does not simply remove so-called overlaps, but brings the requirements into line with the stock exchange listing rules—in other words, the requirements will be given full statutory backing, rather than the present self-regulatory backing of the stock exchange. The Government may talk of "overlap" or "underpin", but in reality they are putting on the statute book appropriate regulation dealing with directors' pay, pensions, share options and incentive schemes in line with the policies of the new Labour party.
The regulations apply to all companies, including listed companies, but the application of the rules will vary depending on whether the companies are listed, unlisted or small companies. In our view, however, the regulations 669 are needlessly complex as they seek to separate out self-regulation through the stock exchange listing requirements and statutory regulation through the Companies Act. The Government have come up with an instrument which, first, seeks to maintain self-regulation and secondly, introduces statutory regulation. That is what comes of not having a clear mind.
Easing administrative burdens, raising disclosure thresholds, dropping many existing obligations on unlisted companies, cutting the costs of disclosure and striking the right balance are all favoured objectives of the Department of Trade and Industry, but they can lead to complex regulations that obfuscate rather than clarify where the Government wish to go. The danger—the unforeseen consequence—is that it might be more difficult for shareholders to scrutinise what company directors are doing.
One result of the regulations will be to raise the bar for companies listed on exchanges other than the London stock exchange, and we welcome that. They will now have more stringent disclosure requirements, as they are to be put on a par with the requirements of the London stock exchange. Building on the Greenbury recommendations, the aggregate gains of directors of publicly listed companies, from share option schemes and long-term incentive plans, will have to be disclosed. Those for the highest-paid director will be disclosed separately.
The stock exchange listing rules require that the gains of each director under any share option scheme operated by a listed company be disclosed. However, unlisted companies do not have to disclose gain from share options or the value of any shares that directors have received under long-term incentive plans. That is said to be because of the difficulty in valuing shares of unlisted companies, but as Lord Haskel pronounced in another place, the Government had no difficulty in estimating a value for London Underground, which is not a quoted company. The Government themselves are the biggest customers of the financial consultants who specialise in the work of valuation.
It would not seem to be particularly onerous to lay down a framework for the valuation of shares in unlisted companies. The value of shares in unquoted companies does not elude the Inland Revenue when it comes to calculating their value for the purpose of inheritance tax. I am glad to see the Minister for Small Business, Industry and Energy in his place. His presence raises a smile among us all on a very dull Monday evening; it is always a pleasure to have him with us. I repeat that the value of shares can be and is calculated by the Inland Revenue for the purpose of inheritance tax. Difficulties there may be, but insuperable they are not. If the Minister wishes to intervene, I shall gladly give way.
§ The Minister for Small Business, Industry and Energy (Mr. Richard Page)
The hon. Gentleman might agree that the calculation of the value of privately owned companies is an art form, rather than a science.
§ Mr. Bell
I agree, but having been a trustee of an estate, I can say that the Inland Revenue has means of calculating such values, and succeeds in doing so.
670 The unlisted company appears to have a further advantage. The current anonymous banded disclosure obligation is to be replaced by a simpler requirement to show a single figure—the aggregated emoluments paid to directors. At present, the salary of the highest-paid director must also be disclosed if aggregate emoluments exceed £60,000. That threshold will be raised to £100,000. The existing obligation to show the emoluments of the chairman separately if the chairman is not the highest-paid director is to be dropped, as is the requirement to show if any director has waived his emoluments.
§ Mr. Cousins
My hon. Friend, like me, represents a constituency in the north of England, where we have recently seen two of our major regional utility companies—Northumbrian Water and Northern Electric—taken over by foreign companies, one French and one American. They have now become subsidiaries of companies located outside Britain. Given that it is far from clear whether Northern Electric will continue to be listed, does he agree that the proposed changes in the regulations provide an incentive to de-list, which is wholly unhelpful to people in the north of England, who wish to know some of the proper details about the governance of companies such as Northern Electric? He will be aware that I have no hostility to American companies, which play a great part in our region.
§ Mr. Bell
My hon. Friend, who has major American-owned companies such as Procter and Gamble in his constituency, makes two valid points. The first concerned whether the regulations cover subsidiary companies in this country, and the second was that although the regulations extend the stock exchange listing requirements to other stock exchanges in this country, they do not extend them to exchanges outside this country. The globalisation of our markets is reflected in the stock exchange, in that new exchanges such as Nasdaq are not covered by the rules. The Minister may wish to address the matter of whether the regulations cover subsidiary companies when he replies, or at a later stage.
The paradoxical effect of the changes would be to reduce the available information about directors' remuneration in unlisted companies. The aspects of the regulations that cover unlisted companies are contrary to the rules of transparency and accountability which everyone in the City agrees are elements of good corporate governance.
A propos small and medium-sized enterprises, I note that the regulations provide yet another definition of a small company. A small company may be defined as one that meets two of the following criteria: a turnover of not more than £2.8 million; a balance sheet total of not more than £1.4 million; or not more than 50 employees. We welcome simplification and disclosure exemptions for small companies. Moreover, the Government have not, as before, accidentally bound themselves in more red tape.
The Minister spent a little time talking about pensions, and I shall do the same. The replacement of paragraph 7 of schedule 6 to the 1985 Act is designed to force disclosure of discretionary increases in directors' pensions in excess of what they would have been entitled to, on the basis of their contributions or the fund's performance. He also mentioned Sir Richard Greenbury; we have not spent much time in the debate discussing him or his study group 671 on directors' remuneration, which published its recommendations on 17 July 1995. Sir Richard recommended that listed companies' remuneration committees should report each year to shareholders on behalf of the board, and that pension entitlements earned by each director during the year should be a part of that report.
According to the regulations, directors' pension benefits can be calculated on an accrued benefit basis. They also provide for the disclosure of sufficient information to calculate the capital value of directors' pensions if that information has not already been disclosed. Therefore, for listed companies, the current requirement to show aggregate pension contributions in respect of directors is to be altered. When the pension scheme is a defined contribution one, the company must show the number of directors covered by it, the aggregate contributions in respect of directors and the contribution for the highest-paid director. The Minister called that "underpinning".
The regulations' treatment of aggregation seems to be at odds with the stock exchange's listing rules. Moreover, there seems to be a logical defect at the regulations' heart. It is said to be too costly for companies to provide by name the amount of each element in the remuneration package of each director—although that is required by the stock exchange—and cheaper to aggregate than to provide figures for each director. However, as an aggregate can be arrived at only by adding together component parts—which must therefore be available and to hand—it is, if anything, more expensive to aggregate than to give legal force to the stock exchange requirements.
I have wandered down the byways of technicality, which is inevitable in so complicated an instrument. Moreover, the regulations deal with complex matters that may not be dealt with adequately on the Floor of the House. However, company pension schemes have massive tax advantages and privileges, which mean that the entire community contributes significantly to the private benefits that directors obtain through pension schemes. A significant slice of the £600 billion occupational pension scheme derives from the public purse because of tax exemptions. Therefore, there should be maximum transparency and accountability. Only time will tell—in the on-going debate on corporate governance and director and shareholder responsibility—whether the regulations meet those criteria.
At face value and on first examination, the regulations dealing with pension entitlement do not seem to be adequate. They fail to give full effect to the Greenbury recommendations on disclosure of the value of entitlements, and instead propose a simplistic statement on the amount of pension accrued yearly. There is also a danger that directors will be able to tuck away out of the sight of shareholders and employees—not to mention taxpayers—a huge part of their emoluments. As we shall see, in some cases, emoluments can amount to hundreds of thousands of pounds' worth of benefit.
The House is quiet today. In the run-up to a general election, it is good that most hon. Members are already out preparing for the dreaded day. However, Conservative Members who survive the electorate's relentless onslaught at the general election should not be surprised if a new Labour Government build on the regulations' legislative framework, on the basis of our commitments on corporate 672 governance and of any recommendations produced by Sir Ronnie Hampel's review of the Greenbury and Cadbury recommendations.
Sir Ronnie Hampel is chairman of ICI, and he has agreed, on behalf of the Confederation of British Industry, to review the Greenbury and Cadbury recommendations. In the words of his brief, he isto ensure that the original purpose is being achieved, proposing amendments to and deletions from the Code as necessary.The Hampel commission is expected to publish a draft report in July 1997, and a final report at the end of the year. However, for new Labour, the criterion will be enhancement of shareholder value in the framework of the stakeholder economy. The Hampel recommendations will be studied within that framework.
Our proposals are clear from our document "Vision for Growth", which was approved last autumn by party conference.
Mr. John M. Taylor
The hon. Gentleman has taken us into some very interesting territory—that new Labour, as he called it, will build on those controls. If indeed the Opposition want to go further—perhaps by implementing salary controls—now would be an absolutely ideal time to say so.
§ Mr. Bell
If I heard the Minister right, he is on about salary controls. He might explain to the House why there is such a vast difference in pay between directors of privatised utilities and those who work for them. He might also tell us why 160,000 people have lost their jobs in the privatised utilities since privatisation.
§ Mr. John Marshall (Hendon, South)
If the hon. Gentleman is talking about pay differentials and implying that some of them are unjust, is he saying that he would legislate on them?
§ Mr. Bell
The hon. Gentleman tempts me into byways that, in the interest of brevity, I had not planned on travelling. Why does not the Minister tell us what he thinks of water company directors and senior managers who, since privatisation, have awarded themselves £24 million in executive share options? Why does he not mention the payments to those on the boards of National Power, PowerGen and National Grid, who, in 1994, were given £5.3 million—more than eight times the £646,000 paid to the board of the Central Electricity Generating Board before privatisation? Those figures must astonish the hon. Member for Hendon, South (Mr. Marshall).
§ Mr. Marshall
Will the hon. Gentleman give a straight yes or no answer on whether he would legislate on those matters? If he would not legislate, why is he so willing to talk about them?
§ Mr. Bell
Talking about such matters on the Floor of the House is the essence of our parliamentary democracy. The regulations deal with aspects of corporate governance. Those aspects arise from the Greenbury recommendations, which were accepted by the former President of the Board of Trade, the current Deputy Prime Minister, who said that there would be legislation—which we are considering today. We are saying that we shall 673 build on the regulations, based on the Hampel commission's recommendations and on the consultation that we have conducted in the City of London.
Therefore, the answer to the question asked by the hon. Member for Hendon, South is yes, a future Labour Government will build on the regulations, in the same terms as the regulations—[Interruption.] I can tell him that a Secretary of State in a new Labour Government will exercise the powersconferred on him"—or her—by section 257 of the Companies Act 1985(a) and … all other powers enabling him"—or her—in that behalfto lay regulations before Parliament. So I not only give the hon. Gentleman a commitment that we shall build on the regulations' provisions on corporate governance, but I have told him the means by which we shall do it.
The clear proposals in our document "Vision for Growth" deal with the role of independent non-executive directors and with shareholder democracy. In response to the hon. Member for Hendon, South, an incoming new Labour Governmentwill also give shareholders a greater effective say over remuneration packages granted to executives by giving them a legal right to vote on remuneration packages at the annual general meeting prior to implementation, as well as the right to re-elect the remuneration committee.
The role of institutional shareholders should also be enhanced. Merely encouraging or requiring institutional investors to vote is not by itself enough. The key issue is one of transparency in voting behaviour. That is why new Labour would require institutional shareholders to draw up and publish a clear code of conduct for their voting policy and to make available disclosure of their voting records.
§ Mr. Bell
We shall, of course, await the recommendations of the Hampel commission; the Minister may find his answer in those recommendations. We shall consult the commission, but any changes that we feel should be made will be made not by primary legislation but, as I have told the Minister, by delegated legislation.
The Minister touched on the next issue briefly; Baroness Miller of Hendon also touched on it in a debate on Friday in the other place. I refer to the reason why we had Greenbury in the first place, which was the so-called fat cat syndrome. There was anxiety in the public mind about the huge amounts being paid to top directors and top chairmen.
I have a friendly remark for hon. Members who may be absent tonight because they are on the hustings already. I refer briefly to a statement made last week in the Wirral, South by-election. One voter, Mr. Keith Howard of Bebbington, who is a newsagent, said in an interview in the Financial Times that he was disillusioned with the way in which the Tories had allowed fat cat utility bosses to make huge personal fortunes while small business men had to struggle to make a living. He said: 674I voted Tory last time, but I am going to teach them a lesson in the by-election.
He added words that may be prophetic. He said:You never know, I might teach them a lesson in the General Election too.
The regulations are a very modest measure from a very modest Government. They are not in keeping with the changes in corporate governance, accountability and transparency for which the City of London is looking. To quote a little poem:Though the mills of God grind slowly, yet they grind exceeding small;Though with patience He stands waiting, with exactness grinds He all.
On 2 May, this Government will be well and truly ground.
§ Mr. Jim Cousins (Newcastle upon Tyne, Central)
This matter is important and significant. It is disappointing that there should be so few hon. Members here to debate such an important matter. We have created a great mass of individual shareholders. New shareholders have sometimes been created as a result of privatisations; others have come about as a result of changes in the funding of pension schemes or the introduction of personal equity plans.
Investors in such schemes now take their responsibilities extremely seriously. We have the clearest possible sign of a new era of shareholder activism in which shareholders, however small their individual investment, intend to be active on matters that affect the control and governance of the company and on significant issues that affect, for example, environmental matters.
On his deathbed, Goethe uttered the phrase, "More light!" There has always been some confusion about what Goethe meant. Was he referring to something ontic, profound and philosophical, or to something mundane relating to the circumstances in which he found himself on his deathbed? In terms of the regulations, the issue of more light is both philosophical and practical.
I take a great deal of heart and comfort from what my hon. Friend the Member for Middlesbrough (Mr. Bell) said about the issue. He has given a clear sign that he regards the changes being made tonight as a modest and conditional advance at best, as a retreat in some important ways and as a range of matters that we shall have to revisit when we have the advantage of the Hampel report later this year. I very much welcome and take heart from that.
There have been enormous payment abuses in some of our great companies and institutions. It was as a result of those scandals and the loss of public trust in the governance of those companies that the Greenbury committee met to deal with directors' pay. That move began in the financial markets themselves.
Some of the things that the Minister has said tonight are inexplicable. How can aggregation be simpler than giving individual explanations of directors' and company chairmen's emoluments when, to arrive at an aggregate, one must have available the details of individual pay and benefits? The aggregate is a sum total. How can it be said that it is simpler to provide the aggregate and not the individual amounts, when the aggregate is constructed out of information about the individual amounts?
Mr. John M. Taylor
I remind the hon. Gentleman that the regulations will become part of the general law 675 of England, which means that they will apply to small companies and to large companies. Aggregates are much easier for small companies because the valuation of pensions and share prices in small companies is more difficult than it is in large companies where that information is available. If a company is a listed company, it will have to produce not merely the aggregate but the breakdown. That seems to be quite logical.
§ Mr. Cousins
My reply to the Minister is extremely simple. He draws a distinction between listed companies and unlisted companies. He seeks to lead the House towards the view that, if a company is not listed, it must be small, insignificant and trivial, and that it must involve a small group of family members or a small network of people, all of whom know each other's business and who are their own audience. That is simply not the case, as the Minister perfectly well knows.
I am not attempting to delude anyone. Company law is quite clear. Within the Companies Act 1985, there is a definition of a small company and a medium company. Anything above that, the hon. Gentleman can choose to call a large company. There is a distinction between listed and unlisted companies. If he is asking me whether there is such a thing as an unlisted large company, I will tell him that there are such companies, but not very many.
§ Mr. Cousins
Those unlisted large companies include Vauxhall, Ford, Virgin and Eagle Star insurance. They are highly significant companies which have a great part to play in the affairs of our country. There is one significant feature about those unlisted companies. Some of the major ones are subsidiaries of companies that have their main financial and governance base outside this country.
§ Mr. John Marshall
Eagle Star insurance is a subsidiary of BAT Industries, which is a British-registered company. Does the hon. Gentleman accept that the vast majority of unregistered companies are very small—normally too small even to consider the alternative investment market?
§ Mr. Cousins
It is true that a great many unlisted companies are small companies, but I have drawn attention to an extremely important point: some substantial, important and influential companies are not listed. A practice is growing—one of the examples that I have given illustrates it precisely—of buying in shares in order to de-list. For whatever reason—I do not intend to explore the reasons in any individual case tonight—that practice is growing and it avoids the openness and the accountability that comes with meeting the stock exchange rules.
I attempted to raise this point earlier with my hon. Friend the Member for Middlesbrough, and I now put it directly to the Minister, who I hope will respond to it. We now have many more significant examples in the utilities sector of water and electricity companies being purchased by companies located outside Britain. I do not necessarily object to that; the practice is increasing owing to the competition for share value in the markets—it has a product and a result. The rules should allow disclosure of the emoluments of individual company directors in large companies that have their main governance home outside this country.
676 It is now an almost weekly event for utility companies which were originally based in this country to have their corporate governance directed by companies located outside Britain. There are already some significant examples, including Vauxhall and Ford. The least that we should do is to ensure that companies whose corporate governance is in this country cannot evade disclosure by having their base outside the country and drawing upon the corporate governance practices of different regimes when establishing what they need to disclose. The Minister has said it himself: in some important respects, our practice of corporate governance disclosure is running ahead and setting a standard of practice for the rest of the world. That is not something to be ashamed of and go back on, but something to develop and exploit.
§ Mr. Marshall
The hon. Gentleman has referred to Ford and Vauxhall and has said that their UK executives should be subject to more stringent disclosure than their United States executives. He also said that disclosure in the UK is ahead of other countries. Does he seek to encourage motor car companies to locate in Britain by saying that their executives in this country will be subject to more rigid rules than in other countries? Is that designed to encourage overseas companies to come to this country?
§ Mr. Cousins
The hon. Gentleman's intervention significantly gives the game away. If it is the intention of the Government or any of their supporters to create two entirely different regimes of corporate governance with different standards of disclosure—one for companies based in this country and another for companies based abroad—an enormous perverse incentive has been created for the relocation of central company decision making in other foreign governance regimes. We should be seeking to establish a corporate governance regime that applies to all the major operators in the country and sets standards of practice here for the rest of the world to follow.
I think that I already have the answer to the question that I am putting to the Minister. I think that the Minister is happy for there to be major unlisted companies—located sometimes abroad, sometimes in this country—that will not have to follow the regime of disclosure that the House is discussing tonight.
§ Mr. Cousins
My hon. Friend is right. If any significant company in this country were exposed to the sort of shareholder activism practised by a major American pension fund such as the California state employees' pension fund, it would be horrified at the degree of accountability that is enforced there—not just through attendance at annual general meetings, but through constant and rigorous scrutiny of activities and developments. In many important ways, the California state pension scheme provides an example to the world of intelligent, well-directed, inspired shareholder activism. In many important ways, the draft regulations do not take us towards that objective, but rein us back. At best, they represent one cheer for shareholder democracy. As my 677 hon. Friend the Member for Middlesbrough has said, when we have a new Government who understand the way in which the financial and share-owning markets of today work, we shall revisit the issues and shed more light on them.
Mr. John M. Taylor
The hon. Member for Middlesbrough (Mr. Bell) said that the House was depleted in number tonight because some of his colleagues were already on the hustings. If so, they had better beware the Representation of the People Act 1983, lest they should have started incurring election expenses already—but that was a topic for the previous debate. As always, the hon. Gentleman was a generous debating opponent; it is always a pleasure to debate with him, even though we do not always find large measures of agreement. He was good enough to say that the subject was technical and that it might be necessary to come back to some of the issues later—and I do not mean on the Floor of the House. If any of my colleagues who have followed the debate, from either side of the House, feel that I do not address all the technical issues in my winding-up speech, they should feel free to write to me. I promise to address the points that they raise.
The hon. Member for Middlesbrough seemed to have doubts about offering different treatment for listed, unlisted and the smallest companies. It is natural to provide different treatment for those companies because they are different. It is right that a higher level of disclosure should be called for from listed companies than from unlisted companies.
I shall try to deal with the argument advanced by the hon. Member for Newcastle upon Tyne, Central (Mr. Cousins) as directly as possible. He postulated the theory—in fact, he did not merely postulate it as we know that it already happens—of a utility that is privatised, or floated, and subsequently taken over by an overseas company. In such a case, full information relating to the remuneration, shares and share options of directors of the utility at the time of the takeover bid will be published in accordance with the rules of the takeover panel.
After the takeover, if it happens, the utility is likely to become a wholly owned subsidiary of the overseas parent. It will be subject to the same rules as any other unlisted UK company—it must disclose the emoluments of the directors in aggregate and, if the aggregate figure exceeds £200,000, the emoluments of the highest-paid director. If any directors lose office as a result of the takeover, the accounts must show the aggregate amount of any compensation paid, including the money value of any non-cash benefits.
After the takeover, it is unlikely that the directors of the utility will hold share options in the utility as all the shares are likely to have been acquired by the parent company as part of the takeover process. In other words, the subsidiary would be reduced to having one shareholder. Greenbury is about disclosure of information about directors to shareholders, and the single shareholder will know all about the directors because it will own the subsidiary for which they work—indeed, it will almost certainly set their terms of employment. The remuneration of the directors of the utility following the takeover, 678 including any special features which could conceivably extend to share options in the parent, will be a matter for the parent company as sole shareholder. The directors of the subsidiary will of course no longer have the ability to determine their own remuneration. The parent company will have full access to relevant information, without needing to rely on statutory disclosures.
The hon. Member for Middlesbrough said that, as a trustee—presumably of an estate or settlement; I know not what and it is not my business—he found that the Inland Revenue had been swift to seek a valuation of unlisted shares in certain circumstances, such as a sale or disposal for capital taxes. In the event of a disposal, a valuation is required; that is almost certainly a proper part of revenue law, but it is quite another matter to require the value of those shares to be calculated every year for accounts purposes. That would be expensive for unlisted companies and we are not in the business of making life more difficult for unlisted companies. The hon. Gentleman might also want to reflect on the fact that changes to company law requiring shareholders to vote or to declare their voting record will require primary legislation.
I am under injunction from the silent ones to move on—I know their authority in this place and there will be no second-guessing from me. In conclusion, I simply want to say that I am no supporter of fat cats; I have no appetite for such matters and the Prime Minister has declared similar sentiments. Whereas we are well up with the European average—in fact, we are roughly typical of the European average—for executive pay, we are well below the levels seen in the United States of America.
The hon. Member for Middlesbrough says that he will build on Hampel, but it is we who will be watching the developments on Hampel. As another successful exercise following the comparable successes of Cadbury and Greenbury, we shall be here to deal with them as we are doing tonight.
§ Question put and agreed to.
That the draft Company Accounts (Disclosure of Directors' Emoluments) Regulations 1997, which were laid before this House on 6th February, be approved.