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Lord Lea of Crondall: My Lords, I am talking about open-market economies. Some people say that of course we cannot compare ourselves with Sweden because Sweden's openness to international trade in the global sense is not the same as ours. However, as regards exposure to world trade, Hollandthe Netherlandshas exactly the same structure as we do. Therefore, the justification is not to do with the rise of globalisation. Incidentally, if it were, noble Lords who argue that way would contradict themselves. On the one hand, we are supposed to think that globalisation demands that there is greater inequality. But when the point is put explicitly, people say that that is not true. There would be a huge political backlash in Britain on the question of globalisation if people thought that it led to greater inequality. The consequence of that assertion would be the growth of protectionism. We are not advocating protectionism; those people who are doing nothing about that image of globalisation are encouraging protectionism.
That was a necessary digression, as it would constitute the only argument one could putif there were an argumentfor not accepting the degree of transparency that we are discussing. The measure does not demand justification, although people will have to analyse the figures themselves. It would give people the opportunity to observe the totality of the company's remuneration policy. I trust that my noble friend the Minister will have no difficulty in accepting the amendment. I beg to move.
Lord Sharman: My Lords, I wish to make a couple of comments on what the noble Lord, Lord Lea, has said. He chose the Netherlands as his comparator. I know that country well; I lived and worked there for the best part of 10 years and I sit on the supervisory board of two Dutch companies. My two observations are as follows. First, the oft quoted justification regarding international business concerns the movement of executives, particularly between here and the United States, and around the world. Very few senior executives in major companies in the Netherlands are not Dutch, whereas a considerable number of executives in the US are Dutch. That shows us that there has been movement out of the Netherlands. The problem of executive drain is becoming apparent. Secondly, it is always argued that further transparency is needed to keep remuneration under control. There is far less transparency on remuneration in the Netherlands than there is in this country.
Lord Lea of Crondall: My Lords, in that case I should have thought that the noble Lord would say
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that we ought to become the 52nd state. Obviously, Holland needs to become the 51st state and we ought to become the 52nd.
Lord Whitty: My Lords, while my noble friend has characteristically moved the amendment in a somewhat wide context, and the noble Lord, Lord Sharman, has responded in kind, I would like to point out that the amendment is, in fact, quite limited. It is not like the groups of amendments that we discussed last night and earlier today which would significantly have changed the duties of directors. I had some sympathy with some of those amendments, and my name was attached to some of them. For example, I regret the withdrawal of OFR. On the other hand, I appreciate that the Government have moved some way to recognise the concerns that the noble Earl, Lord Sandwichwho is no longer presentemphasised today.
However, the issue that we are discussing is much narrower and falls within the existing legal requirements for directors' duties. There is a requirement to report on remuneration and to have remuneration committees dealing with certain matters. As the noble Lord, Lord Sharman, said, this matter is subject to regulation by the FSA. It is also subject to codes of practice of the FSA and of various City and other institutions. The problem is that even with that degree of attention and a significant amount of transparencyindeed, one could argue that there is too much transparency in some remuneration committee reports, at least in the sense of their being far too detailed for anyone to comprehendthe report does not convey how those directors' remunerations have been determined in relation to what else is going on within their company.
The House will recognise that both my noble friend Lord Lea and I come from a trade union background, so in a sense we represent the view of the employees within the individual company. They would like to know how their bosses determine their own pay and to what extent they take into account the pay that they are giving to their employees, both in the main company and in subsidiaries. However, the point is actually wider than that, as my noble friend Lord Lea said. If it is the case that the executives of leading companies are going way ahead of the general level of remuneration in the rest of the economy, let alone in the rest of their company, that is damaging to social cohesion and leads to a degree of suspicion and accusations of corruption from the rest of the population.
We should be humble enough to recognise that occasionally similar doubts and accusations arise in relation to politicians; namely, that effectively we are a cabal of people who are paying one another large sums of money for not very obvious performance-related outcomes. That case can be made in relation to directors and the way in which remuneration committees have turned out. We have had committee
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after committee looking at this, but none of them has specified that there should be in the remuneration report a requirement that the directors set out how they have taken into account everyone else's wages and how they determined them, and that they have at least attempted to justify the level of remuneration for the directors in the light of that information.
This is a fairly simple point, but it goes to the heart of how you sustain both a degree of coherence and loyalty within a particular company and a degree of social coherence, respect, understanding and equity in society as a whole. While this is a narrow point, which builds on what is already there, it is very important for the reputation of our larger joint stock companies and limited liability companies. I strongly support the amendment that has been moved by my noble friend, and I hope that the Government will take into account our arguments, if not today, at least in further stages of the Bill.
Lord Judd: My Lords, for anyone who has not participated in the Grand Committee on a Bill, there should be a good deal of caution about intervening on Report, because an immense amount of work has been done by those noble Lords who were able to participate in Grand Committee. However, I found that my strength of association, feeling and support for what my noble friend Lord Lea is endeavouring to achieve in this amendment was so strong that it could make a nonsense of the Report stage if I were not simply to put on record how warmly I feel towards his argument.
My noble friend Lord Whitty has referred to social cohesion and he has referred to respect. This is not just a matter of cohesion within a particular enterprise and the spirit of a particular enterprise. I do not understand how in the long run a successful enterprise can be sustained unless there is a feeling of fairness and reasonableness and a basis for respect coming from the leadership of that enterprise. I have been a chief executive, albeit not in a company in the normal sense; my role has been in the sphere of social responsibility and social policy. It seems to me that it is crucial for stability and success within an enterprise for fairness not only to be present, but to be manifestly present.
There is a wider social context. We are spending a great deal of time at the moment talking about the need for more respect in society. We are being cautious in our deliberations about reflecting some of the feelings present in society as a whole. Those feelings may be fair or unfair, but there is a strong feeling about greed and opportunism. The very reasonable terms in which this amendment has been tabled are irresistible. If there is a sound basis for the way in which remuneration decisions emerge, and if there has been proper consideration of what that remuneration should be and it is clear to everyone that there has been a process that stands up to scrutiny and reflects what should happen not only for the success of the company but in relation to the responsibility of the company to society as a whole, that is great. But if that is not the case, there is a problem.
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Lord Sainsbury of Turville: My Lords, I welcome my noble friend's amendment, as it gives me an opportunity to put on record the Government's strong support for the principle that companies should be sensitive to pay and employment conditions elsewhere in the group when taking decisions about directors' remuneration.
"Paying over the odds is incompatible with the fiduciary duty of directors to act in the company's best interests. It can spread through normal differentials to other levels in the company, thus increasing the cost base and impairing the company's ability to compete. It can cause resentment among staff and damage the company's reputation".
I entirely agree with my noble friends about the significance of that principle. It should certainly not be seen by companies as window dressing. It is important that companies analyse the general pattern of remuneration in the enterprise and take that into account in determining directors' remuneration.
"good practice for boards to disclose in their annual report the average total annual remuneration of executive directors and the average total annual remuneration of non-board employees in the financial year".
While we do not accept the amendment, the Government will be consulting on all reporting regulations, including those relating to the directors' remuneration report, at the end of this year. I am happy to give a commitment that, in doing so, we will consult on how companies might report more effectively on the way in which they take pay and employment conditions elsewhere in the group into account in deciding directors' remuneration.
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