My Lords, I wish first to follow on from the comments of the noble Lord, Lord Mitchell, concerning the noble Lord, Lord Gavron. I am sure that everyone on this side of the Chamber would agree that we wish him a speedy recovery. Secondly, I take this opportunity to acknowledge the considerable experience of the noble Lord, Lord Mitchell, in the management of companies and on the ups and downs of fortune. It was helpful to hear about his background.
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As noble Lords will know, the Government’s comprehensive reforms in this area address concerns that the link between directors’ pay and performance has grown weak. This is damaging for the long-term interests of business. It is right that the Government act to address this market failure by ensuring that shareholders have adequate information and power to hold companies to account. This contributes to the Government’s wider aim of establishing a corporate governance system that supports long-term sustainable growth.
I note the comments of the noble Lord, Lord Mitchell, concerning the Swiss pay reforms. It is interesting that the result in Switzerland shows that there is widespread global concern about the disconnect between top pay and company performance. Much of what is proposed is already a feature of the UK system or part of planned reforms such as annual votes on the re-election of directors and binding shareholder votes on executive pay. However, the Swiss Government now have the challenge of turning the result into law. We will be watching closely to see how this works out in practice.
Noble Lords have proposed amendments to both the frequency and the type of binding vote. Once again, I thank them for their input on this important issue. However, the Government continue to have reservations about the reforms that noble Lords propose. Amendments 84AHAB, 84AHBB and 84AHCA would require the vote on remuneration policy to be a special resolution that would require companies to secure the support of 75% of shareholders to pass. The Government have consulted stakeholders extensively on the level of support that should be required for remuneration resolutions. Investors agree that the vote on pay policy
should remain an ordinary resolution. They have expressed concern that in cases where turnout is low, a special resolution would allow a small number of activist investors unfairly to overturn the views of a majority. There are cases that I can cite that fit into this category, such as ex-majority owners who remain owners but with a minority shareholding.
A special resolution could also cause significant disruption for companies where a single hostile investor holds a large block of shares. Special resolutions should be reserved for rare issues that have a major impact on shareholder rights or company value, such as recapitalisation or changing the articles of the company. The Government, however, agree that when a large minority of shareholders rejects a remuneration resolution, companies should have to respond. The Financial Reporting Council will look at whether such a requirement should be included in the corporate governance code.
The noble Lord, Lord Mitchell, asked when the Financial Reporting Council will consult on changes to the code. The council has said that it will consider potential changes to the code in the light of government reforms, including: first, how companies should formally respond when a significant minority of shareholders oppose a pay vote; secondly, the requirement that all companies adopt clawback mechanisms; and, thirdly, the extent to which the executive should serve on remuneration committees in other companies. The FRC will consult once the Government’s legislative reforms are finalised and we have seen how behaviour has evolved. However, having recently amended the code, the FRC does not anticipate making any further changes during 2013. I remind the House that the FRC is independent and it is right that it should decide on when it thinks is the right time to consider this matter.
Amendment 84AHBA would remove the requirement for companies to put their remuneration policy to a shareholder resolution at least every three years and instead require that this be done annually. I thank the noble Lord, Lord Mitchell, for the opportunity to explain further the Government’s position on this important matter. Shareholders are fully supportive of the fact that companies can put forward a three-year pay policy because this will promote a longer-term approach to pay. The option of a three-year pay policy is also welcomed by the many smaller quoted companies that offer less complex pay packages and that are confident that they could use their good relations with shareholders to agree a three-year policy. At the other end of the scale, some larger companies with more complex pay arrangements will be likely to want to amend their remuneration policy more frequently to ensure that targets and rewards remain challenging and aligned with company strategy—along the lines of the comments of the noble Lord, Lord Mitchell. In any case, we expect that where companies have a poor track record on pay, shareholders will choose to keep a tighter rein through an annual vote on the policy.
I should also remind noble Lords that shareholders have a wide range of other tools to hold companies to account on an annual basis. Opposing the annual implementation report will trigger a binding vote on the pay policy at the next AGM. Shareholders also have the existing right to force a resolution at an EGM
and have annual votes on the re-election of directors. The Government remain convinced that giving companies the option of a three-year policy remains the best way forward.
I thank noble Lords for their contributions on these important issues and understand that their intention is to ensure that these reforms genuinely empower shareholders.