Companies’ Remuneration Reports Bill [HL]

My Lords, I also congratulate my noble friend Lord Gavron, and other noble Lords involved, on proposing the Bill. Like others who have spoken, I strongly endorse it. When I knew that I was going to speak in this debate, I looked at the writings of the guru of all management gurus, Peter Drucker, to see what he said about this, writing in the mid-1970s. It is pretty interesting. He said that opinion surveys taken at that time showed that the public thought that an appropriate earnings ratio between what he called the "blue-collar worker in the factory" and the "big boss" would be about 1:10 or 1:12. He went on to look at the actual situation of average salaries of employees compared to executives in large businesses in the US. He found that it was about the same ratio. That is quite amazing when you think about what has happened since. He endorsed this as an appropriate ratio for an effective capitalist system because of the solidarity that it inherently produced. As the noble Lord, Lord Taverne, has noted, this ratio has not changed very much in some industrial countries. My figure for Japan is slightly different from his, but it depends on how you calculate it. Most studies show that it is about 1:15 for large Japanese companies. In the United Kingdom, United States and some other countries today, the ratio, depending on how you measure it, is often 20 or 30 times that figure, which is an extraordinary change. The United Kingdom, United States and Australia show much steeper rises than elsewhere. It is easy to confirm these figures in a specific context. In the UK in 2007, top executives got average pay rises of 33 per cent while the typical worker got 3.7 per cent—a 10 times ratio just for a single year. The spiralling inequalities at the top of the corporate and financial worlds could perhaps be justified if it could be shown that they produced superior economic performance. I have done a lot of work on this, looking at the academic studies that exist, and the result is really surprising—namely that the evidence is really weak; what evidence there is tends to show the opposite of the claim; and that those companies where executives are paid very high salaries tend to underperform compared with others. One of the biggest studies was done in Australia. It compared the 20 worst performing companies in a given year with the 20 best performing companies measured by returns on equity. The executives in the 20 worst performers were paid about two and a half times the salaries of executives in the best performing companies. Therefore, the evidence is very weak and surprisingly thin on the ground, and what evidence there is tends to suggest that very high levels of executive remuneration are actively dysfunctional in terms of business success. Even this might not matter if there were not other downsides, but there are very serious downsides to the massive inequalities that we see in the financial sector and the wider sphere of business. I shall mention three points very briefly because others have referred to them. First, as my noble friend Lord Gavron pointed out, we know from many research studies that there is not a proper market for executive salaries at the top. The reasons for this have been explored in many studies, which go back 15 or so years and were largely ignored by policy makers, certainly until recently. As the noble Lord said, they show that the consultants who recommend executive pay are almost always chosen by the CEO. The CEO then packs the committee with his or her friends and colleagues. It is therefore not surprising that you get upward pressure on salaries, that "success" is rewarded and there are very few mechanisms for penalising failure. Secondly, many studies show that mechanisms such as golden parachutes and protected pension schemes mean that top executives are shielded from the risks they ask their employees to bear. The situation is the very opposite to that which Peter Drucker saw as so important for solidarity in business and the wider society. Thirdly, and more crucially, the structure of executive pay has helped to produce the short-termism, irresponsible risk-taking and indifference to systemic risk that are the origins of the current crisis. The Bill has been described by its initiator as a naming-and-shaming exercise. We know that not all individuals accept that they can be shamed. I would rather see the Bill as one step along the way in creating greater accountability at the top level in business and as part of a much larger task of creating a new model of responsible capitalism.