Draft Directors' Remuneration Report Regulations 2002

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Michael Fabricant: To reinforce my hon. Friend's point, I should point out that the regulatory impact assessment published by the Minister's Department says that for

    ''the large majority of the 15,000 public companies on the register there would be no change to reporting requirements if the regulations were to be introduced.''

The measure is just empty window-dressing.

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Mr. Waterson: My hon. Friend makes a point that I was going to make later, in my comments on the regulatory impact assessment. He is absolutely right. The Government cannot have it both ways?they cannot publish a regulatory impact assessment that concludes in a nutshell that the extra cost for businesses will be minimal and then claim that the measure is a great innovation that will be of massive benefit to shareholders. The two claims do not sit together.

On the remuneration policy, the packages that we are discussing tend not to be cash only but to include share options or other long-term incentive schemes. On my first intervention, I tried to make the point that the first part of the Minister's speech seemed to have been written before the recent collapse in stock market prices to a level below that of 1997. Many blameless and even praiseworthy senior executives and directors in large listed companies must be seeing their package disappear or become significantly less valuable, through no fault of their own. [Interruption.] Sorry, I did not catch that sedentary intervention from the silent one on the Government Front Bench.

Michael Fabricant: On a point of order, Mr. Hurst. I have to leave the Committee because I have to attend another meeting, as the Minister knows. I am not leaving out of any discourtesy to you, and it is not a reflection of any lack of interest in the subject.

The Chairman: As the hon. Gentleman knows, that is not a point of order, and his travel arrangements are not a matter for the Committee.

Mr. Waterson: I wish my hon. Friend well in his journey down the Committee Corridor and hope that he does not get lost.

I commend the author of the explanatory memorandum, which is crystal clear. It states:

    ''The regulations are structured so that the vote will be advisory. The regulations will not require directors to amend entitlements under their service agreements, nor to amend their remuneration policy . . . The shareholder vote will . . . send an appropriate message to the directors.''

That is a useful point on which to leave the explanatory memorandum. It is right to regard the measure as a way to send a message.

There are other ways in which shareholders may send such messages. I have glanced cursorily through the many press cuttings about the issue of directors' pay. Such news seems to come in cycles, and there was a phase of it after some of the nationalised industries were privatised. There is clearly an issue over packages that are historic and not open to a vote that means anything, and share prices that collapse for other reasons.

The National Association of Pension Funds has criticised the Government, saying that

    ''had the government acted sooner, it might have been easier for shareholders to deter controversial pay deals.''

After the 2.4 million package for Sir Christopher Gent of Vodafone, when the company had reported Britain's biggest ever corporate loss, the NAPF spokesman said:

    ''We've been calling for a vote for some time. The sooner it happens the better. It has already taken three years.''

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The example of Vodafone is interesting because Sir Christopher received that package at about the time the company made a reported loss of 13.5 billion?the biggest in UK corporate history. As we know, however, that the shareholder vote does not affect matters at a general meeting, it is interesting to see how the problem can be self-regulating. An article in the Financial Times a couple of weeks ago said:

    ''Vodafone hopes to quell public criticism . . . by tying 80 per cent. of his pay to the company's performance and setting aggressive performance targets.''

There is some argument about the detail, but the article says that, before Sir Christopher can receive his deferred bonus,

    ''which could be worth more than 1.8 million . . . Vodafone must meet short-term growth targets based on earnings before interest, tax, depreciation and amortisation . . . free cash flow and average revenues per user.''

Of course, the exact targets are not in the public domain, but my point is that his performance share can be collected only if the company's total shareholder return is better than 80 per cent. of its peers. Growth in earnings per share must be 15 per cent. above retail price inflation per annum. The options for Sir Christopher are worthless unless the share price rises above the strike price.

That is an important example because Vodafone is a responsible company, which has made a large loss at a time when very large losses are being discovered in murky circumstances on the other side of the Atlantic, although there is no suggestion of anything similar in the case of Vodafone. Sir Christopher's package was obviously based, at least in part, on his historic achievements for the company, including its major acquisitions in recent years, and the company is determined that he should be nailed down to a detailed package that depends on his performance and that of the company, or its shareholders.

The other day, The Guardian reported a survey on directors' pay, published by New Bridge Street consultants, which found overwhelmingly that

    ''investors would have preferred companies to follow a voluntary code, rather than be bound by the proposed legislation. The survey found that two thirds of institutional investors did not welcome the government's proposals, which were put out for consultation last month.''

The Association of British Insurers has also said that the proposals will not work. It represents companies with one fifth of investments in the London stock market. It said:

    ''An advisory vote does not provide institutions with a strong enough say in the minority of cases where there is a serious excess . . . the proposed performance graph regulations are excessively complex and may distort performance targets. The objective of enhanced disclosure and accountability would be better achieved through revising corporate governance best practice rather than via legislation.''

Finally, I want to touch on some points made in the regulatory impact assessment?

The Chairman: Order. I remind hon. Members that it is my intention to call the Minister no later than 5.50 pm. I hope that hon. Members will bear that in mind in making their remarks.

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Mr. Waterson: Absolutely, Mr. Hurst. I do not intend to be on my feet at 5.50 pm unless I am sorely provoked.

In a nutshell, the regulatory impact assessment on the regulations mentions three different options for dealing with the perceived problem. The first is to continue to rely on compliance with accepted best practice. The second option is to introduce the regulations with which we are concerned today. The third option is to strengthen shareholder controls through legislation as a result of the company law review.

I have already discussed option 1. I have also talked about option 3, but it bears some repetition because we know that, in the autumn, the Government will put forward some major proposals for company law reform, on which they are to make an announcement next week. I hope that, in her concluding speech, the Minister will lift the veil on what proposals she has in mind in relation to directors' remuneration. It would be barmy for us to pass the regulations and then find ourselves?assuming we perform similar functions in the autumn?debating exactly the same issues in the context of a major Bill. The regulatory impact assessment?

Miss Johnson: Does the hon. Gentleman appreciate that other Committee members might not see this as a gay debate?

Mr. Waterson: I did not mean to get involved with political correctness. I meant gay in the old-fashioned sense. The issues are serious; they may cause some hilarity on the Government Benches, but we are considering imposing further requirements on British business and giving shareholders the false hope that they will have new muscle, which they will not have as a result of the regulations.

On option 2, the regulatory impact assessment report concludes:

    ''Legislation will achieve what reliance on voluntary compliance has not: increased transparency''.

In that, it is at odds with the explanatory memorandum, so I assume that they were drafted by two different officials. It continues, saying that

    ''strengthened accountability and more effective linkage between pay and performance and the competitiveness benefits this brings.''

We have already been through all the reasons why that will not happen in the real world, unless it is happening already. The comment on option 3 contains the reasonable point that

    ''Legislation . . . will . . . take time to draft, consult on and introduce.''

There was a delay of some three years in introducing the regulations, but we are now close to the introduction of company law reform. Why do we not wait and do it all at the same time? That is not the methodology that the Government tend to adopt. The regulatory impact assessment report concludes, as my hon. Friend the Member for Lichfield pointed out:

    ''The cost and impact of presenting this readily available information as required is believed to be minimal.''

It mentions some 2,700 companies that would be affected, because they are listed in the definition set

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out in the regulations. The clincher, the issue on which I should draw my remarks to a close, is the conclusion that compliance costs

    ''would not add significantly to the costs of companies''.

Why? Because

    ''it is already a requirement of the Listing Rules that companies must disclose details of each director's pay.''

As I would say if I were in a court of law, I rest my case. There are legitimate concerns, but?

 
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Prepared 10 July 2002