Directors' Remuneration (Hansard, 17 June 2003)

§ The Parliamentary Under-Secretary of State, Department of Trade and Industry (Lord Sainsbury of Turville)
My Lords, in August 2002, the Government introduced the Directors' Remuneration Report Regulations 2002, which give shareholders of quoted companies a vote on the directors' remuneration report. These regulations need to be given time to demonstrate their full effect; we will be reviewing their operation.
On 3rd June 2003, my right honourable friend the Secretary of State for Trade and Industry published a consultation document entitled "Rewards for Failure": Directors' Remuneration—Contracts, Performance and Severance. Any further government action on this issue will be considered in the light of responses to this consultation.

§ Lord Clinton-Davis
My Lords, is there not a case immediately for cutting out anomalies that arise wherever necessary? Does the Minister agree that severance pay ought to be linked to corporate performance? Is there not a case for ensuring that fund managers are held responsible for the decisions that they make on pay and corporate strategy?

§ Lord Sainsbury of Turville
My Lords, I totally agree that the absolute key issue here is that there should be an effective linkage between pay and performance. The main people responsible for making this happen are the shareholders, and that is why we brought in the Directors' Remuneration Report Regulations 2002. Those regulations only came into force for companies producing reports after 31st December 2002. It is encouraging how many cases we have already seen where shareholders have made it clear that they were dissatisfied with the remuneration report of companies. We would like to see that continue.

§ Lord Razzall
My Lords, does the Minister accept that this is probably the tenth time that this Question, or an equivalent Question, has been asked from his side of the House over the past 12 months, all of which he has answered in similar terms? This is obviously a major issue that the Minister must deal with. Noble Lords will realise that the answer that the Minister gives has always had the merit of consistency on the past 10 occasions that he has given it.
Will he give a date by which the Government will make up their mind whether the voluntary system works? It would also be helpful if he could indicate 661 whether that date is within the time frame to put legislation, if necessary, in the Companies Bill when it comes forward?

§ Lord Sainsbury of Turville
My Lords, I agree that I have answered this Question many times in recent years, but I have not been consistent with the Answer. There has been a changing situation. The noble Lord should take on board that we have introduced a major change, and, as I pointed out, this major change is already having a substantial effect.
In the first six months of this year, we have seen major votes: the 51 per cent vote at the GlaxoSmithKline annual general meeting and substantial votes against the remuneration report at the Royal and SunAlliance and at HSBC and at the AGMs of Reuters, BP, Shell and Boots.
It is clear that the action the Government have taken is having real effect, and it therefore seems to me to be eminently sensible to wait and see what effect that has. I am not under any illusions that I will not continuously be asked this Question over the next six months or year.

§ Lord Marsh
My Lords, does the Minister agree that another way of helping the process along and giving practical advice might be to suggest to shareholders who were dissatisfied with the performance of a company in which they were investing in any way that they should sell the shares and invest elsewhere? I know of people who have done that.

§ Lord Sainsbury of Turville
My Lords, that is good advice. Companies will take heed of that, as they will of votes at the AGMs, where they do not like it at all, if a substantial number of shareholders vote against the remuneration report.

§ Baroness Miller of Hendon
My Lords, can the Minister tell the House whether he believes that there could ever be a satisfactory statutory definition of the words "too generous" used in the Question? How can we ensure, on the one hand, that there are no huge remuneration packages for failure while, on the other hand, ensuring that packages are large enough to entice the best brains to come into companies in our country?

§ Lord Sainsbury of Turville
My Lords, I do not think that Ministers ever have personal beliefs. In this context, they always speak for the Government.
We have a clear view that the Government cannot try to determine exactly what the remuneration of directors should be. It is simply not possible. However, that is not a reason for not trying to give shareholders an opportunity to make their views known to the board. We will see boards taking that very seriously.

§ Lord Brookman
My Lords, when one thinks of shareholders, one thinks of individual employees, but that is not necessarily the case. When we talk about shareholders, we talk about institutions. My experience is that, when decisions are taken on remuneration—even if the decision is that people should not have such remuneration—they are taken by the big institutions, and the small investors are ignored. Will the Government bear that in mind in any forthcoming legislation?

§ Lord Sainsbury of Turville
My Lords, I agree with the noble Lord. It is true that most shares are held by fund managers. However, in the revolts against pay packages at AGMs, we have seen small shareholders and fund managers joining forces to make their views known.

§ Lord Dubs
My Lords, I wish to pursue the point about fund managers. Can my noble friend say a little more about the position of people who own shares indirectly, for example, through PEPs and ISAs or through pension funds such as the parliamentary pension fund? What influence can such indirect shareholders have on the votes cast at meetings?

§ Lord Sainsbury of Turville
My Lords, the first thing that they can do is make certain that the fund managers take a responsible view. Again, it is a question of people who have invested money in an area making certain that the organisations behave responsibly.

§ Lord Lucas
My Lords, will the Government compel such pension funds and others to make their votes public, so that we can know what they have voted on our behalf?

§ Lord Sainsbury of Turville
My Lords, we have no plans to do that at the moment. The issue has been raised several times, and it would be necessary to look carefully at the practicalities.

§ Lord Hoyle
My Lords, I am pleased that my noble friend says that pay should be related to performance. What view does he take of a state-owned company—Network Rail—paying its directors bonuses of £1.7 million, with five executives receiving £1.2 million, for standards of performance—in efficiency and investment—that were lower than those of the discredited Railtrack?

§ Lord Sainsbury of Turville
My Lords, there are cases in which one has concerns about particular situations. However, in this case, it is not for the Government to say whether that is right or wrong.