HL Deb 12 February 2002 vol 631 cc998-1000

3.1 p.m.

Lord Dormand of Easington asked Her Majesty's Government:

What further action they are taking to deal with excessive increases in salary and large bonus and benefit payments to company board members.

The Parliamentary Under-Secretary of State, Department of Trade and Industry (Lord Sainsbury of Turville)

My Lords, on 19th October 2001, my right honourable friend the Secretary of State for Trade and Industry announced her intention to legislate on this issue. On 18th December 2001, the Department of Trade and Industry issued a consultation document on draft regulations. The draft regulations aim to strengthen disclosure requirements, particularly in relation to policy on directors' remuneration, and to introduce a requirement for an annual shareholder vote on the directors' remuneration report.

Lord Dormand of Easington

My Lords, does my noble friend accept that these grotesque payments have continued for the five years that the Labour Government have been in power in spite of the statements that they made in opposition? Is he aware that the argument that these payments are rewards for success is not wholly true? Can he comment on the fact that these huge payments are made, in some cases, where companies are sustaining heavy losses? Does he not agree that the well publicised intention— I assume he was referring to this—to give power to shareholders is a fallacy in that the controlling power will be in the hands of institutional shareholders, who always agree to such large increases?

Lord Sainsbury of Turville

My Lords, I certainly agree that there is concern about the rapid increase in executive salaries which do not clearly seem to be related to the performance of companies. This is an area of concern, which is why we propose to introduce the regulations. However, we believe—it is common ground—that it is for the shareholders involved, both institutional and ordinary, to take action on this point.

Baroness Gardner of Parkes

My Lords, the Minister has previously given answers to me to the effect that the public are most concerned about people who go away with big money when they have failed. In the past he has said that it was a matter of contract and could not be altered. Do the Government have any plans to revise the law in such a way that there could be a clawback afterwards in such cases? This issue really annoys people.

Lord Sainsbury of Turville

My Lords, there clearly is an issue of contract. Most of these directors have contracts which have been freely entered into by the company and the particular director. The Greenbury report rightly pointed out that directors should take a robust view of a company's interest in circumstances where there had been failure. Nevertheless, these are contracts, and if they are not abided by the company is liable to be subjected to serious litigation, which directors also have to take into account. There is a very real issue that if companies want to attract people they have to enter into contracts with them—and, in principle, they should abide by those contracts.

Lord Razzall

My Lords, following on from what the noble Baroness said, while recognising that the Government have sought consultation on this issue and that the view expressed by the Minister in relation to this question—which has been asked six times by the noble Lord, Lord Dormand of Easington—has always been the same, does he not accept that the world has changed and that there is a sense that people at the top level of British industry are being rewarded for non-competence rather than for breach of contract? Does he not accept that, as the world has changed, the Government should look again at their draft regulations to see whether they can set a framework under which this will no longer happen?

Lord Sainsbury of Turville

My Lords, I certainly agree that we have now entered a world where British executives can no longer claim to be underpaid in world terms. In fact, they are now the second highest paid in Europe after the Belgians. So there is no question now of saying that British chief executives are underpaid. However, that does not alter our view that this is essentially a matter for the shareholders. The role of government is to make certain that there is a framework which clearly sets out the basis of those rewards in order that average shareholders—in many cases today those will include employees of a company—have the right to vote on the remuneration report at an annual general meeting. That is the way forward which gives accountability and transparency.

Lord Wedderburn of Charlton

My Lords, is my noble friend aware—I am sure he is—that the proposed regulations require an advisory vote by shareholders, whoever they are? Is he further aware that there is now an overwhelming case for the mandatory introduction of failure clauses, of which the Institute of Directors recently said it had never heard? Such clauses would limit the law of contract—which is not unknown in modern society— by providing that where a company has miserably failed, and the workforce and their families have suffered savage job cuts, directors and executives can no longer plunder a company where they have overseen failure.

Lord Sainsbury of Turville

My Lords, I am well aware that it is to be an advisory vote. I believe that it should be an advisory vote. It will be an extremely powerful signal to boards and to non-executive directors that shareholders are unhappy and will be taken very seriously. It has to be an advisory vote because if new directors are appointed to a board you cannot have a situation where, if they join during the year, they do not know whether the salary agreed with the company will be passed at the annual general meeting. The question of a failure clause comes down to whether one views it as right that the Government should intervene in a situation where a company wishing to recruit someone from abroad does not want to put a failure clause into a contract because it would not be able to attract the person, or whether it is right for the company to decide the issue in the light of its recruitment policy.

The Earl of Onslow

My Lords, is it not true that if you join a company when the share price is £12 and you are sacked when the share price is 41p, you have been in major breach of contract? You are not employed to reduce the share price from £12 to 41/2p; you are employed to make the company prosper. Under those circumstances, surely the director concerned is in direct breach of contract and does not need to be paid a single farthing for his failure. No one minds about big money for big success, but they do object to big money for failure.

Lord Sainsbury of Turville

My Lords, I am not a lawyer but I would be very surprised if it was a breach of contract.