Lord Parry Mitchell Speech to amendments to Enterprise & Regulatory Reform Bill, re: director remuneration House of Lords,

11th March 2013

Annual Binding Vote My Lords As I said in my opening remarks the Government has taken on board some of the recommendations made in Lord Gavrons private members bill. In the bill the Government are suggesting a members approval of directors remuneration policy at an accounts or other general meeting no later than every three financial years. Well something is better than nothing, but we believe that this requirement would be much more powerful if it were an annual requirement and this is what amendments 84HZAA and 84AHBA would do. This is crucial. It means that executive pay is not an issue that is engaged with occasionally, but is focused on at every AGM much the way as approval of the accounts and the selection of the companys auditor. Its that important. The triennial approach that the government have opted for seems to be too casual for this critical shareholders approval. When most newspapers carried the news that the Swiss shareholders were to receive a vote on pay, they didnt say how often, because it was obvious. Like so many company accounting requirements, it will be annual. I quoted the FT editorial on the matter at Committee, but will do so again because I think it neatly summarises the key point. It said of directors: Annual binding votes would at least put them [Directors] firmly on the spot. Mr Cables triennial polls, however well meaning and thoughtful, may not. My Lords, the annual vote was what the government consulted on, and gave the appearance that they would opt for. We believe that it is the better option when it come to holding boards to account. This should not, however be equated with advocating short-termism in British companies. It is our belief that companies should plan over a long-term basis. The Cox review commissioned by the Labour party reported last week, and included some admirable recommendations about how companies can ensure that the pay of their directors reflects the long term aspirations of the company. One is that a third of executive remuneration could be paid in the form of shares held back for five years. The government believe that having a triennial vote on pay will encourage long term thinking, and this is an important goal. But reviewing a policy annually is not the same as making short term plans.

A successful company will produce a plan that stretches many years into the future. But shareholders should have a right to challenge, enquire and ultimately hold them to account at every AGM. This is exactly what an annual, binding vote would allow them to do. There appears to have been some element of confusion from government ministers about why the vote is not to be annual after they consulted on it. At Second Reading Lord Marland said that he imagined there would be: ...enormous shareholder pressure on companies that continue to leave their policy unchanged. Whereas at committee, Viscount Younger suggested that investors were in favour of the triennial vote, saying: We considered that carefully when consulting with investors and companies. They welcome the option of a three-year pay policy The government have chosen to retain the annual advisory (as opposed to binding) vote. But if shareholders choose to reject a companys pay policy at this advisory vote, I understand that they will not get the chance to have a binding vote until the following year. My Lords, having an annual, binding vote would be simpler, clearer and would ensure that boards remain conscious of the need for realism on their pay policy.

75% The following amendments, 84AHAB, 84AHBB and 84AHCA, would require a special resolution rather than an ordinary one to be passed by shareholders in order to approve a change to executive pay. In effect 75% of the shareholders voting. This amendment has been tabled, as under the rules being proposed it would still be possible for companies to ignore significant minorities of shareholders voting against a remuneration package. We want to strengthen shareholders power. At committee stage, the Minister said that the government were looking to the Finance Reporting Council, the relevant regulatory body, to follow through with a commitment made to look at whether or not a company should have a duty to formally respond should such a significant minority of shareholders vote against pay. However, I am given to understand that they are unlikely to look at the matter this year. We can therefore be fairly certain that no action will be taken on this in the near future, despite the other moves both within this legislation and elsewhere in Europe to look at the relationship between companies and their shareholders when it comes to pay. My Lords, this is an important matter that Id like to address today. Company shareholders are a more disparate group than they were in the past. The Kay review pointed out that the effect of the increase in the number of UK shareholders that live in other countries, is to make it harder for them to organise and collaborate to ensure that they get the outcome that they want.

The percentage of shares in UK listed companies which were held outside of the UK in 1981 was 3.6%. By 2008 that figure had risen to 41.5%. Another issue on which both the Kay review and the Cox review have made important comments on is the nature of shareholding today. In 2011, Mr Andrew Haldane from the Bank of England noted: There is evidence of the balance of shareholding becoming increasingly short term over recent years. Average holding periods for shares in US and UK banks fell from around three years in 1998 to around three months by 2008. Furthermore, he said of the banking sector: Banking became, quite literally, quarterly capitalism. Today, the average bank is owned by an investor with a time horizon of considerably less than a year. These factors are amongst those that have made it increasingly difficult for long term shareholders in a company to hold its board to account. Again, the government recognised this problem in their consultation. I quote from it now: Although shareholder activism on pay appears to be strong amongst institutional investors, the increasingly diverse and fragmented nature of shareholders in the UK means that the likelihood of seeing 50% or more votes cast against any resolution can be expected to remain extremely low. And in his speech last January trailing these remuneration reforms, Secretary of State Vince Cable said: For example the future pay policy might require approval by 75% of the votes cast. In 2012, during what became known as the shareholder spring, there were undoubtedly some significant votes against pay packages, notably SirMartin Sorrells mooted 30% increase - which here we are in 2013 and its back on the agenda. However there was still an overall increase in executive pay of 12% from 2011 to 2012, in a year when the increase in pay for everyone else averaged out at 2.8%. A mere 12% of the population received a pay rise of over 4%. Widespread discontent can be covered up under current rules. Companies do not even have to respond. In 2009, for instance, 1 in 5 FTSE 100 companies had more than 20% of their shareholders withhold support for their remuneration reports in an advisory vote. So my Lords, it is harder than it was in the past for shareholders to organise effectively. But, when a significant minority of them do, it is still possible for a company to ignore them. This amendment would remedy that, and I hope the government will consider it carefully. My Lords, I beg to move. ENDS