HL Deb 24 July 2002 vol 638 cc513-5

11.31 p.m.

Lord McIntosh of Haringey rose to move, That the draft regulations laid before the House on 1st July be approved [34th Report from the Joint Committee].

The noble Lord said: My Lords, the regulations before the House today are concerned with the legislative framework for the setting of directors' pay. The subject is at the centre of the debate about effective corporate governance. On this issue directors face an obvious conflict of interest.

The Government have made it clear that they do not support high rewards for mediocre or poor performance. Too often there continue to be cases—particularly with the financial results of the past few weeks and months—where directors are seen to have been paid excessive amounts when a company has not performed well. That is a matter of concern to shareholders and to employees who may lose their jobs in such circumstances. It is also damaging to the reputation of business within the wider community.

That is why the Government have decided to take this action to strengthen the corporate governance framework. There is a clear need for shareholders to be fully informed so that they can make their own judgments and play their role effectively. These new regulations will increase transparency through greater disclosure on remuneration policy and strengthen the accountability of boards to their shareholders by a shareholder vote.

The Government recognise that it is also very important that our major companies are able to attract, retain and motivate directors of high calibre to sustain and improve the UK's productivity and competitiveness in the global economy. We have consistently made it clear that we are not in the business of becoming involved with the setting of directors' pay in individual companies. What we wish to do is to create an open and effective framework within which pay can be set and disclosed, given the conflict of interest that directors face.

More than six years ago now, the Greenbury report set out three fundamental principles in this area—accountability, transparency and performance linkage. The Government believe these to be the right principles, but they do not believe that the best practice framework has been successful in achieving adequate levels of compliance to these principles.

The purpose of these regulations is to improve transparency, accountability and the linkage of pay to performance, in the setting of directors' remuneration. This will be achieved by amending Schedule 6 to the Companies Act 1985 to require companies to produce an annual directors' remuneration report; and by giving shareholders the right to vote on that report through the adding of a new section—241A—to the 1985 Act. Some of this is not new. It involves transposing existing listing rules requirements into the Companies Act. What is new is the improved disclosure of remuneration policy, linkage to performance and the annual vote by shareholders. The regulations will apply to quoted companies. These are companies which are incorporated in the UK and listed in the UK or in an EEA state, or on the New York stock exchange or NASDAQ.

I shall now give a little more detail of the regulations. The specific requirements were arrived at after a detailed consultation on draft regulations. That was published in December last year and closed on 15th March this year. We received a substantial response to that consultation, which included—your Lordships will not be surprised to hear—a wide range of differing opinions. Balancing those opinions has proved difficult, but the Government believe that the changes we have made to the draft regulations as a result of the consultation has led to better balanced legislation.

The regulations require companies to publish for each financial year a directors' remuneration report. This report will be divided into two main parts: a policy section and a report section looking at directors' pay in the recent financial year in question. The policy section must include a statement on the company's future policy on directors' remuneration including details and an explanation of performance criteria or the lack of them for share options or long-term incentive schemes. It must also include an explanation of company policy on service agreements, their duration, notice periods and termination payments with an explanation of any significant award to a director whose services were terminated in the previous year.

Remuneration committee details must also be provided: names of members, who advised them, and the nature of any other services provided to the company by those advisers. Finally, this part of the report must include a performance line graph which shows how the company has performed in comparison with an appropriate share market index.

The review section must include full details of each director's pay package set out in tabular format broken down to show the amount of each element which forms the package. This includes full details of any share options and long-term incentive schemes and details of any significant award made to a director whose service agreement was terminated in the most recent financial year.

The regulations also require that a resolution to approve the directors' remuneration report be moved at the annual general meeting. This vote will be advisory; in other words, it will not require companies to amend contractual entitlements. The Government nevertheless believe that the result of the vote will send a very strong signal to the directors and that the directors will wish to take notice of the shareholders' views and to respond accordingly.

Overall, these regulations reflect a balanced approach to creating an appropriate framework for the setting of directors' remuneration. I beg to move.

Moved, That the draft regulations laid before the House on 1st July be approved [34th Report from the Joint Committee].—(Lord McIntosh of Haringey.)

Lord Rotherwick

My Lords, like the Institute of Directors, we broadly welcome the Government's proposed regulations which we hope will give greater transparency on directors' pay. We are not certain how much difference it will make in practice; only time will tell. I, too, agree with the noble Lord, Lord McIntosh, that it is not unusual for directors to have been paid excessive amounts which are difficult to justify when their companies are performing badly. That should not detract from justified high remunerations when directors are seen to have performed well and have benefited the company, shareholders and employees.

It is important that shareholders are able to hold directors accountable. I hope that the regulations will increase the transparency and accountability and enable shareholders to link pay to the performance of directors as the Greenbury report seeks to do.

Lord Roper

My Lords, from these Benches we, too, welcome the proposals. There has been a series of parliamentary Questions in recent months on these issues. The proposals seem a rather good balance in order to ensure that there is transparency to an appropriate extent and to deal with some of the somewhat excessive remarks which have been made—sometimes informed and sometimes ill-informed—in the past.

Having information available to shareholders, making a responsibility for shareholders to come to a conclusion on these reports seems a sensible solution. We welcome them.

Lord McIntosh of Haringey

My Lords, I am grateful to both noble Lords. I commend the regulations.

On Question, Motion agreed to.