Draft Directors' Remuneration Report Regulations 2002

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Alan Simpson (Nottingham, South): Before my hon. Friend has to field too many more questions from Opposition Members, will she make it clear that there are problems with the current position not because of difficulties over companies complying with regulations, but because some companies make up their own regulations and figures, and then wing it with a glut of self-reward? It is against the backcloth of the lack of confidence in corporate governance that we must revisit the sense of probity and have a clear framework in which we can expect people to work.

Miss Johnson: I am grateful to my hon. Friend for his remarks, and he is entirely right. We want employees and shareholders who are worried about pay awards to company directors that are not matched by good performance to have access to more transparency and accountability than they currently gain through the practices of many companies.

Mr. Waterson: Will the Minister give way?

Miss Johnson: I want to make a little progress.

The regulations will apply to quoted companies. Those are companies that are incorporated in the United Kingdom and listed in the UK or in a European Economic Area state, or on the New York stock exchange or Nasdaq. I shall run through the regulations in more detail to help hon. Gentlemen. They require companies to publish for each financial year a directors' remuneration report, which will be divided into two main parts: a policy section and a report section examining directors' pay in the recent financial year in question.

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The policy section must include a statement on the company's future policy on directors' remuneration, including details and an explanation of performance criteria, or the lack of them, for share options or long-term incentive schemes. It must also include an explanation of company policy on service agreements and their duration, notice periods and termination payments, with an explanation of any significant award to a director whose services were terminated in the previous year. Remuneration committee details must also be provided, such as the names of members, those who advised them and the nature of any other services provided to the company by those advisers. That part of the report must include a performance line graph that shows how the company has performed compared with an appropriate share market index.

The review section must include full details of each director's pay package, set out in tabular format and broken down to show the amount of each element that forms the package. That includes full details of any share options and long-term incentive schemes, and details of significant awards made to a director whose service agreement was terminated in the most recent financial year.

The regulations also require that a resolution to approve the directors' remuneration report be moved at the annual general meeting. That vote will be advisory. In other words, it will not require companies to amend contractual entitlements. Nevertheless, the Government believe that the result of a vote will send a very strong signal to directors and that directors will want to take notice of the shareholders' views and respond appropriately.

The specific requirements that I have outlined were concluded on after a detailed consultation on draft regulations, which was published in December last year and closed on 15 March this year. We received a substantial response to that consultation, which included a wide range of differing opinions, as hon. Members will be unsurprised to hear. Balancing those opinions has proved difficult, but the Government believe that the changes that we have made to the draft regulations as a result of the consultation has led to better balanced legislation.

I shall deal briefly with the three changes. First, companies are now required to produce only one performance graph showing their performance, in terms of total shareholder return, over the last five years against an appropriate equity market index. The regulations as drafted in the consultation document would have meant that some companies might have had to produce many pages of complex graphical data. We felt that that would not contribute to clarity of disclosure, and decided that the default total shareholder return graph, as described in the consultation document, is the best option. Of course, it is open to companies to supplement that with information on performance that uses what they consider to be more appropriate measures.

Secondly, companies will be required to disclose other services provided to the company by any firm that advises the remuneration committee, and whether

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the committee was able to appoint its own consultants. The Government believe that the remuneration committee should be able to choose its own source of advice. We are aware that there is the potential for conflicts of interest if the consultancy appointed to advise the remuneration committee also provides advice to the executive directors on other matters. That is why we have decided on greater transparency in that area.

Thirdly, companies will not be required to disclose whether the board accepted the remuneration committee's recommendations without amendment and details of recommendations that were not accepted by the board. Having considered the matter carefully, the Government have decided that requiring that disclosure might have undesirable consequences.

Michael Fabricant: The Minister mentioned the consequences of the board not agreeing with shareholder recommendations on publication of the report. Will she say precisely what the legal consequences will be, as they give the statutory instrument teeth?

Miss Johnson: I have already answered the hon. Gentleman's point. We believe that a strong message will be sent; directors will then have to decide how to respond in future years.

Michael Fabricant: As my hon. Friend the Member for Eastbourne just said, we may be talking at cross purposes. I take the Minister's point, but she said earlier that there would be legal consequences if a board of directors chose to ignore the strong wishes of the shareholders expressed as a consequence of the publication of the report. [Interruption.]

The Chairman: Order. One speaker at a time. If Mr. Fabricant has finished, Miss Johnson may reply.

Miss Johnson: I am struggling to find the reference. I am not sure what the hon. Member for Lichfield (Michael Fabricant) is referring to.

Mr. Waterson: My intervention is an attempt to move us on. My hon. Friend is referring to the Minister's point on taking the directors as a package, in relation to the legal consequences, and the problems of overturning that package. That could lead to lawsuits by people who thought that they already had a remuneration package. I do not want to forfeit my other intervention, which I am still waiting to make.

Miss Johnson: If that is the point that the hon. Member for Lichfield is making, I understand and I am grateful for the clarification. However, there would be contractual difficulties with that, because the retrospective look at pay is just that. That pay would already have gone out, contractual obligations would have been entered into and there would be legal consequences if one tried to unpick that. Therefore, retrospective change is not a viable option and it has been rejected. I hope that that clarifies the hon. Gentleman's point.

Michael Fabricant: I am grateful to the Minister for her clarification, but I must again ask what meaning this statutory instrument has if it turns out that we are reporting a historical change that has been made and

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which is contractually sound between the company and the directors.

Miss Johnson: Perhaps I explained too quickly. The policy has two parts. The report has a retrospective aspect, which looks back over the pay and remuneration packages of the previous year, and a future aspect, which considers the policy that the directors or the company would propose to adopt in relation to directors' remuneration. It looks ahead and says exactly what the criteria will be. That element will have a direct impact on what will but has not yet taken place, so it therefore does not fall foul of existing contractual liabilities.

Mr. Paul Marsden (Shrewsbury and Atcham): Why has new Labour opted for a U-turn? Section 2.7, covering trade and industry, of the 1997 new Labour handbook states:

    ''There must be greater disclosure of executive pay packages in company accounts, and all companies should seek prior''?

I stress ''prior''?

    ''and explicit approval for pay decisions from shareholders.''

What has changed? Why the U-turn?

Miss Johnson: There is no U-turn, and the hon. Gentleman is striving to make a point that does not exist. We are placing on companies an obligation to declare their future remuneration policy. If the shareholders see fit to reject that by expressing opposition in a vote, it will be for companies to rethink that remuneration policy, or they will fall foul of the severe disapproval of their shareholders.

Mr. Waterson: This is my free shot. So that we can all pack up and go home, will the Minister identify what precise difference the regulations will make to a currently listed company, which is required to obey the code that is part of the listing rules as a pre-condition to being listed at all? What is the precise difference between the current arrangements and the regulations?

Miss Johnson: I explained some of the added extras. A company may comply with the code and use good or best practice under it?that is similar to what the regulations require. There is nothing to prevent people from complying with the code or doing more. The point is whether they generally do so. We know from the evidence that they do not, and there is insufficient compliance with good practice and the code. If a company were in contravention of the listing rules, it would clearly be at risk of being delisted. However, those are not the only issues to be considered in this context.

To return briefly to my final remark on not having to disclose the details of proposals that were not accepted by the board, we accept that if we required such disclosure it might well lead to substantive discussions taking place in private and not, therefore, to improved transparency. The changes are practical, and they provide for more disclosure where necessary and for the regulatory burden to be reduced where appropriate. Overall, the regulations reflect a balanced approach to creating an appropriate framework for the setting of directors' remuneration and I commend them to the Committee.

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I return briefly to the listing rules. Under them, there is no requirement on future policy or on justification of compensation under contract, so they would not be sufficient.

4.54 pm

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