My Lords, in moving Amendment 84AHAZB, I will also speak to Amendment 84AHBA, which is consequential. These would give shareholders an annual binding vote on executive remuneration.
Last year, my noble and very dear friend Lord Gavron tabled a Private Member’s Bill on the subject of executive pay. Sadly, he cannot be with us today. In the next few days, he is due to have a very serious operation. I know that I speak for the whole House when I wish him a very safe and speedy recovery. It was the noble Lord who first stimulated my interest on this issue when he asked me to support his Bill. Of course, I was pleased to do so. Since then, I now find myself on the Front Bench and fortuitously in a position to lead the opposition position on this issue. It must also be said that the noble Lord, Lord Gavron, is also a generous supporter of the High Pay Centre, which has conducted a great deal of important research on this subject. Based on discussions that the noble Lord had with the noble Lord, Lord Marland, and others, he felt that the Government had taken his points on board and in consequence he withdrew the Bill. To their credit, the Government have indeed incorporated some of the points made in the Gavron Bill, but I believe that this Bill can still be improved on. That is what we are seeking to do.
At the heart of the matter lies the empowerment of shareholders. Just in case noble Lords question my position in speaking on this subject, I add a little personal background. From 1972 to 2006, I set up numerous businesses. Some were very successful, some were total disasters. I will make no further reference to the Soho restaurant that vanished without trace. I lost a packet and there were several others like that. On the other hand, I have had my notable successes. I have been in the IT services business most of my adult life. I created three businesses from scratch, built each of them over 10 or more years and then sold them. Each company became a market leader and two of them were international operators. Not surprisingly, I dwell upon my successes these days although it must be said that the failures made me a better man. I learnt one golden rule: stick to what you know.
I am a senior entrepreneur in tooth and claw. I know that success is wonderful and failure is painful. I understand the rules of the game. I have made this personal statement to put it all in context because the series of amendments I have tabled, and which we are about to discuss, centre around the rights and powers of the shareholder, with whom I have a strong personal sympathy. The shareholders are the owners. If the company does well, their share price goes up. If it fails, they can lose the lot. Executives can move on; shareholders are left with a loss. The board of directors is accountable to the shareholders and the management reports to the board of directors.
In many small private companies, the management, the board and the shareholders are often one and the same, but in quoted companies this is seldom the case. That is one of the reasons why these amendments refer solely to quoted companies. There are, of course, other stakeholders in all companies, first and foremost, the employees, but also the customers, the suppliers and the community where the company is located. They are important but just for now we are concentrating
on the shareholders and their rights to know and to control. When we address executive pay, we are saying that this subject is so important that the shareholders of a publicly listed company should not only be consulted but should also vote on the policy and the actuality of the pay packages that senior executives are to receive.
Much today is said about the shareholder spring—the hope that shareholders will assert themselves more and, of course, we agreed wholeheartedly with this. If we look around the world, shareholders are flexing their muscles in all sorts of ways. In the United States, the Dodd-Frank enactment of 2010 has significantly tightened shareholder scrutiny on executive compensation. This is referred to as “say on pay”. In the EU a couple of weeks ago, strong recommendations were announced with respect to bankers’ pay and bonuses. It will not have escaped noble Lords that just over a week ago, the Swiss, of all people, held a referendum on curtailing bankers’ bonuses. The proposal received 67% support among Swiss voters; 1.6 million of them turned out to vote; and all 26 cantons approved it. Were we to have such a referendum here, one wonders what the result would be, although we can get some idea by looking at the attitudes of the British public. Only 7% of those polled say that they think that the CEO of a large company should receive compensation of more than £1 million and only 1% think that they should be paid more than £4 million a year. Is that any wonder when profits for failure feature so heavily in the news? For example, last week, HSBC announced that 204 of its global staff were to receive £1 million in bonuses and compensation—this in a year that has seen the bank fined £1.2 billion for laundering Mexican drug money. RBS has made it clear that a £5.2 billion loss was no barrier to paying out more than £600 million in bonuses.
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Before going any further, I want to scotch one of the more pervasive arguments against taking firm action, which is that in a global market any such moves will lead to CEOs leaving for countries which do not have to show any restraint—the so-called “pay ‘em or lose ‘em” line. There is no evidence to show that this is true; indeed, there are contrary data. Of the Fortune 500 companies, only four have CEOs who were recruited while being CEOs in another country. That is 0.8%. The number of CEOs who were poached from their roles as CEOs at other companies moves up to 6.5%. Therefore, it is disingenuous to suggest that any restraint leads to an exodus for the facts are obvious: no matter how superb a CEO may be, taking him or her from one company and plonking them down in another is not always a successful ploy. Furthermore, this blackmail scenario of, “Either you give me a whacking increase or else I am off to another company” or, in this case, another country, is often a bluff that deserves to be called. My advice to anyone who is faced with this gun to their head is to show the person the door. This applies just as much to bankers as it does to non-banking companies, as illustrated by the annual saga of Sir Martin Sorrell’s salary, which has come to light this weekend.
Shareholder power is increasingly becoming a hot political issue. We agree with this week’s edition of the
Economist, the leading article of which is headed, “Power to the Owners”. Some people resent encroaching shareholder power, but we welcome it. When the good folks in Switzerland seek to ensure that executive pay is subject to shareholder approval, we can only applaud. In the United States, shareholders in successful companies such as Disney and Apple are becoming very assertive. In days gone by, the only shareholder activism was the occasional nutter or the predatory raider, but, most of all, the Wall Street walk pervaded: that is, if you do not like the management, you can sell your shares. However, I think the times are a-changing. The mood is also changing here. Our laws need to keep pace with the change and that is what we are seeking to do.
As I said in my opening remarks, the Government have taken on board some of the recommendations made in the Private Member’s Bill of the noble Lord, Lord Gavron. The Government propose in Clause 71, headed, “Members’ approval of directors’ remuneration policy” that a resolution on this issue should be moved at an accounts or other general meeting no later than every three financial years. Something is better than nothing but we believe that this requirement would be much more powerful if it were an annual requirement, as proposed in Amendments 84AHAZB and 84AHBA. This is crucial. It means that executive pay is not an issue that is engaged with occasionally but is forced on at every AGM, in much the same way as approval of the accounts or the selection of the company’s auditors—it is that important. The triennial approach for which the Government have opted seems too casual for this critical shareholder approval. When most newspapers carried the news that Swiss shareholders were to receive a vote on pay, they did not say how often that would occur because it was obvious. Like so many company accounting requirements, it will be annual.
I quoted the FT editorial on the matter in Grand Committee, but will do so again because I think that it neatly summarises the key point. It said of directors that annual binding votes,
“would at least put them firmly on the spot. Mr Cable’s triennial polls, however well-meaning and thoughtful, may not”.
The annual vote was what the Government consulted on and gave the appearance that they would opt for. We believe that it is the better option when it comes to holding boards to account. This should not, however, be equated with a policy of short-termism in British companies. It is our belief that companies should plan over the long-term basis. The Cox review commissioned by the Labour Party reported last week and included some admirable recommendations about how companies can ensure that the pay of their directors reflects the long-term aspirations of the company. One is that a third of executive remuneration could be paid in the form of shares held back over five years. The Government believe that having a triennial vote on pay will encourage long-term thinking, and this is an important goal. However, reviewing a policy annually is not the same as making short-term plans. A successful company will produce a plan that stretches many years into the future, but shareholders should have the right to challenge, enquire and ultimately hold them to account at every annual general meeting. That is exactly what an annual binding vote would allow them to do.
There appears to have been some element of confusion from Ministers about why the vote is not to be annual after they consulted on it. At Second Reading, the noble Lord, Lord Marland, said that he imagined that there would be enormous shareholder pressure on companies that continue their policies unchanged, whereas in Committee, the Minister suggested that investors were in favour of the triennial vote, saying that the Government had considered that carefully, and that investors and companies had welcomed the option of a three-year policy.
The Government have chosen to retain the annual advisory—as oppose to the binding—vote, but if shareholders choose to reject a company’s pay policy at this advisory vote, I understand that they will not get the chance to have a binding vote until the following year. Having an annual binding vote would be simpler, clearer and would ensure that boards remain conscious of the need for realism on their pay.
Now we come to the special resolution. Amendments 84AHAB, 84AHBB and 84AHCA would require a special resolution, rather than an ordinary one, to be passed by shareholders in order to approve a change to executive pay; in effect, 75% of the shareholders voting. This amendment has been tabled as, under the rules being proposed, it would still be possible for companies to ignore significant minorities of shareholders against their remuneration package. We want to strengthen shareholder power. In Committee the Minister said that the Government were looking to the Finance Reporting Council—the relevant regulatory body—to follow through with a commitment made to look at whether or not a company should have a duty to formally respond should such a significant minority of shareholders vote against pay. However, I am given to understand that it is unlikely to look at the matter this year. We can, therefore, be fairly certain that no action will be taken on this in the near future, despite the other moves, both within this legislation and elsewhere in Europe, to look at the relationship between companies and their shareholders when it comes to pay.
This is an important matter, which I would like to address today. Company shareholders are a more disparate group than they were in the past. The Kay review pointed out that the effect of increases in the number of UK shareholders that live in other countries is to make it harder for them to organise and collaborate to ensure that they get the outcome that they want. The percentage of shares in UK-listed companies which were held outside of the UK in 1981 was 3.6%; by 2008, that figure had risen to 41.5%.
Another issue, on which both the Kay review and the Cox review have made important comments, is on the nature of shareholding today. In 2011, Mr Andrew Haldane from the Bank of England noted:
“there is evidence of the balance of shareholding having become increasingly short-term over recent years…Average holding periods for US and UK banks fell from around 3 years in 1998 to around 3 months by 2008”.
Furthermore, he said of the banking sector:
“Banking became, quite literally, quarterly capitalism. Today, the average bank is owned by an investor with a time-horizon considerably less than a year”.
These factors were among those that have made it increasingly difficult for long-term shareholders in a company to hold its board to account. Again, the Government recognised this problem in their consultation. They said:
“Although shareholder activism on pay appears to be strong amongst institutional investors, the increasingly diverse and fragmented nature of shareholders in the UK means that the likelihood of seeing 50% or more votes cast against any resolution can be reasonably expected to remain extremely low”.
In his speech last January, trailing these remuneration reforms, Secretary of State Vince Cable said:
“For example, the future pay policy might require approval by 75% of the votes cast”.
In 2012, during what has become known as the shareholder spring, there were undoubtedly some significant votes against pay packages—again, I refer to Sir Martin Sorrell and his 30% increase. Here we are in 2013 and the very same issue is back on the agenda. However, there was still an overall increase of 12% in executive pay from 2011 to 2012—a year when increase for everyone else averaged out at 2.8%. A mere 12% of the population received a pay rise of more than 4%. Widespread discontent can be covered up under the current rules; companies do not even have to respond. In 2009, for example, one in five FTSE 100 companies had more than 20% of their shareholders withhold support for their remuneration reports in an advisory vote.
It is harder than it was in the past for shareholders to organise effectively, but when a significant minority of them do, it is still possible for a company to ignore them. This amendment would remedy that, and I hope that the Government will consider it carefully. I beg to move.