Transparency of Company Accounts: Motion.

Mr. Ross

I move:

That Seanad Éireann congratulates the Tánaiste and Minister for Enterprise, Trade and Employment for her measures, taken in the interests of small shareholders, to bring more transparency to company accounts; in particular the Seanad notes the Tánaiste's insistence that the directors of public companies should reveal their individual salaries; furthermore Seanad Éireann urges her to take further measures to ensure that investment and pension fund managers consult with their contributors and customers before supporting measures which enrich directors at the expense of small shareholders.

I regret the Tánaiste and Minister for Enterprise, Trade and Employment is not present but I fully understand the reason for that as she is taking the Company Law Enforcement Bill, 2000, in the other House. This subject is close to her heart and is one on which she would have made a considerable and weighty contribution. However, I welcome the Minister of State to the House. I know he act as a very adequately substitute, as he always does.

I particularly would have liked the Minister to be present because the motion specifically congratulates her on the role she has played in imposing transparency on public companies in Ireland. Members will be aware of the controversy that has raged for many years regarding both executive and non-executive directors of public companies declaring their salaries to their shareholders. For many years the Stock Exchange, the Institute of Directors in Ireland and other bodies and the directors of public companies have resisted almost unanimously the pressure that was put on them to inform the shareholders of public companies how much their directors were paid.

This was the most simple request that one could put forward as a small or large shareholder of a public company but large shareholders did not seem to have a great interest in those who acted in their name declaring how much they were taking from them. It is similar to politicians who must declare their salaries to taxpayers because they pay them.

The motion is not so much about how much people are paid or how grotesque the payments can be and have been in certain circumstances but about the right of those who have a stake in public companies to know how much is being paid. Those who have a stake include small shareholders, unit holders, pensioners, the staff of the companies and various others. The resistance to this among those who have benefited has been staggering in the past and I congratulate the Minister for taking the measures necessary to meet and overcome such resistance. That will be a permanent monument to her tenure in office.

One of the most extraordinary aspects of the Minister's insistence on change and overcoming resistance to it was that we suddenly discovered the reasons for the resistance. We have come to know in the past few weeks why directors of public companies have not felt comfortable with being accountable for their salaries. Public companies are accountable to their shareholders, not the public. What we saw in the banks last year demonstrated a lack of accountability by public companies to the public but we have also seen the revelation of bank salaries which, if not unacceptable, are much higher than people expected. Some would say that they are justified because bank profits are so high, bank shareholders have done so well and bank employees are benefiting. In such circumstances, shareholders perhaps do not mind so much when six figure sums are paid to their directors. They want to know, they have a right to know and they are beginning to find out.

This is particularly topical as a debate will take place on Friday in the Burlington Hotel, because the revelations which the Tánaiste forced, have shown that the chief executive and chairman of the Jefferson Smurfit Group is receiving 6.5 million.

Mr. Coghlan

A feudal overlord.

Mr. Ross

This is an extraordinary amount of money. This is a multiple of what the bankers are being paid. Maybe there is some justification for it, but we have not heard of one. Maybe he will come before his shareholders on Friday and tell them why he is paid so much money. I doubt it very much. The Tánaiste, Deputy Harney, has forced these revelations. This is a particularly bad case, not necessarily because of the sum of money earned by the chairman and chief executive, but because of the way shareholders have been treated and have benefited from this company. The real problem here is the relationship between a bad performance by Smufit shares and a fantastic benefit to Smurfit executives.

Let me look at the performance of Smurfit shares in the last five years. They have underperformed in the Irish market by 58.5% over the last five years, by 46.6% over four years, 35.7% over three years, 28% over two years and 22% over one year. At the same time the Smurfit family and directors are milking this company of millions.

That is what we have found out and what the Tánaiste, Deputy Harney's, directive has revealed. Of course directors at the top of Irish public companies have resisted these revelations. They are very embarrassing for those who are overpaid while their shareholders are suffering at the bottom. I suppose a large number of people in this House know that shareholders own these companies. Why do they not do anything about it? Why have they not been able to stop these exorbitant payments? The reason is very simple, that this company, like most Irish public companies, is owned by a club of about 17 institutions who rarely if ever challenge the sort of commercial incest one sees in the Smurfit company.

This time something exceptional has occurred as a direct result of the Tánaiste's actions. Last week Aberdeen Asset Management, one of the 17 fund managers, declared that on Friday they would vote against such exorbitant payments. That was pretty startling news but people felt that they were mavericks, as they are new to the club. A far more sensational development took place the day before yesterday when one of the great stalwarts of the investment management game in Ireland and an extraordinarily constant member of the club, Irish Life Investment Managers, declared that they would vote against the re-election of five directors of Smurfits this week. They have had enough. This particular payment was a breach too far. They are going to cast their vote, which I think is £46 million or thereabouts, I am open to correction on that, against such exorbitant pay. We are beginning to see a movement where shareholders are taking up the cudgels on their own behalf, whether they are shareholders by virtue of being part of a managed fund or shareholders in their own right. They do not intend to suffer any more if the directors of public companies are going to help themselves to great wads of their money. If we are not getting a return why should they get one? That is what I hope we are going to see as a direct result of the Tánaiste's measures.

The problem lies I think in Irish public companies partly with fund managers, whom I will deal with in a few minutes, but partly as well with the directors of public companies. Directors of Irish public companies have on the whole been a disgrace in their behaviour as regards shareholders. The only purpose of independent directors is to look after the interests of shareholders. Nobody can stand up here today and say that the independent directors of Jefferson Smurfit look after their shareholders. They do not. They look after themselves and they look after the chairman. That is the pattern which has emerged in many other public companies as well. We did not know about it until the Tánaiste, Deputy Harney, decided we should know about it and put pressure on public companies to reveal these exorbitant payments.

I would like to ask if the Minister of State, Deputy Treacy, has any reply or suggestions to make to the question of whether there are any public companies in Ireland which are controlled by truly independent directors. I do not think so and I certainly cannot name them. A pattern emerges of people being in each others pockets with cross directorships, obligations to one another and certain perks which are indispensable and remain as long as people toe the company line.

Let me take the example of the Irish Association of Investment Managers, which is the association of the fund managers who supposedly set the criteria for corporate governance for public companies. They say they are very keen on corporate governance and on independent directors. As far as I know, they set four criteria which an independent director should fulfil, some of which are negative. One states that no director can be considered independent if they have served on a public company for more than ten years. Another is that a director cannot be con sidered independant if they receive consultancies from that company. It is perfectly obvious that if one serves for more than ten years in a company one becomes embroiled in the culture and is to a certain extent compromised. It is difficult to avoid this unless one is a very exceptional person and none of the people concerned shows any sign of this being the case.

Mr. Dardis

Does this mean the Senator is not standing for election again?

Mr. Ross

It does not mean anything of the sort. I have not been elected ten times. The second point is this—

(Interruptions.)

Mr. Ross

—that if one gets a consultancy from a company of which one is a director, then one is compromised because one is in effect being paid and is therefore more dependent on the company and the board. The next criterion is that one is not a former employee of the company because that implies having ties to the company and to people in it which one should not have if one is to be truly independent. The fourth is that one should not have given, or have been given, legal advice to, or by, the company or its directors.

The Smurfit annual report confronts these issues and states that though the company may have offended, it does not consider that to be wrong. So many of the directors there receive consultancies and Dr. Smurfit himself received a bonus of over 3 million last year while the company's share price was falling. The Irish Association of Investment Managers, which sets down these criteria, is a paper tiger. We need urgent legislation, orders or pressure from the Tánaiste and Minister for Enterprise, Trade and Employment, Deputy Harney, to enforce this on public companies. The IAIM has failed to make public companies conform to its guidelines with the result that our largest public company has said the IAIM is wrong and it will not take any notice of it. Fund managers have backed off and that company has continued to behave as it always has, which is unacceptable. Meanwhile, the directors continue to benefit, the guidelines have been breached and the shareholders are losing money. I suggest, though I cannot prove, that there is a direct relationship between shareholders losing money and directors doing well. They are doing far too well to care how the company does and where directors' pay is not related to shareholder performance this pattern continues.

By nature of this being a small country with a small number of institutions, there is a system of cross shareholdings which is much tighter than elsewhere.

Mr. Coghlan

It is a small club and rather incestuous.

Mr. Ross

Anyone who has studied in any depth, or even watched, the pattern at AGMs of proxy voting will be used to seeing them nearly always cast unanimously in favour of the board. What that has meant in the past, though I hope it is changing, is that the Bank of Ireland votes for AIB, the AIB votes for Bank of Ireland and Irish Life votes for Bank of Ireland. They all go to each other's AGMs and vote for each other to be re-elected. It is extraordinary. They never question each other's bona fides and they never ask questions about how the company is being run. In the manner of the old Soviet Union, they all put their hands up and when one hand goes up that is five million votes. The end of the story is that some guy is re-elected. Whose are the votes? They are the votes of the pensioners whose funds these people manage. It is amazing. Do you think that Bank of Ireland Asset Management, which holds 8% of Smurfits, though it used to be more, will vote against Dr. Smurfit's pay? The people it has on the board are Mr. Ray MacSharry, Mr. Howard Kilroy, an ex-governor of the Bank of Ireland and Mary Redmond. This is an example—

An Cathaoirleach

I prefer Senator Ross not to name individuals who are not here to defend themselves. The motion refers to companies and to directors of public companies but I would prefer the Senator to use those terms rather than refer to individuals by name.

Mr. Ross

I am sorry I cannot withdraw that from the record. If I could, of course, I would. There are three Bank of Ireland members on the board, one of whom is an ex-governor, so it is inconceivable to think that Bank of Ireland would vote against the re-election of its own members who are on that board, whom I will not name.

Ms Cox

The Senator will not name them again.

Mr. Ross

Such is the nature of the incestuous commerce of which I speak and that is why it is so important that these matters are exposed and revealed to the public. We have fund managers who vote willy-nilly for the board and we must ask why they do it. This is where the Minister should intervene as it is a fundamental problem. It is not simply commercial incest. Let me look at who they are voting for.

Fund managers here and overseas cast hundreds of millions of votes before or during every annual meeting and invariably cast them in favour of the establishment. Where do they get those votes? They are the votes of the pensioners whose funds they manage. Those pensioners, if asked, would come, inevitably in many cases, to totally different conclusions from the fund managers, and the fund mangers know it. Does anybody believe that a pensioner of BIAM consulted by their fund manager would say "go and give Dr. Smurfit 6.5 million"? Nobody wants to give him that but the fund managers vote for it against the obvious wishes of the pensioners whose funds they manage.

What does that tell you? It tells you that they are casting their votes for a different motive from the one with which they were entrusted. It tells you that they are casting their votes because there are other pressures on them, that they are casting their votes for what is not a normal, direct, commercial reason. It tells you they feel they have to for reasons which may be to do with their career, the interests of their own company or their parent bank, and it tells you they are not carrying out the wishes of their pensioners. Clear evidence is that, before this week, I know of no case where any fund manager ever broke ranks.

As a solution to the problem I suggest that legislation or ministerial pressure be brought to bear to insist that on contentious issues to do with salaries, the direction of the company and payments, fund managers, pension fund managers at the very least, should be forced to consult with the trustees before they vote. I know of no record of fund managers consulting with trustees on controversial issues to do with corporate governance. There is no tradition of it because they might get a result they would not like. The trustees are honourable people whose role has been usurped to a large extent and in many cases they do not do the job with which they were entrusted as conscientiously as they might. They do not even know the roles they are playing and my guess is that they would give opposing instructions on these issues because they would consult their members and their members would say no. Fund managers must be reined in to consult them, pensioners and their unit holders.

Not long ago I rang the two managers of my pension fund and I got an unsatisfactory reply from both of them. One was the AIB while the other was KBC. They informed me that it was not normal to talk to little minions like me about my money and that they would consult the trustees, but obviously had not done so and will not do so. Both institutions are members of the Irish Association of Investment Managers which, supposedly, sets down criteria for good corporate governance, which obviously does not include consulting the people whose interests they are supposed to be looking after.

Let me make another suggestion. One of the key aspects to this problem is the remuneration committees of the boards of public companies which, almost inevitably, are full of stooges. There is no point in mincing one's words. That is the reason they are there. They are there to rubber-stamp. What the board thinks, the board and the chief executive ought to get. Remuneration committees sit in secret behind closed doors and never reveal what is discussed, the alternatives put forward or the submissions received. Occasionally, they commission the views of what they call independent consultants on the possible salaries or awards that should be paid to chief executives. In my experience, independent consultants inevitably consult widely and come to the conclusions that those who pay their fees want them to come to. Unfortunately, that is the reality.

I suggest to the Minister that remuneration committees, which decide on the level of pay, should not consist exclusively of members of the board. That is a simple request. Remuneration committees of four, five or six people should consist of shareholders in the company, including small shareholders. That would cause absolute panic in the boardrooms of Ireland and be totally unacceptable because the people concerned would not be part of the club. They would come in and make reasonable suggestions, but they might do something far worse. They might come out and tell the world what had happened behind those closed doors and how a matter was agreed. We could not have that situation unless they were hand-picked stooges. We could not have a situation whereby they, simply, rubber-stamped everything. They could be changed every year. Three or four could be members of the committee. It would be like a jury, and we could have reasonable pay for the people concerned.

We witnessed an appalling situation with Eircom last year where bonuses were awarded at a time when shareholders were losing money hand over fist. We witness the same situation in Smurfit this year. The Tánaiste must give serious directions again whereby institutions which hold such shares will be forced to reveal what they are doing and consult primarily with their shareholders. I do not necessarily want to see pay levels lowered. I have no problem with people being paid huge sums of money, but I do have problems with secrecy and with people being paid enormous sums when boards are in their pockets deciding them, and with them being paid vulgar sums of money at a time when shareholders and pensioners are suffering.

Mr. O'Toole

It gives me great pleasure to second the motion. It is unusual that, first, Senator Ross and I would agree completely with the content of a motion and, second, that he and I would agree to propose and second a motion which congratulates a member of Government, and pigs are not flying.

Mr. Treacy

We hope there will be other similar motions.

Mr. O'Toole

In the interests of consistency of approach between Senator Ross and me, let me pick out one point from his very fine contribution with which I disagree. It was a tremendous statement for the House to have heard and it puts many important issues in place, but we should marshal all our forces in doing this. I am not sure whether Senator Ross was critical of the Irish Association of Investment Managers. He did say that, perhaps, it was not effective enough and that rather than—

Mr. Coghlan

Paper tigers.

Mr. O'Toole

That may not be incorrect, but it need not necessarily be a criticism of it. I have admired and continue to admire the work done by the IAIM, by Ms Fitzgerald in particular in leading that organisation, for particular reasons. It does not have the authority that it should and could have if the Government was to take heed of this proposal. Perhaps, the way forward is to look at what can be done.

I have a number of suggestions which I would like the Minister to take on board in his response in terms of how we can implement the wording of the proposal. First, the Irish Association of Investment Managers should be given statutory powers or else have its proposals implemented through statutory power. This can be done in a number of ways. It can be done through a ministerial order or regulation, as Senator Ross said, or by giving powers to the body. In that way the criteria it brings forward would have the power of statute and regulation. This would change completely the complexion and influence of the body and would be welcomed. It is something we should examine.

Second, I would like to see regulation of the various relationships into which fund managers enter. I will come back to this point. Third, I would like to see an annual report from fund managers explaining their decisions in the course of a year being required by statute, and would require both the internal auditors and the audit committees of large public companies to explain to shareholders – their function is to explain decisions to shareholders – the logic behind and the supporting evidence for the decisions of the board on issues such as the remuneration of directors. That would have to be included as part of their report and endorsed and supported by the internal and external auditors in line with a series of regulations.

Fourth, the audit committees of large public companies, such as Smurfit, the example given by Senator Ross, should recognise their responsibility as being to their shareholders, should be comprised only of independent directors, and give a separate report to shareholders at each AGM explaining these matters. That would move matters forward significantly.

I support the views expressed by Senator Ross in congratulating the Tánaiste on taking these important steps. It has been a revelation and opened up a whole area which we never understood previously. We suspected, but did not know. I have no objection to the levels of salary, allowances or payments of whatever description being earned by directors. That is not the point of the proposal. It is about accountability, answerability and fairness, which we do not see.

What is the next step? The Tánaiste has taken this fantastic step to ensure disclosure. The requirement to disclose has now produced information. It cannot stop there. We know how to determine how we use that information, the ends to which it is applied and how it is brought forward. The information of itself does not make the shareholder any better off or protect him or her any more than before. It provides no additional support to the security of the workers, customers or creditors of a company. We need to know what to do next with that information. That is the reason for this motion today and it is why I propose those issues. It is a wake-up call to many people.

Two significant groups of people are effectively in charge of funds. There are the pension fund managers and the unit trust fund managers and, as Senator Ross outlined, the pension fund managers are almost two steps removed from their customers. They make the contributions to the pension funds but only the trustees of the fund have contact with the pension fund managers. As public representatives, we should be asking the people who pay their shillings or pounds into their pension funds each week, month and year to ring up their fund managers this week and ask them how they intend to vote at the Smurfit AGM this week and why. This is part of what needs to be done. Only in the last month, we in the INTO took the decision to demand an annual response from the people who look after the pension fund of our employees. That is part of the process of making people accountable and answerable.

The pension fund managers and unit trust fund managers have a very simple choice. They decide whether the money goes to the directors or the shareholders. It is a simple choice and there are no further options. That is the importance of the matter we are discussing here today. The issues we are exploring are crucially important following the whole debacle, as investors would see it, of the Eircom flotation, which hurt many people financially, some of whom were misled while others were foolish. Leaving those things aside, however, the fact is that interest in this area of work persists and we need to ensure that investors, whether they be in unit trusts or elsewhere, can have trust and confidence in the system.

I ask people to do the following exercise on a weekly basis. Pick up the business section of any newspaper, including Senator Ross's newspaper, and look at the weekly report on the various funds. First have a look at the tracker funds and then at the funds run by the big boys, who promise they will use their great powers of intelligence and expertise as well as investment news to look after our money. A comparison of managed and tracker funds rarely shows any significant evidence that the humans of the managed funds bring greater benefits than the computers of the tracker funds. Why?

Mr. Coghlan

Hear, hear.

Mr. O'Toole

That question needs to be asked and I ask it every year of fund managers. They are no better than the computers. I do not know what they are doing and we need to a response from them. They are the voice of the small shareholder.

We need to look at the way fund managers do business in terms of the competition laws of the EU. They seem to flock and herd together and because they are only measured against each other, they protect each other, move together and take decisions together. In effect, therefore, they become market makers by another name. In many cases the fund managers are a cabal that effectively controls prices.

There should be legislation to deal with all these areas and to look at the various sets of relationships that fund managers have. What is their specific relationship with the large companies in which they invest? We ask these questions of auditors of both external and internal companies so it is fair to ask the same question of the fund managers who have an equally controlling influence over the company. What is the relationship between the fund managers and the Stock Exchange?

Let us hear about the flow of information from large companies to fund managers. It is utterly unacceptable that fund managers get access to information before small shareholders. This happens all the time. Waiting for the results from various companies is becoming a joke. Once they are released either they have no impact on the stock prices whatsoever, neither good nor bad, or the price moves in the opposite direction from what one might expect simply because the results have been either discounted from or added to the share price weeks earlier. That is wrong. I notice that the SEC in New York is taking a keen interest in the free flow and control of information and the practice of making information available to the large investors and large fund managers before it becomes available to the ordinary investor or shareholder. That cannot be allowed. I believe that there is a golden circle or club – Senator Ross talked about it – among the fund managers. Their job is an important one, but this House should still investigate it.

As Members of the House will know, I do not hold fund managers in very high regard anyway. I was particularly annoyed and upset at the precipitate way in which they reduced their investment in the Irish market as soon as we went into euroland some years back. The swiftness with which they reduced the levels of their portfolio investment in Irish funds from some 30% to 40% down to 15% or lower created chaos in the Irish market. Admittedly, that might have been necessary but it showed very little commitment to the development of this country or to the needs of its shareholders. They were quick enough to turn their back on them.

We will need to give teeth to the various bodies involved in this area. I recognise what the Irish Association of Investment Managers is trying to do. I am in no way critical of them and I congratulate Ann Fitzgerald on being the first person, as far as I know, to come out with a clear view on the remuneration of the Smurfit Group directors. We should also recognise the move made by the Aberdeen Asset Managers and the Irish guide fund managers and ask other fund managers to take a similar line.

We have here today a wake-up call. As elected public representatives, we recognise, welcome and support the moves made by the Tánaiste but ask that they be taken that bit further. We need to put in place regulations and controls like those we are introducing for accountants and auditors. It is equally, and in many cases more, important that we do so for this group of people because they will not do it on their own and will cock a snook at anyone. They already have in the case of the IAIM, where they refused to act honourably on the basis of voluntary movement. They will be required therefore to change their attitudes to statutory requirements and the Tánaiste should make this move in the knowledge that she has the full support of this House and of all small investors because it would return some element of trust and confidence to the marketplace, which is important for all of us.

I am delighted to second the motion and thank Senator Ross for putting it on the agenda. I also thank the Government for taking a Private Members' motion in Government time for the first time in my experience. This is the way the House should work on issues where there is a general consensus and we are grateful for that opportunity.

Minister of State at the Department of Education and Science (Mr. Treacy)

Is cúis áthais dom freagra a thabhairt ar an rún seo. Gabhaim buíochas ar mo shon féin, ar son an Tánaiste, ar son na Roinne agus ar son an Rialtais as ucht an rún seo a chur faoi bhráid an tSeanaid.

Mr. Ross

On a point of order, does the Minister of State have a script?

Mr. Treacy

I do have a script and it will be circulated to Members in a moment.

I am delighted to have the opportunity to address Seanad Éireann on the issue of the remuneration of directors of public limited companies. The issues raised are topical, in that we are at present in the middle of the AGM season of many if not most of our publicly quoted public limited companies, popularly known as plcs.

On behalf of the Tánaiste and myself, our Department and the Government, I wish to thank sincerely Senators Ross, O'Toole and their colleagues on the Independent benches for tabling this motion. The Tánaiste has played a key role in this area. I have certain legal, political, governmental and departmental responsibilities additional to those of the Tánaiste and I assure Members that the Tánaiste and I and the Depart ment are at one in trying to ensure that absolute transparency will be available to everyone, irrespective of the size of their shareholding or the company in which investment is made. The Tánaiste in particular has played a strong and committed role in this area.

The Irish stock market is relatively small – approximately 80 companies are quoted – with a market value of 85 billion. The companies listed have a market capitalisation varying from 14.5 billion to 300,000 million. In the year 2000, the ISE raised approximately 5.9 billion, as compared with £939 million in 1998.

In recent years the most significant corporate activity on the exchange was the flotation of Eircom plc. The monitoring and supervising of takeovers is the statutory responsibility of the Irish Takeover Panel, the chairman and chief executive of which report directly to me and whom I met in recent weeks. The objective of the panel is to ensure fair and equal treatment of all shareholders in takeover situations and to provide support and credibility for our financial markets, a task they undertake most creditably. Some weeks ago I signed into law regulations which extend the remit of the panel to cover publicly quoted companies registered here, but not listed on the Irish Exchange, which will provide greater safeguards to investors in such companies in the event of significant corporate activity.

Statute gives, in so far as our Department is concerned, two roles to the Stock Exchange – first, a role as listings authority and, second, a specific role in relation to the investigation of instances of alleged insider dealing. I am currently engaged in examining the year 2000 report. The preceding indicates some of the measures put in place to give greater transparency in the governance of corporate affairs in this State.

Senators will be aware that the Companies Acts, 1963 to 1999, impose considerable statutory obligations on directors in a variety of ways. They are required to disclose interests in other companies, must disclose substantial contracts and can only accept loans from their companies in restricted manners, etc. This is not an exhaustive list of requirements placed on directors, rather it is illustrative.

In the area of the remuneration of directors, the 1963 Act provides that the emoluments of directors be disclosed in aggregate. As Members will be aware, provision for the payment of remuneration to directors is determined by the articles of the company. For example, Article 76 of Table A provides:

The remuneration of the directors shall from time to time be determined by the company in general meeting . The directors may also be paid all travelling, hotel and other expenses properly incurred by them in attending meetings . or in connection with the business of the company.

In 1994 the Company Law Review Group dealt with the issue of disclosure. It recommended that the following minimum information should be disclosed: all salaries, pension contributions and other benefits paid to directors in aggregate; aggregate figures for the performance element of the remuneration of executive directors should be stated separately; and detailed information on share option schemes available to individual directors.

The issue of disclosure of directors' remuneration remained somnolent until March 1999 when the Tánaiste indicated that she was unhappy at the lack of transparency in this area, especially at a time of increasing globalisation of our capital markets, maximum accountability and transparency. She was of the view, one which I share, that full individual disclosure to shareholders would be in the in the best interest of all. In that connection she indicated her preference that the Stock Exchange rules on that issue should be revised voluntarily and that would be the best way to bring about change.

In June 1999 the OECD published its Principles of Corporate Governance, which, it suggested, should disclose sufficient information on the remuneration of board members and key executives for investors properly to assess the costs and benefits of remuneration plans and the contribution of incentive schemes. After intensive discussion, the exchange amended its rules to come into effect for financial periods beginning on or after 1 January 2000. Thus we have now reached the situation of disclosure of directors' remuneration on an individual basis.

With the disclosure of individual directors' pay, a number of commentators have expressed concern, among other places in the media, on the correlation between the remuneration paid to directors and the performance of such companies. This issue was highlighted by Senators Ross and O'Toole. The consequence of the correlation is a structured mechanism to express dissatisfaction where in the view of the investor the remuneration package is not in keeping with the performance. Among the views expressed is that investment and fund managers should consult with their clients and policyholders on this issue.

It is a matter of current interest in this debate that in the case of the proposed demerger and sale of Eircell to Vodaphone, a postal ballot of beneficiaries is in being to determine how the votes attaching to the ESOP 14.9% shareholding should be cast in relation to the resolution to demerge Eircell. Before remarking on that issue, I must state that it is striking to see the size of the market. Somewhere in the region of 200 billion is under management here, of which 75 billion is invested on behalf of Irish clients. A significant portion of the latter is invested in Irish equities to fund pension, life and other schemes.

The goal of the investment manager is to obtain the best return for his client, which can number from single figures to hundreds of thousands. Irish institutions own something in the region of 20% of the Irish stock market, a proportion that has dropped by several percentage points in recent years. This is related, to an extent at least, to eurozone investment possibilities, of which we hope there will be many more.

I am conscious that the Secretary of State for Trade and Industry in the United Kingdom has suggested a number of ideas in the area of directors' remuneration. These include special procedures to allow shareholders to table resolutions for the AGM on remuneration; a requirement for listed companies to have an annual vote by shareholders on the boards' remuneration report; a requirement for them to have a remuneration policy and to seek shareholders' agreement to it annually; annual elections for directors of listed companies; and a requirement for the chair of the remuneration committee to be elected every year.

There are other legal issues in the matter of how to fix pay. One is conscious, as I have said already, that payment of remuneration for directors is normally provided in the articles of the company. There is the ability of shareholders, although in practice this would be institutional shareholders due to voting strength, to propose an amendment to a company's articles in such cases as meet their disapproval.

The current Company Law Review Group, representatives of which I met in recent weeks, received no submissions on issues related to directors' remuneration in response to public advertisements placed as late as February 2001. Similar advertisements were placed in February 2000 and, again, no response was forthcoming. While the final report of the group at the end of 2001 will contain substantial recommendations to correct anomalies relating to directors and on directors' fiduciary responsibilities, it will not include any recommendations on directors' remuneration.

I have been advised that, within the past fortnight, the Irish Association of Investment Managers has written to the chairman of each plc on a range of issues. In that letter the association is seeking, in connection with a review it is undertaking on its March 1999 paper on corporate governance, the views of each listed plc on peer group comparatives in relation to pay and remuneration. I gather the outcome of its review will be published and I look forward to reading it when it becomes available.

With the advent of the directors disclosure regime, another significant element of primary data is now available for investors to assess. Where investors, either primary or by association, wish to invest in a company, they can use such information and criteria as they feel appropriate. The growth of pension fund activism raises the question of whose interests precisely are being pursued in the name of good governance. The increasing tendency of publicly quoted companies to return to closely held forms of ownership through buy-outs and similar forms of reorganisation suggests that dispersed shareholder ownership may not be as effective in ensuring good governance as many have thought. Meanwhile, attention is being paid to alternative modes of governance, including co-operative and mutual forms of ownership, collective employee voice and creditor-based monitoring.

Research in corporate governance needs to unravel the incentive effects of these different forms of ownership and control. Giving shareholders, whether they are institutional entities representing many thousands or hundreds of thousands of policyholders, the right in law to vote on remuneration is problematic. As a means of reining in excessive pay, they might be slow to work. I agree with Mr. John Lawrie's remarks made some years ago that "initially only the most flagrant cases would result in a row at an AGM and a vote against the Board".

However, research in this area in the United States does not show clear trends. It is a fact that boards of directors pay their key staff for performance. While researchers feel that performance is being measured, typically total return to shareholders, the actual director pay plans are often built around other criteria. In a paper by the North Western University's Kellogg Business School the authors ascertained that performance measures often cited were net income, sales, return on assets, earnings per share and share price. Comparing the weighting of those criteria in the directors pay plan indicated that the board of directors got what it paid for. To the extent that there is a problem, it is that directors mostly are not paying for what shareholders want, which is higher total return.

The issues in relation to directors remuneration packages, in so far as the Irish market is concerned, are now unfolding. Clear trends are not yet evident. It is a fact that we have considerable sums invested through investment and pension fund managers. A salient issue is whether such fund or pension managers have the ability to set down criteria for executive remuneration. Is it practical that institutions be mandatorily obliged to consult their clients, who will range in their thousands, on such an issue? Are those consulted competent to understand the issues they are being presented with as such packages are notoriously complex? There will be cost issues involved which I would be concerned would translate to cost to the individual pensioner or saver probably on an ongoing basis.

I mentioned earlier that the Eircom ESOP is currently balloting on the sale of Eircell to Vodafone. Such a ballot, which I presume involves thousands of people, is focused on a strategic issue, namely, a substantial asset disposal of the company. I would be concerned if corporate practices that routinely reward poor main board directors' performance with massive pay and perks jeopardise working families' savings, retirement savings, children's third level education funds and other family finances. Another concern would centre on excessive directors' pay and corporate practices which threaten jobs, as nobody in a company has more at stake than workers and their communities. Perhaps their clients would expect the institutions to whom they have contributed their funds to invest to seek the highest returns and where they did not obtain the highest return to immediately disinvest. Such clients use the services of the institutional investors at no small cost to themselves, as such individuals perhaps have neither the capacity nor the opportunity to invest directly in the markets to ensure a satisfactory return to fund pensions, savings etc.

Calls have not been made on me as Minister of State to change company law in respect of remuneration. I see no prospect of moving in that direction unless a compelling case is made. I would not accept as a starting thesis that something should be done by the State because of the remuneration package given in one plc. That would not be a basis to create new legislation. The current debate on the various issues centring on directors' remuneration has, in the words of the Carpenters refrain, only just begun. Let us see what companies, individual directors, institutional investors and others bring to the matter over the next 12 months or more and let us see what investors want.

Mr. Coghlan

I welcome and support the motion and I thank Senators Ross and O'Toole for tabling it. I thank the Minister of State for his overview from the Department's perspective of this extremely important subject, namely, to ensure that investment pension fund managers consult their contributors and customers before supporting measures which, although beneficial to directors, may be detrimental to small shareholders. The motion urges the Minister for Enterprise, Trade and Employment to "take further measures to ensure that investment and pension fund managers consult with their contributors and customers before supporting measures which enrich directors at the expense of small shareholders".

I agree with all what Senator Ross said except his reference to the Irish Association of Investment Managers as a paper tiger. Perhaps it is to some extent but it has also done valuable work. More legislation is necessary and I urge the Minister for Enterprise, Trade and Employment to introduce it. There should be consultation with the trustees before fund managers cast their vote. I agree that remuneration committees must be seen to be truly independent. I strongly support Senators O'Toole and Ross in urging the Minister for State and the Minister to give direction in this matter. The IAIM should be given statutory powers.

It is a matter of vital national concern that we do everything in our power to ensure that small investors maintain confidence in the economy. They invest much of their savings in Irish equities both directly and through fund managers in various insurance companies with whom they have either pension or medium to longer-term investment products. Consequently, the institutional managers who manage such vast sums for their investors must maintain constant vigilance and act sharply to rule out complacency and slackness in the performance of their investment policy.

The Minister of State referred to the Companies Acts, 1963 to 1999, and the obligations they statutorily impose in different ways. I also welcome the good work done by the company law review group which published its report in 1994. It made recommendations which were a step in the right direction. The most important work done to date in this area, given the sluggishness or reluctance of the Irish Stock Exchange following the division with the London Stock Exchange, was done by the Minister. I was delighted that Senator Ross was lavish in his praise of her. She indicated she was unhappy at the lack of transparency in this area, particularly at a time of increasing globalisation of our capital markets, maximum accountability and transparency, as the Minister of State outlined in his speech.

Another important step was the publication of the OECD principles of corporate governance in 1999. It was after extensive discussion that the exchange bowed to the view of the Tánaiste and the Department in amending its rules, which came into effect for financial periods beginning on or after 1 January 2000. That is how we arrived at full disclosure of directors' remuneration on an individual basis. All of this is vital given that there is approximately 200 billion under management here of which 75 billion is invested on behalf of Irish clients. A significant portion of the latter is invested in Irish equities to fund pension, life and other schemes. In common with one of the previous speakers, my only criticism of fund managers is in that they may have shifted too sharply out of Irish equities.

The London Stock Exchange introduced the requirement for publicly quoted companies to disclose individual directors' salaries before us. Obviously this was a very necessary measure from a performance point of view,

I pay tribute to Ann Fitzgerald and the Irish Association of Investment Managers who campaigned successfully for full disclosure of directors' remuneration and to the Tánaiste for taking on board their views. This is a very important step to allow investors and small shareholders to make a judgment on the relationship between performance and reward. They rightly felt that full disclosure, which is the norm in the developed capital markets of the US and UK, was essential if companies were to be more accountable to their shareholders. I believe that disclosure to date has vindicated their stance.

The combined code on corporate governance, which is embedded in the listing rules of the London and Irish Stock Exchanges states that remuneration levels should be reasonable but not excessive. It recommends that a proportion of remuneration should link pay awards to corporate and individual performance.

In compliance with the code, companies have, over the last few years, established remuneration committees to decide on executive directors' remuneration. This was necessary because they have been required to make a remuneration statement in their annual reports and many engaged independent consultancy advice to assist their decision-making. It would be regrettable if that advice were not fully independent as has been implied. From now on, we will be able to see how Irish companies rate on the quality and depth of that information. So far, based on what has been published, the quality of information the remuneration reports contain has varied widely, with some being very forthcoming while others are obscure to say the least.

A vitally important question relates to responsibility in ensuring that performance and reward are linked and what shareholders should do if they are unhappy with the level of pay. I believe that corporate governance vests responsibility collectively in the board of directors even though, in practice, it seems they often hide behind the decisions of their remuneration committees.

The combined code lays down that members of the remuneration committee should be independent non-executive directors and increasingly independence is being seen as not being a former executive of the company, not receiving consultancy fees from the company, not being retained as a legal adviser and not being a non-executive director for more than ten years. Senator Ross referred to that at some length and he may have had a further point that I overlooked. This leads to the need for a more precise understanding of potential conflicts of interest, which sadly are not often enough understood or appreciated in Irish companies.

It is interesting to note that Ann Fitzgerald of the IAIM has argued that the Smurfit Group has not complied with the minimum standard on disclosure whereas other leading companies such as AIB and Irish Life and Permanent have. She stated that both of the latter "in their statements of remuneration policy gave details of the broad criteria and parameters relating to annual bonus awards to executive directors" and went on to say that "this has not happened in the Smurfit Annual Report. We have no information as to the parameters, percentage of base salary, which can be granted in bonuses to executive directors. Neither do we seem to have the same quality of information in relation to pension contributions".

The IAIM is obviously very unhappy that nearly £8.5 million was paid out in 2000 to the five executive directors of the Smurfit Group which included a whopping £5.2 million to the chairman and chief executive, Michael Smurfit.

An article in the Irish Independent of 28 March by Cyril Hardiman states:

The executives' underlying remuneration was even higher when individual pension contributions, not disclosed by the company, are included.

Moreover, adding in extra share options awarded last June under the group's special long-term incentive plans boosts the value of the chairman's 2000 package to £13m (16.6m), way above the remuneration range to which other chief executives of Irish companies, most of them much more successful, can aspire.

The options, exercisable in the future and conditional on earnings targets being achieved had a value of 10 million at that date.

The Irish Association of Investment Managers (IAIM) said the Smurfit payments "can be considered excessive" by comparison with the standards and performance of AIB and CRH, two of the country's leading companies which, like Smurfit, have an international focus.

IAIM secretary general Ann Fitzgerald, a staunch campaigner for full remuneration disclosure over the years, noted: "On the basis of a total return to shareholders of approximately 2% per annum since 1990, there does not seem to be, in reality, any correlation between the remuneration paid to the chairman/chief executive and the performance of the company."

In contrast, CRH and AIB have produced comparable returns to shareholders of 19% and 17% respectively.

Despite easily outperforming the packaging group over the years, the executive directors of these two companies have been paid considerably less. AIB chief executive Tom Mulcahy earned 1.1m last year, excluding pension contributions – a mere one sixth of Michael Smurfit's remuneration.

Ms Fitzgerald was scathing in her criticism of Smurfit for not disclosing more information in the annual report. It is normal for listed companies to include individual pension contributions when working out their executive directors' total remuneration.

Smurfit chief operating officer Gary McGann, who himself picked up a pre-pension £827,000 (1.05m) package for the 11 months he was on the board, stressed yesterday: "We followed the letter of the law" in this regard.

However, Ms Fitzgerald rejected this as "a specious argument", saying: "From shareholders' point of view, pension costs are an integral part of the cost of employment and should be disclosed"

It is good to note that the IAIM is assessing remuneration committee members of Irish quoted companies in the context of a survey that they are carrying out in compliance with the criteria laid down in the combined code. It is necessary that directors be truly independent in practice in assessing remuneration. This is extremely important work as shareholders do not see what goes on in the boardroom and need to rely on objective criteria in making assessments. The IAIM has pointed out that, in evaluating this year's annual reports, they are focusing, in particular, on those companies where the composition of the board and remuneration committees do not meet with accepted standards, either because the position of chairman and chief execu tive are combined or there is an insufficiency of independent non-executive directors. They have stated:

We will measure them against the combined code and consider whether there is a need for more specific guidelines than the code provides. We will consider adopting recent UK Government proposals that quoted companies give information on the performance of comparator companies and disclose whether the board changed the remuneration committee's decisions with the reasons for the change.

We will also have to consider the most effective ways for investors to exercise a negative vote at an AGM. At present shareholders who are unhappy with the level of directors' awards, for example, cannot vote against them directly. All they can do is vote against the adoption of the annual accounts or against the re-appointment of directors, none of whom may be on the remuneration committee.

We may also publish guidelines, setting out our views and indicating the areas of non-compliance that may lead investors to exercise a negative vote at general meetings.

At the end of the day, institutional investors have to make the decisions that they consider to be in the best interest of their clients. That is what they are paid to do. Whether these decisions involve seeking change or disinvestment will vary depending on their views of individual companies. The one certainty is that companies who want a stable and committed shareholder base should aim to meet the highest possible standards and achieve the best possible returns over time.

The work of the IAIM is vital as most small shareholders are not adept at monitoring company performances and learning to read the signals which affect them. I commend IAIM because accountability to shareholders is everything and there is clear evidence that some chairmen and chief executives are treating their shareholders with contempt by governing the companies with which they are entrusted as personal fiefdoms. They act as though they are feudal overlords.

Compliance with the best corporate governance standards is vital and conflicts of interest must be avoided. In this age of openness, transparency and accountability there is no room for shoddy practices and all cards must be face up on the table. In line with Senators Ross and O'Toole, I urge the Minister and the Minister of State to take further measures. These may be taken as a result of further study or they may be taken as a result of consultation with IAIM, or both. The issue needs further time, as the Minister has agreed, and the House will allow that time. The House urges the Government to take the appropriate steps arising from the further study. I hope that will not take too long.

Ms Cox

I welcome the Minister to the House and am delighted to speak on this debate. I echo the Minister in agreeing that the current debate on directors' remuneration has only begun. We need to see what companies, individual directors, institutional investors and others want to bring to the debate over the next year. It is better to discover what investors want rather than legislating before we understand what is required. Small investors want to see their shares and investments protected while getting a return, as will be emphasised following the Eircom-Vodafone questionnaire. Much of this money is put away for pensions, third level fees and second homes, among other things. Investors may not want to participate in running a company, setting directors' fees, agreeing directors' remuneration etc. They may feel that this area is too complex and whether we agree with the amount of money directors get paid, the area is complex.

It is important to take this matter slowly. This is the first year we are beginning to see the breakdown of individual director's remuneration and salaries at AGMs. As Senator Ross mentioned, there has been a change in the way major investment brokers and fund managers are dealing with this issue. Some are unhappy. We should see how this issue develops so that we can evaluate how best to continue. It is essential that while board and director performance are rewarded, this does not take away from the savings of working families and small investors who are saving for family reasons. The Government agrees with this position. While it is not up to us to decide what directors should be paid, excessive corporate practices which threaten jobs and savings should not be allowed. Small investors provide the funding for companies to move forward through pension funds and shares and their interests should be key in any discussion. The money they invest should be safe.

There is no disagreement on this issue in the House. Senator Ross spoke about the need for greater transparency, and this is something which has become more apparent over the past two years. Initially, aggregate figures for salaries, pension contributions and benefits paid to directors were published. Separate aggregate figures for the performance element of the remuneration of the executive directors were published and we also saw detailed information on share option schemes available to individual directors.

In 1999 the Minister indicated that she was unhappy with the lack of transparency in this area, particularly as we have seen the globalisation of capital markets and a general increase in accountability and transparency. In the view of the Government, full disclosure to shareholders would be in the best interests of all. If one feels entitled to a particular wage or bonus, one should be able to stand up at an AGM, look shareholders in the face and explain why that wage or bonus is merited. Directors should be able to explain that payments to directors will be of benefit to all shareholders.

The Minister and the Minister of State at the Department of Enterprise, Trade and Employ ment, Deputy Treacy, have put a lot of work into this area and are to be commended for the progress made and for their courage in taking on the Establishment, as Senator Ross mentioned. Change is difficult, and Irish financial institutions have gone through a period of unprecedented change in the past five or six years, especially in the past two or three years. Openness, transparency and accountability have made a difference and this is to be welcomed. Public companies are now declaring directors' salaries to their shareholders and to other directors.

I do not fully believe Senator Ross when he says that the issue is not about how much is being paid but about the right to know. However, I agree that the right to know is vitally important. Directors should not be unhappy for shareholders to know the amount a company pays to them. Openness may even make directors feel more worthwhile about their contribution to a company. Senators O'Toole and Ross asked why individual directors did not feel comfortable having their pay publicly quoted at AGMs and company accounts. Perhaps they felt their remuneration was too high, or did not know what others were receiving. However, once pay across similar businesses and sectors is known openly, directors will have a clearer picture of whether they have earned their rewards. If directors are happy that their contribution to growth and profits is deserving of the remuneration they receive, they will be satisfied for shareholders to share that information.

A sea-change is under way in Ireland currently. The Minister spoke about the size of the Irish stock market. Small investors only recently started to acquire shares in Irish companies and read the financial pages of the newspapers to monitor their shares' performance. Due to economic growth and the fact that people have increased disposable income, we are only now beginning to see increased investment in stocks and shares and are gradually becoming educated about it. It will take some time before shareholders begin to reclaim power to the stage at which they can make decisions at AGMs. One only needs a single share to be eligible to attend an AGM and make a statement. It may not be possible to effect change at that level, but one can, at least, start the ball rolling. Investors must undergo a learning curve which companies must facilitate. Any decent public company will ensure its shareholders understand what they can do, what their rights are and where they can effect change.

The independence of directors was raised. It is vitally important that directors are independent and seen to be so. They must not appear to make decisions solely on the basis of what is good for them as opposed to what is good for the company and its shareholders. I have a high opinion of the directors I know in many publicly quoted Irish companies. While most are very well paid, they have shareholders' welfare as their primary objective. They work for the good of the com pany and its employees, the community in which it operates and the shareholders.

Directors' pay should be related to share performance. If that does not happen, the correlation between the company's performance and directors' pay will not be obvious. If a company undergoes a bad performance period, a director's remuneration package should reflect that slump. Equally, good performances should also be reflected in directors' pay. This should be borne in mind by the various remuneration committees being established by publicly quoted companies.

Senator Ross referred to the incestuous nature of directorships in public companies. There are benefits to sharing views on the different ways of conducting business at the boardroom table. Knowledge is very beneficial; if one knows exactly what is happening in the market and the direction in which it is headed, a certain synergy can be achieved through sharing knowledge. It is not desirable that the nature of directorships would work against the companies, shareholders or employees, but there are occasions when the close-knit nature of communications in this area can benefit companies and shareholders.

There is total agreement in the House on the disclosure of directors' salaries – performance related bonuses, pension provisions etc. We should aim for greater accountability and transparency in this area. If directors accept money, they must be able to justify it and outline what they did to earn it. Situations must not arise in which individuals act over and above the good of entire organisations. The common good must always be borne in mind. Small investors, employees and the communities in which companies operate must be catered for. The rights of small investors must be protected and I am confident the Government will continue to take the necessary action to ensure this. I thank the Minister and the Senators who contributed to the debate.

Mr. Norris

Although a signatory to the motion, I did not anticipate speaking on it as this is not the type of subject which normally excites me. Listening to the debate in my office, however, I found it extraordinarily stimulating. We are indebted to Senator Ross for his initiative in tabling this important motion which follows a tradition he has upheld in the House for some time. As a former stockbroker, Senator Ross displayed great courage in a previous session when he opened up the issue of insider trading. He took a significant risk in doing so given his background. As someone who is often perceived as coming from an Establishment background, Senator Ross has shone a light into some very murky corners.

Small investors receive glossy reports containing photographs of very important looking people. Traditionally, such investors assumed that all was well and did not really question a company's underlying ethos. The Minister used the term "insider trading" in the first page of his speech. He did not state that the subject of this debate constitutes insider trading, but is leaving it to me to suggest that there is a clear parallel between the two. The people about whom we are speaking are, undoubtedly, insiders who deal themselves an extraordinarily benevolent hand. I would be suspicious if I was involved in that card game, although I suppose one could justify the rather dangerous ethos at play on biblical grounds: "To him that hath shall be given, from him that hath not shall be taken away even that which he hath."

This attitude seems to be creeping in everywhere. One can see it in the attitude of the Arts Council to the Gate Theatre; the theatre has been chastised because it has not lost sufficient money. Grant allocations have been questioned because the theatre is not in a loss situation. It appears failure is to be rewarded and success penalised. The companies cited here may not have penalised success, but they, certainly, appear to have rewarded failure. It is astonishing to even the meanest intelligence that people in a responsible position in a company should reward themselves with such huge bonuses at a time when the company's dividends and profits are decreasing. That is an absurd Alice in Wonderland type scenario.

Perhaps the penny has not dropped with some of those involved that these are public companies, not personal fiefdoms which can be ruled in a feudal manner, although many seem to be getting away with this. Towards the end of his speech, the Minister pulled back somewhat in stating that he had not received sufficient representations or submissions on particular issues. The Government's action today in happily accepting a Private Members' motion during Government time and the Minister's use of the words "delighted to be here to take part in the debate" signal to me that the Government is sending a message to those involved in this area. For the record, the Minister is nodding. This debate is sending out a clear and important message that the Government is watching and that if matters do not change voluntarily, some type of statutory move will be made. I believe we are correct to be concerned.

I wish to look at one or two aspects of the Minister of State's speech. He states that he would be concerned if corporate practices that routinely reward poor main board directors' performance with massive pay and perks jeopardise working families' savings etc., investments which are intended to produce yield to pay for children's education and so on. I am concerned about the grammatical construction of that sentence. He states he would be concerned if certain things can be shown to jeopardise these pensions and so on. Built into that is an extraordinarily calm acceptance that there is a situation which routinely rewards poor main board directors' performance. This is something that ought to be looked at because we cannot just accept it. Frequently poor performance is given a paradoxical enormous reward. That is something which concerns me and should concern everyone. The Minister of State goes on to say that clients might expect the institutions to which they have contributed their funds to invest to take action in this regard. However, Senator Ross has exposed why they will not do so, that is, they are all so incestuously inter-related. Many of the main investment funds have people who are on the board of these companies. There is a total spider's web of inter-relationship and the fact that there is a golden circle has been clearly demonstrated here today. How can one possibly expect these people to vote against themselves, because that would not be human nature?

What makes me laugh is the revelation that the principles of capitalism and the free market do not seem to operate once one rises above a certain level inside a company structure. What happens to the free market philosophy when remuneration is being decided and where are the severe capitalist criteria in terms of profit and reward being applied in this situation? The private investor is just whistling in the wind because the Minister of State states that such individuals have neither the capacity nor the opportunity to invest directly in the markets to ensure a satisfactory return to fund pensions, savings etc. Obviously these institutions will not operate in the interests of their investors. That raises the question whose money is it in terms of the trust funds. The directors of these trust funds appear on many occasions to have acted as if the money was theirs, rather than that they were charged with the responsibility for the small shareholders and the investors, which seems to be a very bad practice.

On the payment of these enormous sums, if a board decides more or less in secret to pay itself and its members these enormous sums in circumstances where market share is declining, where yield on the shares is also declining and where profits are declining, it raises questions about the obligations of those directors who have a legal obligation to behave responsibly in the interests of the shareholders. It suggests at the very least that people who grant themselves enormous sums in remuneration are guilty of, if nothing else, poor business judgment. If their vision of the future of the company is so obscured by their personal greed and the fact that they want to get a good position for their snout in the trough, that suggests that they have bad judgment and are incapable of operating in the best interests of the company. The fairly run-of-the-mill provisions for the remuneration of directors rehearsed in the articles of companies are in very vague form. They state that the remuneration of directors shall from time to time be determined by the company in general meeting. Senator Ross demonstrated the weakness of this. I hope the Minister of State will look at this aspect and consider some statutory regulation.

He refers to the fact that in 1999 the OECD published its Principles of Corporate Governance, which it suggested should disclose sufficient information on the remuneration of board members and so on, and that the IAIM has an initiative in this area. Senator Ross demonstrated that the board of Smurfit's was aware of these ideas from both the OECD and the IAIM, yet it cavalierly simply referred to them and then dismissed them as if they were of no consequence. In such an instance the Government would be correct to use the opportunity of this debate to fire a warning shot and signal its intent that, if something is not done by the companies themselves, it may take specific action.

I congratulate Senator Ross on bringing this matter to the attention of the House. It was a courageous thing for him to do given his background in commercial journalism. He has exposed something which needs to be looked at and about which the public should be aware. I note he has had some success with his colleague, Mr. Dunphy, in acquiring proxy votes and turning up at meetings. However, I do not believe this is sufficient because they will always be defeated by the bloc vote which is wielded by institutions, not apparently in the interests of their investors, but in the interests of an "old boy" network. I regard this with a certain irony when I recall the squawks out of the capitalist lobby against the Labour Party in Britain on the parallel issue of bloc votes for trade unions. Precisely the same is happening inside the structure of our own corporate world.

This is a very important debate which I hope will be widely reported. It certainly deserves to be widely reported because the Government, above all others, has encouraged the small investor to make an investment in the various businesses and publicly quoted companies. It is very disillusioning for ordinary small investors to realise the operations of these companies frequently are in the interests of the directors of the companies to the detriment of the ultimate financial interests of the small shareholders.

Mr. Dardis

At the outset, as is customary on these occasions, I declare an interest in that I am a shareholder in some publicly quoted companies on the Irish Stock Exchange. By the time I am finished, I am not sure if they will thank me for having said that.

I welcome the Minister of State, Deputy Treacy, and commend Senator Ross and the other Senators on tabling the motion. Perhaps it is not surprising that as a member of the Progressive Democrats I am enthusiastically in favour of the motion which commends the Tánaiste in her capacity as Minister for Enterprise, Trade and Employment. It is important to look at the context of the debate. I suspect there would not have been as much demand for such a debate even as recently as five years ago. Perhaps it is a measure of our increased prosperity that there is now a greater degree of personal investment in publicly quoted companies, pension funds and equity based savings. That underlines the need to ensure those investors have a greater degree of control or influence on the investment managers and, through them, on the companies in which the funds are eventually invested if they are in the equity based end of the market.

The fundamental issue is whether the interests and wishes of those individual shareholders are being fully met. If one examines, historically, the behaviour of companies in this jurisdiction and elsewhere, it is the case that some directors and managements played fast and loose in the way in which they conducted their affairs because there was no accountability. They dealt with few institutional investors and the broader market did not enter into it. As has been stated on several occasions, it was a cosy little club and, to a degree, that is still the case.

The Tánaiste and Minister for Enterprise, Trade and Employment is dealing with Committee Stage of the Company Law Enforcement Bill in the other House, but there are certain things that she would have liked to have said about the motion, although the Minister of State, Deputy Treacy, has dealt adequately and ably with it. The explanatory memorandum of that Bill contains a startling point regarding the report of the working group on company law, compliance and enforcement, which was chaired by Mr. Michael McDowell before he became Attorney General. It is an unusual statement in an explanatory memorandum, but it states that the working group found that Irish company law had been characterised by a culture of non-compliance and a failure by companies and their officers to meet their obligations under the Companies Acts. The result is the establishment of a director of corporate enforcement who will take over the functions of the Minister for Enterprise, Trade and Employment regarding the investigation of potential company law offences. The Bill will come before the House at a later date and while I do not wish to anticipate the debate, it indicates the background to and context of the motion.

Shareholder democracy is well established in a legal sense, but is less established in relation to the ability of the beneficiaries of pension funds and other managed investments to influence the companies in which the money is invested. This contrasts with the position in other jurisdictions, particularly the United States, where shareholder democracy is much more developed and pension fund members have the ability in many cases to influence how their trustees and investment managers manage their money in areas other than those related solely to financial reward. The MacBride principles governing investment in Northern Ireland and the Sullivan principles for South Africa were made real only because pension fund members could mandate their trustees to act in particular ways. Pension funds are to the fore in raising corporate governance standards in the United States and are leading the way on this front on a worldwide basis. There is no reason that Ireland should be excluded from that development or that it should not follow the model of the latent power of pension funds.

Traditionally, the mandate of pension fund trustees and investment managers was to secure the best possible financial return for the pension fund members consistent with reasonable levels of risk. This remains the best way to manage pension funds. Nevertheless, there is a strong argument that pension fund members should be able, in a democratic way, to mandate their trustees to act or vote in particular ways on matters which are non-financial and do not undermine or compromise the fiduciary duty of trustees. I do not suggest that all matters on which trustees or investment managers make decisions should be put to a vote of pension fund members, but it would be useful if a mechanism was available to pension fund members to make their views known and, ultimately, mandate the agents to act in a particular way.

This is related to the point that there is now much more individual investment in such products. It is reasonable to assume that those investing their money should have some degree of control or influence on the outcome of some of the decisions made by the managers and trustees of the funds. As the Minister said, the mechanisms and rules should be carefully designed to ensure the fundamental purpose of pension funds is not undermined or that particular pension plan members are not disadvantaged. I am sure that can be done given the level of expertise in the public service and elsewhere.

The wider context is that people are, increasingly, providing for their future retirement. This is related to my point about individuals investing in equity products. Contribution pension plans, which are more commonly established than defined benefit plans, reflect the change in the world of work. This change is all about and the Government will soon introduce personal retirement saving accounts which should increase the number with pension savings. If all this is added to the increase in equity savings, it is clear that the financial power of ordinary savers must receive increased recognition. This reflects the change in the level of personal investment by individuals compared to five years ago and the situation is markedly different from the position ten years ago.

There is a greater need for proactive financial education of the public, given the trend for greater investment in personal savings accounts, retirement accounts and equity funds. I am pleased that, as part of the new regime of financial regulation in Ireland, the Tánaiste and Minister for Enterprise, Trade and Employment and Minister for Finance have brought forward the establishment of the new statutory post of director of customer protection. This person will have a mandate to promote the financial education of the public. This is a positive and forward looking move and the Tánaiste and Minister for Enterprise, Trade and Employment has been to the forefront in terms of putting the consumer and the customer at the heart of financial regulation and other areas.

I referred to the Company Law Enforcement Bill and the Office of Corporate Enforcement. That is a step in the right direction and the Minister can correct me if I am wrong that there is a commitment to a bi-annual review or amendment of company law. This is important because it is obvious that companies have a great degree of expertise available to them and can be ahead of the posse in devising weird and wonderful ways of legally circumventing the intention of the Oireachtas. In that context, it is important to ensure regular updating of company law. I recall the large composite Bill introduced when Deputy O'Malley was Minister for Industry and Commerce. It was a voluminous and complex Bill and it is appropriate that such matters are reviewed and updated regularly.

Regarding pension fund management, the central issue is in whose interests the pension fund manager is acting or whose interests he or she has at heart. Obviously, it must be the beneficiaries of the fund, the shareholders, but, as Senator Ross and others highlighted, that was not always the case. It came back to the question of an old pals act or a golden circle and, perhaps, the management was not as vigorous or forceful as it should have been in defence of those who had invested their money. This is related to the issue of empowering the investor. This power has been latent because if one is an individual shareholder in a company, one has no influence whatsoever. If one receives one's proxies in the letterbox before the AGM, there is no point in filling them in and returning them because one knows they will have no influence whatsoever on the outcome of the meeting. However, if individuals form a corporate entity through a fund manager, their influence will become much more powerful. It will have the capacity to effect change as happened in the United States, given that the core mandate is the power of the shareholders.

To be fair to the professional managers of the funds they do not always feel that they have been given a professional mandate to act in a certain way. Some of them, as has been pointed out, have done extremely well and have stood up to powerful influences. They are to be applauded for that. There needs to be more coherence in that area. I do not know if that should be done by regulations or voluntarily but it should certainly be looked at. The question of the powerlessness of the individual shareholder is certainly an issue. Circumstances have changed and the whole context needs to change.

The interweaving of directors, which has been referred to by Senator Ross, is of course true. If one considers a cross-section of publicly quoted companies in this country or elsewhere, one finds names recurring across the spectrum. That is not very healthy. It is obviously difficult in a small society to have a large representative group with the necessary experience and qualifications to go on to every board. That is not to say it cannot be done. It can be done and there is a case to be made for the directorships of these companies to be more diverse. The matter of the Irish Association of Investment Managers has been referred to. I believe in general managers take their duties seriously and try to ensure those who invest are protected.

The other question, which has become central to this debate but is not central in my view, is the remuneration of directors. It is an important issue and I would not understate it, nevertheless I do not think it is the key issue. I agree with Senator Ross that the pay of directors should be related to the performance of the company. It is ludicrous if company profits fall that the remuneration of the directors should rise. Anyone in business on their own, whether they be a farmer, a shopkeeper or something else, knows very well that if their business decreases their income decreases. The same rules should apply to the directors of public companies. There must be some connection between pay awarded to directors and the performance of the company. That is not just the capital performance on the stock market but the actual profits generated by the company, although the two things are related.

I would like to know if anyone could point out to me a director in a public company who was defeated by a vote at a company's annual general meeting.

Mr. Ryan

Bernie Cahill.

Mr. Dardis

I am talking about a plc where the proxies had the effect of removing the director rather than a palace revolution or coup or where the institutional investors decided someone was not to their taste. The goal of this must be to obtain the best return for the client and the company.

I have spoken frequently in this House about a certain culture which survives in this country. It is, in my view, the last vestige of colonialism. It is evident at some times in the public sector. It is certainly evident in companies. It is that the peasants cannot be entrusted to manage things properly. They do not know how things should be done and an elite group should decide on their behalf, in their best possible interests of course. The natives are not to be trusted. That is evident in the higher levels of company law.

I hope that when those on the boards of various companies sit down to their Chateau Petrus or Chateau Latour this evening they will reflect on these matters, although I doubt very much that they will. I suspect that while what we have said today will have an influence on the Minister and the Department, I doubt it will have much effect on the consumers of the Chateau Petrus and Chateau Latour at board level.

Mr. Ryan

There is a story I used to enjoy about Lee Iacocca, the former chief executive of General Motors. He visited Japan in the entourage of an American President and met his counterpart from Toyota. They had a discussion in which the chief executive of Toyota asked him if it was true that General Motors had not been doing well in terms of sales and profits. Mr. Iacocca reluctantly confirmed this and the final question from his Japanese counterpart was to enquire why Mr. Iacocca was paid a salary six times more than he.

This motion, however uncomfortable it might be for an Opposition spokesman congratulating the Tánaiste—

Ms Cox

Try hard.

Mr. Ryan

Sometimes I think members of the Labour Party have less difficulty congratulating the Tánaiste than members of Fianna Fáil. The Minister for the Environment and Local Government forgot he was in coalition not so long ago when he was singing the praises of a Fianna Fáil Government. Senator Quill had to remind him—

Mr. Treacy

I think the Senator has the wrong man there.

Mr. Dardis

I am sure the Leas-Chathaoirleach will remind the Senator not to be provocative.

Mr. Ryan

Members are easily provoked.

The Tánaiste is to be commended for her willingness to face down the bluff of people in the Stock Exchange and other areas about their determination to retain a level of secrecy about their individual incomes. It was entirely wrong. I was entertained by the reasons they gave in the mid-1990s for retaining that secrecy. One of them was fear that they would be kidnapped. This was taken seriously. The total remuneration of directors was available but the remuneration of individuals was not. If potential kidnappers knew that the average payment was £300,000 they would not kidnap a director, but if they knew that one director was getting £1 million and another was getting £250,000 then they might kidnap one of them. It was the height of nonsense and part of a certain arrogance that seems to infect people in those places.

There are two reasons for wanting a higher level of disclosure and accountability and influence over the decisions of investment and pension fund managers. The first of those is equity, the second is efficiency. Both are affected by the degree to which individuals feel accountable. If individuals are not accountable to their customers they will do what is necessary to satisfy the terms of their contract with the customer and then do what suits themselves. That is neither equitable nor good for economic efficiency. The contrast between the aggrandisement of executives in certain cultures and the realisation that such aggrandisement is not good for business or society which can be found in other cultures, often correlates well with concepts of equality in society. And, incidentally, the acceptance that wealth brings with it not just privileges but enormous responsibilities. That is what this debate is about.

We should start by reflecting on the scale of some of the rewards. A member of the Committee of Public Accounts which investigated the DIRT scandal said to me that across from him at the hearings were arrayed the well clothed bodies of eminent bankers. Any one of whom was paid more than the seven members of the investigating committee combined. It dawned on him that there is a different world, unknown to most of us other than to look in from the outside, in which the definition of adequate reward begins at about £100,000 and moves upwards, whereas for most people the definition of adequate reward begins at about £20,000 with the upper limit being £50-£60,000. There is an element in Irish society which sees itself in a quite different framework. The range of rewards is different. The question which society must ask is whether these people are doing something that is both so important and so valuable that in terms of income and pensions they are entitled effectively to live on a different planet. There is not much evidence that they are so wonderfully talented, skilled or innovative.

I remember 15 years ago, when the Irish Permanent was demutualised, information was disclosed that non-executive directors were paid £20,000 for attending four meetings a year. That was regarded as the minimum a non-executive director could be paid at a time when the average male industrial wage was about £10,000 a year. What criteria justify that level of payment to persons who are part-time members of boards, who take minimal risks, whose attendance at meetings is not enormous and whose duties are not onerous? There is a presumption that £20,000, £30,000 or £40,000 a year is the least a person can be expected to paid for being a non-executive director. It suggests an entirely different world.

I wish to cite some facts from an American website entitled inequality.org. In 1960 the average ratio of the salary of a chief executive to that of the average employee in a corporation in the United States was 41. In other words, the average chief executive was paid roughly 40 times as much as the average employee. The figure increased to 79 in 1970 and decreased to 42 in 1980, presumably because of the recession in the 1970s. In 1999 it was 475. What criterion was used to justify that explosion in inequality in the United States? I am not aware of anything in terms of economic performance which would justify it. The United States has enjoyed a period of sustained growth of 3% to 4%, but that hardly justifies a tenfold increase in the gap between the salary of the average chief executive and the average worker. It is, however, related to certain other factors to which I will return. It is related to the increasing generosity of the share options offered. It may be related to the increasing generosity of the capital gains tax exemptions or the pension funds made available.

The truth in Ireland is that we do not know very much about these matters. There is the scandal of a family fix-it in what is supposed to be a plc, where members of the family report to a person who is paid less than them, even though the person concerned is further up the company hierarchy. Very little can be done about this. It is difficult to argue the case for it in terms of any reward, performance or incentive basis or other logical arrangement other than the fact that the company is owned by the family who believe they are entitled to be paid more than those with more onerous jobs than them. It is a wonderful concept which has very little to do with the function of a plc. Perhaps the Minister of State should take a slightly less benign view. It is not just one company, it has crystallised reservations people have had for 20 years about the closed shop method of fixing or settling corporate rewards.

I do not have any problem with rewarding people who take genuine risks, something of which we on the left are always accused. However, I do not know anyone in the banking sector deserving of reward because none of them ever took a risk in their lives. They have all managed to move from one safe job to another. Neither do I have a problem with rewarding people who are genuinely innovative. One does not see much of this in the corporate sector, although there are exceptions which I will mention. Nor do I have a problem with rewarding people who are genuinely successful in a competitive market, because that usually means a person is doing something better than others in a way which is good for consumers. Success in a non-competitive market means a person has succeeded in manipulating customers and consumers. I can think of examples of success, such as Iona Technologies where Chris Horn has been enormously successful. Another is Elan, a company which has spent considerable sums on research and development. Other examples are the dotcom companies, however dodgy their future may now seem. They were established by people with imagination and I would not begrudge them rewards.

They are not, however, the people whom we are discussing. We are talking about safe, stolid companies in comfortable, non-competitive sectors of the economy, which is what the banking sector is. It is, effectively, a cartel cared for by the Central Bank which is so obsessed with the stability of the sector that it has allowed layer upon layer of fat to grow on it to secure the basic idea of its stability. This has been done at the expense of the customers of the banks. There is a similar regime to a considerable degree in the insurance market. Due to concerns about proper funding, comfortable cosy arrangements have been formed, crystallised in the appalling overcharging of young people, something we know to be a fact. As young people pose a slightly higher risk, most companies opted out and those who stayed in discovered that they could make more money out of young people than out of anyone else. Companies are allowed to be in a position to do this because of the fear of a threat to them if they are not allowed to be like that.

I repeat that I do not have and never have had any problem with substantial rewards for genuine risk and achievement. My problem is with those who receive rewards. I do not regard someone who is fortunate to receive on the cheap a licence to run a second mobile phone service with a low level of capital investment, makes £250 million from the sale of his company, leaves the country for 18 months to avoid paying capital gains tax on the money and then comes home brandishing his Irish credentials to claim the right to take over Eircom as a model of either corporate, personal or social responsibility, nor as an example of the type of risk taking which deserves such rewards. People should be rewarded with incentive schemes when they perform properly, but we do not know how these are done, the reason they are done and, until recently, to what extent they were done. We were, simply, given global figures. This used to happen in so-called mutual societies, such as building societies owned by their members. They would say nothing about how much was being paid when dubious arrangements involving family members and relations of the directors were entered into. It was and still is a wonderful arrangement for those on the inside.

On the issue of the scale of rewards for those involved in pension and investment funds, my colleague and friend, Senator Ross, has consistently indicated that most of our pension funds underperform by comparison with the market and that anyone who decides to invest money in half a dozen major plcs would do better than the reward he or she would receive from any pension fund, especially in the medium to long term. This is supposed to be a thrusting and competitive area and those involved are thrusting and competitive, but only in how they make money for their funds. They do not perform well for those who provide the money, namely, those who contribute to pension funds. Fund managers are not models of enterprise and effort. They are cosy, safe and well able to safeguard their interests without deferring to the interests of those who pay for their capacity to play the market.

When these institutional shareholders attend the annual general meeting of plcs, the remuneration of directors may be questioned and an attempt made to vote against it, but the institutions vote to retain the directors' exorbitant level of remuneration. This happens because all the people who attend AGMs are in similar positions in other plcs and will not allow awkward and unhelpful lay people to enter into the cartel which guarantees that no one in the cosy circle of directorships is paid anything like the rest of society. There is hardly a chief executive of a single plc who is not being paid at least twice and probably three or four times the salary of the Taoiseach. This is not an argument for inflating the Taoiseach's salary. There is still some sense of decency among politicians. However, a funda mental question must be asked when plcs whose performances are mediocre reward many of their middle ranking and senior executives with salaries which are vastly greater than that of the Taoiseach, who has a responsible and extremely demanding job – whatever one thinks of how he does it – which consumes enormous amounts of time, involves huge sacrifice and produces limited financial reward. It is a cheap shot for newspapers, particularly those in the group owned by the person whom I understand I am supposed to describe respectfully as Sir Anthony O'Reilly, to criticise Ministers' and politicians' salaries while their executives are rewarded with vast sums out of proportion to their performance.

Ireland is faced with a peculiar dilemma. This is not Boston, where capital is held accountable with vigorous regulation, or Berlin, where capital has a tradition of social responsibility. We have become a seedy offshore island in which grubby people can make money and be accountable to nobody. Like our neighbouring island we have, I presume, rolling contracts whereby executives always have two or three years left in their contracts and even if they underperform and are dismissed they are compensated for the remaining years of their contracts. The trick of the rolling contract was invented in Britain in the 1980s. We also have the mutual support society in which no one questions anyone else.

I believe in rewarding effort and particularly in rewarding risk taking, achievement and innovation. People deserve incentives to encourage innovation. There is a clear and inexorable logic which dictates that companies must make money if they are to reinvest and attract further investment. No one disputes that. Let us not confuse this with the naked greed which characterises corporate Ireland. This greed defines a minimum income on a level which most of society could never imagine. It is in this context that the Minister of State's speech was so disappointing. It was limited, conservative and protective of vested interest.

The Minister of State said, "No calls have been made to me as Minister to change company law in respect of remuneration." Senator Ross has written on this topic, perhaps once a month, in the Sunday Independent and it has been raised frequently by various Members of the House. The Minister of State is actually saying that none of the people he thinks are important has asked him to do anything about company law in respect of remuneration. The people the Minister of State thinks are important are those who are doing well out of the existing situation. They will not ask him to do anything about it. Virtually everybody else, including lobby groups such as the Conference of Religious of Ireland, the trade unions and large numbers of Members of the Houses of the Oireachtas who talk about inequality and have suggested that corporate greed is one of the things which may undermine social stability and solidarity, have called for something to be done about company law in respect of remuneration. Obviously, these people do not have the ear of the Minister of State. Those who have are doing well out of the existing situation. As long as the Minister of State listens only to them there will be no calls for change.

Mr. Treacy

I listen to everybody.

Mr. Ryan

The Minister cannot have heard all the people who have been calling because his speech says, "No calls have been made on me as Minister to change company law in respect of remuneration."

Mr. Treacy

A series of advertisements was published over two years and there was not one response.

Mr. Ryan

That is not what the Minister of State said in his speech, and he has provided Members with a written script. We know that Ministers must have scripts because they enunciate Government policy. His script states that no calls have been made on him as Minister to change company law. The Minister of State can never say that again. I am calling for a change and Senator Ross and others have also called for it. That piece of the script will have to be left out in future because the Minister of State is now being called to do something about corporate remuneration.

Inequality is socially destructive. It makes societies worse. There is evidence that inequality affects people's health and it limits society's willingness to deal with real problems such as housing and public transport. Societies which have a commitment to reducing inequality are also the societies which deal with those issues. As long as people like the Minister of State are in power, who believe that inequality is a good thing and that allowing corporate greed is good for society, we will not deal with the other symptoms of inequality. Although I congratulate the Minister on what she has done, I doubt if she will move very far in the direction in which we should be going.

Mr. Mooney

I welcome the Minister to the House and I commend my friend and colleague, Senator Ross, for his initiative in presenting this motion before the House.

A couple of years ago at the time of the impending IPO of Telecom Éireann, like many of my colleagues I enthused at the prospect of the concept of shareholding dawning on a new Ireland in a period of economic prosperity. Today's debate affords me the opportunity to apologise for the enthusiasm with which I embraced this concept. In theory it seemed to be working wonderfully well.

As a minor shareholder – anyone who cares to look at the register of Members' interests will see the extent of my shareholding – I have been following the stock market and financial instru ments as a hobby for a number of years. I had watched the highly successful IPOs launched in Britain since the sale of British Telecom shares and all of them had done very well. There seemed to be no reason the Telecom Éireann IPO would not do equally well, especially at a time of phenomenal economic growth. Two years later, with hundreds of thousands of people, I am nursing a heavy financial loss. It is a tribute to the courage and bravery of those shareholders that they have not sold out, as one would expect nervous shareholders to do. If it was happening in an American environment, they would long since have distanced themselves from what has been seen as a failing share. That is the reason I am in apologetic mode.

For the vast majority in this country, shareholding was a new concept. Others and I, both in this House and outside, encouraged people to put their money into Eircom because it seemed to be a safe bet, but we added the rider – very much tongue-in-cheek – that what goes up can come down. None of us anticipated, however, that having gone up ever so slightly it would come down with such a crash and hit the floor with such resounding force that it has been damaged, although I hope not beyond repair.

In that context, I welcome Senator Ross's initiative. Purely from a shareholder's point of view, I also share serious concerns about the way in which Eircom has gone about its business. The suggestion that its directors should somehow be rewarded for the pathetic share performance in the last couple of years has caused me and others a great deal of anger which was expressed eloquently by Senator Ross, representing many of the smaller shareholders at the last AGM. I have no doubt that he will be loading his barrels to have another go when next we meet.

Having said all that, I compliment the board of Eircom on having the vision to initiate discussions with Vodafone, notwithstanding the fact that the telecoms sector has been going through an extraordinarily difficult period since the flotation two years ago. I acknowledge that the board of Eircom could not possibly have anticipated that there would be such a run on its stocks that has brought us to today's sorry state.

We, in Ireland, have suffered from what I can only describe as the poor management practices of many of the major companies, Vodafone included, which seem to have completely lost the run of themselves in the auction process in the United Kingdom. They were buying up licences for third generation mobile phones at such inflated prices that even those who had absolutely no knowledge of economics, or of how the market works, were beginning to question how, in the name of all that is holy, they would be able to recoup the amount spent purely on the acquisition of the licence, not taking into account the amount it was going to cost to invest in third generation phones.

What is the current situation in relation to the 3G networks? Worldwide evidence now indicates that most of us are quite happy with the generation of phones we have. It is not rocket science. What do most people want a mobile phone for? They want to switch it on, make a call, receive a call and switch it off, but we have been bombarded in the last couple of years with all sorts of hype surrounding the 3G mobile phone. We are told that it will be able to do everything, including making a cup of tea, but most could not care less about it, as recent surveys have suggested. This begs the question as to where Eircom is going in its merger with Vodafone. As I said, I welcome the initiative. It is the best possible deal for Eircom and I will be strongly advising shareholders to support it. I have sent back my particular tuppence ha'penny worth and hope everybody else will do the same because it really is the best future we have got. Eircom is unique among European telecom companies in that it has no debt overhanging it. It is, literally, going in as a clean operator to join a company which is acknowledged as the world's largest in its field. That has got to be good for shareholders in the medium to long term. I advise them to stay in and hold onto their shares.

In the context of the remuneration involved, it is not at all surprising that shareholders have become angry and agitated about what they see as inflated sums being given for poor performance. In a way, however, I feel sorry for Alfie Kane and his people having to face that barrage of criticism. While it may seem that I am looking after one of my own, I wish to compliment the chairman of Eircom, Mr. Ray MacSharry. Whatever the criticisms for failings that may be levelled at Eircom for the way in which it has managed matters since the flotation, I have always had the height of respect and admiration for Ray MacSharry who has a proven track record in business. The fact that he has given his services to that particular business at the invitation of the Government is a tribute to his own civic mindedness. I have every confidence in him. If he was not there, I, probably, would not feel as confident about the future well-being of my shares in Eircom.

There is a need to create some type of vehicle whereby shareholders can have a say in what is going on, but there is another element to it. Institutional investors who make up the bulk of shareholdings and represent the vast majority of those who have pension plans, and others, rattle the cages whenever it is necessary to do so. It has not happened here to any great extent and, although there was an expectation that it would at the Eircom AGM, it did not. It has happened recently in the United Kingdom, however, in the case of the managing director of Marks and Spencers.

That company has been going through an extremely difficult patch, so much so that it has circled the wagons. It is closing down its European operations and will concentrate exclusively on the UK market. Its share price has halved in the last two years. The reaction from the board of Marks and Spencers to its relatively new man aging director, Mr. Luc Vandevelde, was not only to increase his salary, but also to propose that he should receive a performance-related bonus of £800,000, this at a time when the share price had fallen from over £6 to £2.20 and when the company was closing its stores left, right and centre. It happened at a time when the managing director's refocusing of the Marks and Spencers in-store brand was failing at such a disastrous rate that it was not even meeting its own low quarterly projections. Yet, the board decided to give Mr. Vandevelde a performance-related bonus on top of the £2 million salary he had already received. What happened? Mr. Vandevelde had to withdraw and voluntarily give up his performance-related bonus within the last two weeks. This was because the City of London decided that enough was enough. The institutional investors rattled the cages, wielded their fists and said that performance-related bonuses should only be given for legitimate reasons.

In the case of Marks and Spencers, the bonus was totally unjustified and caused a great deal of anger among small shareholders. It was the institutional shareholders, however, who took the initiative. I hope it will be a lesson for institutional shareholders in this country in order that they will wield the stick when they see corporations which are not performing. There are a number of examples that have been outlined during the debate which I will not repeat.

The Minister referred to the United States and I take the point he made which was a specific reference to the Kellogg business school and how the criteria for performance-related pay bonuses were arrived at. Interestingly, however, the United States may not be the best example of how to pay corporate bosses because the corporate culture in the United States, and the wider environment in which shareholders operate, is not one of begrudgery or envy of material success. It is the complete opposite. To illustrate the point, an apocryphal story is told of the American who sees one of his fellow citizens driving a Rolls Royce down the street and says: "How can I make enough money to buy one of those cars?" An Irishman watching one of his fellow citizens driving a Rolls Royce down O'Connell Street asks: "How the hell did he get the money to buy that?" Success is encouraged in the United States, but there is a different culture here.

Only recently I heard a quote to the effect that in order to be successful in the United States corporate jungle one has to be a failure first. To be a failure in this society is to be branded for life as if one was a common criminal. I sometimes wish that we did have a culture of encouraging and acknowledging success, instead of the old, mean-spirited begrudgery that sometimes raises it head. What immediately springs to mind is the hypocritical reaction from some political quarters to the Taoiseach's proposal for a national sports stadium.

This is a typical example of mean spirited, nasty begrudgery of the traditional Irish kind where there is a lack of vision on the part of people who do not know how to create a legacy. It is probably part of the corporate culture in which we have grown up. I wish the day would come when the shackles of begrudgery would be removed from our shoulders, success would be acknowledged and encouraged and, if somebody stumbles and fails, he or she would not be branded forever but encouraged to get up again and work in the best interests of society generally.

Such people will make money in the process. Denis O'Brien is not my favourite person, not because I know the man well but because of his style. However, I admire him for what he has done. He failed several times but now he is a rich man and he is spending some of his money on good causes. Last week I attended a presentation by Mary Lawlor, the former head of the Amnesty International Irish Section, who is now heading up an organisation called Frontline, which aims to protect human rights defenders across the world. Denis O'Brien is the main financier of the organisation.

I am sure there are many other instances of individuals in corporate Ireland, particularly those among the nouveau riche, who have made money as a result of the economic policies pursued by the Government. However, they are investing some of their wealth for the betterment of the less well off. I would like to see the development of such a society and it is the type of corporate culture that I would encourage. The Minister of State will have no difficulty agreeing with the philosophy. We will always criticise such individuals and have difficulties with the way they operate at corporate level but in general it is good for the country.

US President Harding in the 1920s was asked what was America about. He replied, "The business of America is business." I would not mind if somebody said the business of Ireland was business because at the end of the day the creation of wealth can only raise the standard of living for everyone. That is similar to many of the issues addressed by Senator Ryan and all of us subscribe to that philosophy.

Dr. Henry

I welcome the Minister of State whose contribution was impressive and I thank Senator Ross for tabling the motion. I am very much an innocent abroad in this area. Senator Dardis was wise enough to declare his interest in the stock market and, while I have no stocks or shares, I subscribe to a pension fund. However, I was horrified to discover that my best interests were not at heart. I was particularly annoyed to find this was the case because while 39% of the workforce comprises women, they are in an invidious position regarding pensions compared to men. Women have an 11% lower pension rating in comparison to men because they rely on spouses and partners frequently to provide pensions in their old age and they have the problem of breaks in service.

How am I supposed to encourage women to become more involved in pension funds when such a carry on, which is outrageous, can take place where the best interests of those who subscribe to pension funds are not put forward by those who are responsible for the money? It is a depressing scenario and I hope the Minister of State will do everything he can to rectify that. However, those who run pension funds can do a great deal more. The trustees of the funds have an onerous task and must carry out an important duty. They must ensure they obtain the best return on the funds they invest, but at the same time they must not take unreasonable risks with the money.

Many pension fund trustees transfer the money to banks to invest but, as Senator Ross pointed out, frequently the same people are directors of the banks and public companies in which the funds are invested. This is an extraordinary scenario in that the right hand knows only too well what the left hand is doing and perhaps it would be better if there was at least a Chinese wall between them. That does not seem to be happening. The directors of each group are easily supporting the activities of the other group. We must first query the overlap that occurs when pension funds are managed by a bank whose directors are also directors of the companies in which their funds are placed. This is a difficult problem because Ireland is a small country and such overlaps can easily occur.

Senator Ross referred to the almost consanguinity between investment/pension fund managers and those in the companies in which they are investing and the lack of investigation into the high remuneration of some directors and the exorbitant expenses which are claimed in many cases. This is particularly difficult to understand when companies are not doing well.

I do not have any involvement in such companies financially but at their AGMs the small investors who attend are in a weak position regarding the questions they can ask because the directors hold the proxy votes from the investment fund managers and can say there is no need to answer certain questions or that the remuneration is correct and so on. It is profoundly depressing that many company directors who do not give the answers that are required consider themselves pillars of society. That is laughable as they should set an example to the rest of society regarding how best to deal with the funds for which they have responsibility on behalf of people who are often not very well off.

As a doctor I have had the unfortunate experience of meeting patients who had invested with brokers and in pension funds which went to the wall and into liquidation. The distress caused to such people through the loss of their life savings was quite incredible. Their concerns must be taken into consideration more often. We forget there are human faces behind money and frequently these people only have a few thousand pounds that is extraordinarily important to them.

We have begun to think in terms of hundreds of thousands and millions of pounds and we forget those who may have saved £10,000, £12,000 or £25,000 over their lifetimes. I recall one company which went into liquidation. Most the people who had invested in it were bus company employees who were terribly distressed when their few thousand pounds was lost. This area needs to be examined carefully.

There is no excuse for investment fund managers or bank directors investing in companies in which they do not think the directors are behaving properly commensurate to their remuneration. Until recently approximately 60% of investment funds were invested in Irish equities and gilts. However, domestic investment is now considered to be within the euro zone, in which we all travel nowadays, because if we travel anywhere else we will not be able to afford our tickets home. If it is felt that the directors of Irish companies are paying themselves too much, the old fashioned phrase, "Up with this I will not put", should be adopted and the funds should be moved elsewhere because there is no constraint on such movement. The salaries of companies should be carefully inspected and monitored by fund managers and it should be stated clearly why they are moving money.

The problem, as Senator Ross stated, is not the remuneration of directors but obtaining good value for money. For example, when a company is not doing well, it is ridiculous to pay directors well. What Senator Ryan noted about rolling contracts was important. Even if a person was fired, huge sums of money in severance pay seem to have been given to him. I am jealous that I did not manage to get into one of these situations myself because some people seem to have done extraordinarily well.

Senator Norris pointed out that there was an old boys network in operation. At the risk of sounding sexist, I wonder if it would be better if the small number of women involved in investment fund management and as directors of major companies increased. I would hope so, but I am not sure it would happen. I note that the Bank of Ireland has on its court of governors a 100% increase in the number of women on the board – there are now two. It would be good to have an increase in the number of people whose social consciences are focused on the small shareholders about whom I am talking. These are the people who should be influencing the investment funds managers' thoughts when they are deciding where they have to put their investments. Of course they want to get a good return. Of course they cannot take on unsustainable risks, nor should they. However, they must remember that there are people behind the money who give them the power to invest. I congratulate Senator Ross on his having put this motion before the House.

Acting Chairman (Mr. Mooney)

I call upon Senator Ross to conclude.

Mr. Ross

I thank Senator Henry for her kind words. I hope that the near unanimity on this evening's issue is the beginning of something big and representative. At the top of public companies, people are doing things that none of us likes very much. If we can do nothing about it, nobody can, because it is the Government that decides whether abuses of this kind should take place and whether they are right or wrong. They are certainly legal, but do we disapprove of them enough to take measures to expose them and remedy the problem? I suggest that we take such measures. The Minister's reply was very welcome. I detected a hint that there is more to come in the future, but that he is not yet sure of what approach to take. In recognising what the Tánaiste has done, we are going down a path that is primarily one of transparency. As Senator O'Toole rightly said, when one has the facts and figures, one decides what to do with them. We now have the facts and figures, thanks to the measures of the Tánaiste, and they make pretty grim reading.

It was no coincidence that there was an uproar when the Smurfit salaries were revealed. It was no coincidence, simply because they were not revealed before and because the top layer of Irish public companies fought tooth and nail to see that the details were not revealed. Now we know why. It is because they were not performing up to scratch and the shareholders who were paying them felt they were being cheated. As Senator Norris said, it is either their money or the shareholders money. Every penny that goes into the pocket of Michael Smurfit comes from the pockets of the shareholders. I may have a small shareholding in Smurfit's. I do not know if it is declarable as I am not certain if I have it yet. Let us pay the directors only if they deserve it. It is very simple.

This evening, we heard an interesting view of the role of fund managers, who are in this loop of which I have been speaking. They are part of a loop that pays too much. The Minister was careful to say that he was not going to tackle the problem too radically. I do not blame him for that because the measures I am proposing are very radical and very democratising. The Minister might say they are very impractical. What we are seeing, as stated by Senator O'Toole, is fund managers coming under focus. Who the hell are these people who are looking after billions of pounds of our money? I was upbraided today by the Cathaoirleach for naming people who could not defend themselves.

Acting Chairman

I would never do that.

Mr. Ross

It was not by the Acting Chairman but by the Cathaoirleach. I do not know the names of the culprits, the magnificent 17 who manage our money, because they hide. They vote with proxies but never appear in person. They send in forms with 100 million votes on them, but we never know who they are. These are the very same people – one knows who they represent – whom one cannot get at to ask them to be accountable for their actions because they move like shadows in the night. As Senator O'Toole said, they underperform the market at every turn. They are unbelievable. They vote against the wishes of those they represent, and when they are representing them in other areas, which is meant to be their professional job, they perform appallingly. They cannot beat the ISEQ index, the Financial Times 100, the Dow Jones or any index known to man, but they are paid vast sums for this. Senator O'Toole asked what their benchmark was, a word very familiar to the Senator. Their benchmark is themselves. It is most extraordinary that they do not measure themselves against markets or indices. They publish tables every quarter, which state who is on top and who is on the bottom. It is like being at school, but there is no pass mark. If there was one, they would fail, these people who are so well paid. They appear in little groups, very close together in terms of coming first to seventeenth. Why is that? It is because they follow one another like sheep. They all invest in the same shares and stocks because they are frightened of being out of line or taking risks. If they did, they might be on top or on the bottom, so they all conspire together silently to invest in the same stocks to come out close together. One year, one is on top, and another year, another. The top becomes the bottom and the bottom becomes the top. It is a joke and they get paid millions of pounds for doing this. At the same time, these clowns vote to keep the directors' salaries high with shareholders' money.

Pensioners are the most abused group in terms of fund management because they are losing out due to exorbitant fund-management fees. They would do better if they went into tracker funds, as Senator O'Toole said, or if they invested the money themselves. They are also losing because vast amounts of their money are going towards the payment of directors who do not deserve it, and they do not know it. The only real gain that pensioners get, and the only real reason for being in a pension fund, is the tax relief. The fact that pensioners benefit greatly from tax relief means that they do not realise how much they are being ripped off elsewhere. By giving tax relief, the State is camouflaging the fact that pensioners are losing on fund management and costs.

Although today's debate was progressive and useful, I am disappointed that the Minister did not reply to some of the very specific questions I asked. I know he was acting to a brief. He came up with hints of things to come, vis-à-vis the suggestions put forward in the United Kingdom. The Minister and I agreed on the fact that the remuneration committees are fundamental to the problem. The committees, comprising people who pay and agree upon the pay of directors, are filled by stooges and directors who feign to be independent, but are not. They must be filled by ordinary small shareholders whose interests should be looked after. When they come out and say what was discussed we will see pay levels coming down to realistic levels or only being high in cases where shareholders and pensioners are also benefiting.

I thank the House and all who spoke in what has been a very constructive discussion.

Question put and agreed to.

Seanad Éireann debate - Wednesday, 2 May 2001