§ The Parliamentary Under-Secretary of State, Department of Trade and Industry (Lord Sainsbury of Turville)My right honourable friend the Secretary of State for Trade and Industry (Ms Patricia Hewitt) has made the following Written Ministerial Statement.
My department published a consultation document on 3 June 2003 seeking views on the extent to which further measures might be required to enable shareholders to ensure that any compensation paid reflects performance when directors' contracts are terminated.
This Statement explains how the Government intend to proceed in the light of the responses to the consultation document, including that from the Trade and Industry Committee (Rewards for Failure, HC914, 16 September 2003). I am grateful to the committee and to all those who commented. A summary of the responses is today being placed on the DTI website at http://www.dti.gov.uk/cld/published.htm and in the Libraries of the House. My department is today also replying to the Trade and Industry Committee report.
This consultation generated a large response from a wide range of parties: institutional investors, companies, trades unions, accountants, remuneration advisers and many representative organisations. This demonstrates the high level of interest in this issue and the concern, which I share, about cases where poor company performance is accompanied by excessive remuneration.
That is why, before publishing the consultation document, the Government had already taken significant action, through the Directors' Remuneration Report Regulations, introduced in 2002, requiring quoted companies to produce a detailed annual directors' remuneration report and to submit it to shareholders for approval at the annual general meeting. These regulations give the UK a corporate governance framework for directors' pay which leads the world in terms of transparency and accountability. They have had an immediate impact in terms of increasing the focus on directors' remuneration by shareholders and promoting constructive dialogue between them and companies about remuneration strategy and practices.
The full impact of the 2002 regulations, however. cannot be measured after one year alone. For this reason, my department will be commissioning a detailed assessment of compliance with the regulations in the course of this year's AGM season, and an assessment of changes in remuneration practices.
The challenge for remuneration committees and their advisers is to produce rewards packages which tie pay and performance targets to the creation of longterm value for shareholders and are transparent to shareholders. All can agree that directors deserve high rewards for good performance but companies need to 37WS think creatively about the design of remuneration packages with those objectives in mind. Shareholders must be vigilant to ensure that situations where directors enjoy rich rewards while companies perform poorly and shareholders and employees suffer are challenged. The improved design of all aspects of directors' remuneration packages will play an important part in creating an environment where good businesses can prosper: businesses which produce goods and services of high quality; are honest and fair in their dealings with consumers, employees and suppliers and careful with their reputation; and thereby create sustainable long term value for their shareholders.
Building on the regulations, the consultation document set out a range of options for tackling the problem of excessive compensation payments made to directors who leave companies which have performed poorly. The great majority of respondents considered that this was an area where the focus should be on promoting the take-up and implementation of best practice. In particular, the responses demonstrated a good deal of support for reducing notice periods and the use of mechanisms such as phased payments and liquidated damages in order to reduce the problem of rewards for failure when contracts are terminated.
I have therefore been very pleased to see the further development in recent months of guidance on directors' contracts, both by the Association of British Insurers and National Association of Pension Funds, and separately by the Confederation of British Industry. I welcome their contributions and commend them to remuneration committees and their advisers. Shareholders too have an important role to play in holding boards to account for their policies in line with the code on activism agreed by the Institutional Shareholders' Committee.
I have considered very carefully the question of whether to introduce further legislation in this area and have concluded that this is not necessary at this stage. I agree with the conclusions of the Trade and Industry Committee report and the comments of its chairman that "the recent examples of increased activism by institutional investors, and the promotion of best practice has the potential to remedy the situation. The Government should wait to see the effect of these developments before it considers legislative remedies".
38WSI have specifically ruled out legislation of the type introduced by the honourable Member for Tunbridge Wells (Archie Norman) in his Company Directors' Performance and Compensation Bill. The overwhelming view of the respondents to the consultation was that this would be wholly unworkable in practice for a number of reasons: it would interfere with the operation of existing contracts; it would create a large degree of unnecessary uncertainty and complexity in the negotiation of new contracts; it would be incapable of taking account of the wide range of recruitment circumstances; it would act as a deterrent to the recruitment of good quality directors; and it could potentially lead to lengthy litigation which would be costly to shareholders.
I will be paying close attention to developments over the next 12 months. I am clear that the best way forward is through the application and development of best practice in negotiating contracts which deal with performance issues effectively. But if the monitoring which I am commissioning demonstrates that further changes to the Companies Act are required, I will not hesitate to take appropriate action in the context of wider company law reform.