Companies’ Remuneration Reports Bill [HL]

My Lords, I, too, wish to speak in support of the excellent Bill introduced by my noble friend Lord Gavron, on which I congratulate him. I should declare—there was a time in the Labour Party when it was almost dangerous to admit it—that I worked in the City. I was a member of the old Stock Exchange, a partner in a leading stockbrokers and a director of a merchant bank. That experience was once not very common on this side of the House, but I am delighted to see more noble Lords with that background on our Front Bench. They have a much more distinguished record than I do. Many of the excesses of greed in recent years in the City—I know that the Bill refers to more than the City, but the City is at the heart of it—were unthinkable when I was there before the big bang. In my firm, the ratio between rewards for senior partners and directors and the average ones for ordinary foot soldier employees was reasonable. It was a responsible ratio, probably in the high single figures, as in our Armed Forces, which my noble friend mentioned. Today, it can be obscenely in the hundreds. Much of the job satisfaction that I and others felt related to the quality of working life, something that has virtually disappeared from the modern City. It related to team spirit in the firm, where staff often worked for their whole lifetime. My stockbroking firm had one of the nicest and straightest bunch of colleagues that I have worked with—of course, I have a fairly wide and disreputable record, having been in journalism and academia as well as politics, so perhaps the competition was not strong—and, 23 years after the firm was taken over and dissolved, we still meet regularly for dinner. That would be unthinkable today where the only—certainly the main—motivation is money, and staff move regularly to the highest bidder. The effect of such huge pay differentials is bad, as several speakers have convincingly demonstrated. Institutionally, in the firms themselves, it alienates the low paid more than it motivates the highest paid. Socially, it creates too big a gap between the privileged at the top and the foot soldiers doing excellent work at the lower level. It gives the wrong signal socially and nationally to those in the public and social sectors who do great social work for small rewards. It creates the wrong values and priorities, with the view that only money matters and fairness does not. It is not good for social cohesion, as the noble Lord, Lord Taverne, convincingly argued. In the banking and financial sectors, it creates a casino atmosphere, except that it is worse than a casino because they are gambling with other people’s money, not their own. It also entrenches short-termism. Executives earn huge sums in the short term and can retire after high-risk trading activities that enrich them in the short term but may bankrupt their firms in the longer term. I support the broad thrust of my noble friend’s approach. I shall, briefly, ask the Government to consider other related corporate reforms that would produce what we want, which is more accountable and responsible behaviour from those at the top of our corporate sector. The reality today is that shareholders, the notional owners, can do little to hold senior directors and senior executives to account. This is true of individual shareholders, who are fragmented with no collective power, and of institutional shareholders, who do not wish to rock boats in case somebody else catches the habit and rocks their boat. Boards are virtually unaccountable to shareholders and in banking the top trading executives, especially the big traders, are virtually unaccountable to the boards. It is historically interesting that 150 years ago, the greatest flaw of capitalism—there were others, but this was the greatest—was the excessive exploitation of unorganised workers by the owners. The Labour Party and the trade unions came to power to stop that, and succeeded. By the mid-20th century, most employers did not excessively exploit their employees and, by my observation, were very responsible in their social attitudes to them. Today, the flaw in capitalism is quite different. It is that shareholders and low-paid employees are exploited by their senior executives and directors. The latter run remuneration schemes that take an excessive share of the corporate cake—the croupier’s take, as my noble friend and others have referred to it—often regardless of management performance, and leave too little for shareholders and ordinary employees. The unacceptable and unaccountable power of boards and senior executives has made possible the excessive and growing differentials of pay in the corporate sector, which my noble friend Lord Gavron addresses. In this context, I briefly suggest three extra reforms. The Government should consider legislation on the conduct of annual general meetings, especially in relation to remuneration, mentioned convincingly by the noble Lord, Lord Tugendhat. I suggest that AGM votes on remuneration committee reports be made binding; currently, they can be ignored. There should be separate AGM votes on bonuses. You will recall that Sir Fred Goodwin of the Royal Bank of Scotland only a year ago was granted a bonus of £2.9 million on top of a salary of £1.3 million, clearly as a reward for bringing the bank to its knees. Bonuses should also not be annual but should be granted over a longer period, when the value added by managerial contributions can be more fairly assessed and, again, they should be subject to binding AGM votes. Finally, share incentive schemes are usually paid within three years. That is too short. A longer period of five to seven years would be more appropriate to assess the value of the contribution, again subject to binding votes. Those additional suggestions would strengthen the excellent approach of my noble friend Lord Gavron in the Bill. In concluding, I should stress that I support the free market economy. I do not want Governments to set individual pay. We went through that in the 1970s—some of us were painfully associated with it. It simply does not work. I do not want to stifle genuine commercial creativity. The free market that I support should be conducted responsibly. It is not a value-free economy. It is not a jungle where the top snouts in the trough take excessive rewards out of all proportion to their contributions or those of others, the poorly paid below them. Still supporting a free market, the Government can give a steer towards a better balance of rewards between those at the top and those at the bottom and towards making top executives and directors more accountable to the shareholders who, notionally, are the owners. Those steps would strengthen the market economy and make it more acceptable to the wider community, which is currently shocked by what has taken place. The Minister understands these issues better than me and better than most. I trust that he will ignore much of the negative wording in the winding-up speech that his officials have given him and give a sympathetic response to this debate.