Corporate Governance — House of Lords, 2016-11-29
Topic: Domestic Commerce
Jonathan Mendelsohn (Labour, Centre-left): My Lords, we welcome the Green Paper on corporate governance. I do not think there is anyone who does not recognise the mood of the country given that, since the financial crisis, we have faced growing disparities and unfairness that are neither justifiable nor economically efficient. We also have to recognise that we have long delayed any serious action to deal with chronic issues such as short-termism, weak R&D investment, the lack of large UK businesses acquiring overseas and the problems with productivity. This is a vital debate and the Green Paper should be welcomed as an opportunity to start the long required process of change, not end it. However, this Green Paper will have as much impact on changing the issues at hand as a stick would have in changing the course of a river: it is the exercise of power without purpose and policy development designed for press releases, not practical impact Business and business people are also crying out for change, be they investment managers, entrepreneurs, investors or corporate leaders. However, this measure does little but protect the status quo. To set the debate in terms of shareholders’ influence on executive pay is too limited, not least when a huge underlying problem in our country concerns the investment industry. Its pay, performance and methods of charging are, in and of themselves, part of the problem. It is also instructive that BlackRock, for example, is now being criticised by its own shareholders and investors for voting against positive environmental policies despite claiming to adhere to them. Shareholders are arguably less of a problem than the boards which fail to address the normally compliant shareholders’ voting patterns when they vote against executive pay To extend the public company governance requirements to private companies is rubbernecking on media coverage and not a serious analysis even of the event that it purports to address. Its obvious weakness will be starkly laid out in the attempts to draft legislation, if it ever gets that far. As for the watering down of the commitment to place workers on boards, that is an illustration of the limited thinking about the effectiveness of governance on public companies. Advisory panels and non-executive advocates—this is thin stuff. No wonder we have ended up with a debate on publishing pay ratios to do with remuneration—a suggestion so limited that it does not deserve the controversy that it has generated The chronic problem is that the current arrangements for corporate governance enshrined in the corporate code is the problem. All you have to do is read the few paragraphs on relations with shareholders, which does not even muster a page, to understand the nature of the problem. This Green Paper is not enough. We have to admit that the road started by Cadbury has gone too far in the wrong direction and needs to be addressed The balance between shareholders, workers and customers has drifted too far away from the interests of the country, and nothing but a complete overhaul and review of the combined code will deal with it. The 2009 Walker review was, and should have been seen as, the drink in the last chance saloon. The glass is now empty. Will the Minister accept that the Green Paper should accept the debate on all aspects, including the code itself? Does the Minister also agree that the code itself should not be seen as the gold standard to set against private companies, and that to extend it to all private companies will require its own evaluation, given the very different nature of what a private company can be? Executive remuneration is out of control—a point recognised in the Minister’s Statement. Will he please tell us whether this Green Paper will rein back some of the completely unjustified leaps in executive pay? Does he agree that pay itself is an example of the weakness of a second-rate code being mixed with transparency? The principal reason is that what is known as the "ratchet effect" has occurred. Remuneration consultants present a company with data comparing their executives’ pay—now that it is fully published—with others. They ask: "Does the company want to be seen as a company in the top quartiles—the top performers and payers; those who are most attractive?". Of course, every director will want to appear in the top one or two quartiles of pay, but for every director who is inserted in the top half, another must fall to the bottom—a fact that will soon be drawn to their attention by remuneration consultants. So the ratchet clicks over and creates a natural inflationary effect, with no relationship to pay, performance or anything to do with the company. This has become a chronic problem. I urge every Member of this House to look at the reports of company accounts of companies that declare that they are in the upper quartiles. That tells you the story of unrelenting pay advances with no justification Remuneration consultants have done an appalling job and a great disservice to the UK economy. They represent a prophylactic for weak and lazy boards. As the noble Lord, Lord Myners, the former Trade Minister said, "They allow the remuneration committee to say ‘this is what the consultants say, so we should do it’" Non-execs frequently complain that the report they have seen has been redrafted to the advantage of the executives by the executives with the remuneration advisers. Will the Minister recognise the problem with remuneration consultants and confirm that their role will be the subject of a review, whether in this Green Paper or at any other time It is not as if we do not have enough challenges ahead. Yes, the Government should be credited for starting a debate, but it does no credit to set it off in a manner that just feeds media headlines and is poor policy. It will inevitably lead to thin and limited proposals like this and, rather like the non-appearance of the Small Business Commissioner tackling late payments, will be delayed as the Government do not listen to the sensible suggestions, which I am sure will come from all sides of the House, that will make this work This Green Paper is a new type of dangerous dogs debate. We should be wary of the bark being worse than the bite.