Katja Hall, Tim Thomas and Alexander Ehmann gave evidence.

Good morning. I thank the witnesses for coming along to help us this morning. I first ask all the witnesses to identify themselves for the record.

Katja Hall: My name is Katja Hall and I am the chief policy director at the CBI.

Alexander Ehmann: I am Alexander Ehmann, head of parliamentary and regulatory affairs at the Institute of Directors.

Tim Thomas: I am Tim Thomas, head of employment policy at EEF, the manufacturers organisation.

This evidence session needs to conclude by 11.15, so that is the only constraint on the questions that are being asked, other than staying within the terms of the Bill. I ask the shadow Minister to start.

Q 1

Good morning. This question is for all three witnesses. In the CBI submission, it says: “The Enterprise & Regulatory Reform Bill needs to support UK growth. All measures in the Bill should be judged against whether they boost business confidence,  free up businesses from unnecessary regulation and avoid creating new barriers to growth.” Does it do that? Do the measures in the Bill help provide that?

Katja Hall: I think there are some welcome measures in the Bill and I would highlight as an example the clause on sunset clauses, which we support and welcome. One key test will be the amendments on executive pay. The challenge there will be to find a way to ensure that shareholders have the right information they need to hold boards to account without undermining the corporate governance structure in the UK.

Tim Thomas: I am only going to comment on part 2 of the Bill, which covers employment law. I want to highlight one provision that I do not think will support growth, which is fines for employers. That is an area that we have followed for some time. We regard fines for employers as unlikely to support growth in the economy as a whole or to achieve the Bill’s aim, which is to ensure greater employer compliance with employment law in general. It is likely to increase the settlement regime and lead to more expensive settlements for employers and simply add to their costs, quite frankly.

Alexander Ehmann: Quite simply, I would add that there is very little in the Bill that is not an enabler of growth. Tim has touched on one element—the fines for employers during the tribunal process are a disappointing addition to the Bill and there are a few others that we will touch on later. Broadly, however, the thrust of the Bill is in the right direction. Our main observation is that the Bill could have gone a great deal further and that is the greatest disappointment about it.

Q 2

Miss Hall, you mentioned sunset clauses. Can you give me an example of where sunset clauses can be a positive thing when it comes to regulation? Where have they worked in the past?

Katja Hall: I think that in general it is good practice to properly review regulations after a few years to see whether they are working and how they are embedding. Sunset clauses should in some ways be the norm, rather than the exception. I will give one example, which I think illustrates the point, which is the right to request flexible working. When the legislation was introduced, the aim was to encourage the employer and the employee to have a constructive discussion about flexible working, but the way that society has changed since and the way that the legislation has been successful means that there is less of a need for the legislation, so in some cases the sunset clause could be there because the legislation has achieved its purpose. In other cases, it may need to be there, and used, because the labour market or whatever it is has changed in such a way that it is no longer appropriate.

Q 3

Finally, a question to all three of you on the clauses that concern the Green investment bank. Do the measures go far enough to enact real change and provide real transformation to allow us to be a leading competitor in the global economy when it comes to green and clean technologies?

Katja Hall: The clauses in the Bill are welcome, and we welcome the fact that they make the Green investment bank a legal reality. We think it can have a really important role in helping investment into low-carbon technologies in the UK. It is part of a solution. On its own it will be helpful, but we also need policy certainty on, for example, the electricity market reforms.

Q 4

Does the Bill go far enough? Should the bank be allowed to borrow, for example?

Katja Hall: We think that it should be allowed to borrow as soon as fiscally possible.

Tim Thomas: I do not think I can add or assist.

Alexander Ehmann: I have nothing to add to that.

That takes us on to other questions about the Green investment bank. A couple of colleagues have signalled their interest.

Q 5

The fact that the Government are setting up the Green investment bank implies that there is some kind of market failure, and that the private sector cannot do that. Why do you think that has happened?

Katja Hall: I think it is about encouraging investment into technologies that are not entirely proven yet, or that will require a little assistance to get going. The Green investment bank is part of helping private sector investment and it could have a role in topping up investment in new technologies. We do not see it as being just a vehicle for promoting one technology over other technologies. It needs to be able to aid investment in a range of renewables.

Q 6

You use the word renewables, but it is about low carbon. As I understand it, that means that the bank’s brief would include, for example, other types of low-carbon technology and potentially nuclear and the supply chain around that.

Katja Hall: Yes. It is not just renewables; it is low carbon.

Q 7

Do you think the Government’s strategy would be more effective in making markets in green products if they used their procurement power to focus in on encouraging the creation of and buying, for example, solar tiles for council houses, rather than having a bank that gives to companies to provide productive capacity? In other words, you supply to the demand rather than the supply side.

Katja Hall: The Green investment bank is very welcome and it has a role to play. I would not have thought that would preclude the Government from also being smarter in their use of procurement. We feel that procurement should be about promoting growth, and we should realise the power that Government have in their role as a buyer of goods and services from the private sector. The Government might have a role in procurement as well, but there is still a need for the Green investment bank. There is also a wider need to look at how we can get investment into infrastructure more generally, and we have been doing quite a lot of work on that.

Q 8

Does not that mean that there is a great big hole in the Bill? If the raison d’être is about growth, why is there not something about procurement? In Wales, for instance, something like 70% of procurement is done through small and medium-sized enterprises, half of which are based in Wales. In England the figure is about 6%. If that were refocused on SMEs, particularly on green growth, it would do something for growth, but these measures are just messing around at the edges, are they not?

Katja Hall: I am not familiar with the details, but my sense is that the issue on procurement is not a legislative problem. We need to build on the progress that we have made through the publication of the Government’s pledge on procurement and the departmental pipelines that have been published. We must build on those and provide more detail in the pipelines, and we must ensure that we have more of them. That has been a welcome initiative on procurement, and I am not sure what the legislative gap is.

Q 9

To what extent do you think the Green investment bank should be equipped with expertise in terms of the kind of advice it can give to businesses that seek support? Do you think it will be appropriately equipped in that regard?

Katja Hall: The bank must be able to give good-quality advice and support for businesses, and I hope that it will be properly equipped. I do not have much more to add.

We move on to competition law.

Q 10

Do you think that the proposed consolidation of the Office of Fair Trading and the Competition Commission will achieve the objective of ensuring that overall our systems are more efficient and quicker? Those are the main criticisms that the external bodies have of our current arrangements.

Katja Hall: We very much welcome the proposed merger, and yes, I think it should do. It should help to reduce duplication, in particular, which is our members’ key frustration with the current system. You would think that a merger would reduce the need to ask the same questions again, because all the information will be held in one body. We welcome the merger, but of course the proof of the pudding is in the eating.

Alexander Ehmann: In principle, the consolidation makes a great deal of sense. However, I draw the Committee’s attention to the fact that the competition regime for growth proposals that are impact-assessed has shown that there is a net burden to business from those changes. We would be keen to ensure that that was minimised.

Q 11

The UK has one of the best competition regimes in the world, according to independent assessments. The merger was not in any of the coalition parties’ manifestos. Do you think that the benefits of the merger outweigh the risks, and will it deliver growth?

Alexander Ehmann: The UK may have one of the best competition regimes in the world, but it also has one of the slowest. Arguably, the measures here are part of a process to ensure that the regime is proportionate and delivers results effectively. Provided that it reaches those outcomes, and we have every hope that it will, we will be content with the outcome.

Q 12

Katja, in your submission you say that the Competition and Markets Authority’s being able to consider the public interest is a “retrograde step” in comparison with leaving the public interest test as the responsibility of the Secretary of State. Could you explain why?

Katja Hall: Our concern is about the risk of blurring the responsibility of the new Competition and Markets Authority. What is the benefit of giving the CMA the right to look at wider public interest issues rather than just leaving those with the Secretary of State? That would be our concern: why is that change necessary and is there a risk that it would blur the duties of the CMA?

Q 13

Also in your submission you argue that “only the worst forms of cartel” should be criminalised. Could you explain what you mean by the worst forms of cartel?

Katja Hall: Yes. On this whole issue around the cartel offence and removing dishonesty, I think we understand the intention behind the proposal. We accept that at the moment it is a high hurdle and therefore difficult to prove dishonesty. Our concern is about getting the change, but in a way that is practical for businesses. Our concern is that if you just remove dishonesty and leave it as it is proposed, you will catch a lot of legitimate business activity, such as joint partnerships. Given that the sanctions are so severe, that is a worry for us and for our members. We would be interested in looking for solutions so that you can get a system that works and can deal appropriately with cartel offences without catching out legitimate business activity. One thought we had was whether there was something in the phrase “intent to deceive” that could be used in the Bill to try to distinguish between genuine business activity and criminal activity.

We move on to the employment aspects of the Bill.

Q 14

There has been a lot of hysteria about the Government’s proposals to make amendments to employment law, but you have all defended them. The Government are essentially trying to create the environment for the businesses that you represent to take on more people. Can you talk about the opportunity that there is, if we move ahead with this Bill, for your members to take on more staff with the modest liberalisation of employment law that is described in the clauses?

Tim Thomas: Employment burdens are a serious issue for employers of all sizes, particularly in the manufacturing sector. Our members operate in a global marketplace where flexibility among the labour force is so important for them to retain their global competiveness. Some of the measures in the Bill will help improve that global competiveness and improve employer flexibility. For example, our members tell us that one of the issues that they have is dealing with older workers and ascertaining when they intend to retire. It is a logical fear of employers that having discussions with older workers may give rise to claims for discrimination. If, as part of this Bill, we can have enshrined a provision that will allow employers to have a conversation with elder workers in an adult way, which helps them plan for their work forces of the future—we are talking about succession planning and bringing more apprentices on—and in a secure place for employers, that will encourage growth and lead to more jobs.

Katja Hall: I would agree with the point about protecting conversations and also with the point that employment regulation is a burden for employers. We do an employment trends survey every year and 67% of respondents to the  survey we did a few weeks ago said that employment regulation was a threat to the UK’s competitiveness. I think that the way to think about it is that there is an issue in some cases with the laws themselves—I would use the agency workers regulations as an example here—but often the biggest problem is the application of the law. The biggest problem for our members by far is the employment tribunal system. Small firms in particular feel that the tribunal system is not working at the moment. We know that a quarter of firms settle tribunal claims, even where the legal advice is that they would win that claim in court. We are particularly interested in the proposals to reform tribunals in the Bill and we think that there is probably scope to go further at some stage.

Q 15

Just to be clear, the businesses that you represent have largely got human resources departments and are larger, so some of the issues that you have for your members may be quite distinct from those of smaller and medium-sized businesses. Would that be correct?

Katja Hall: The CBI represents large and small firms, so we would have quite a few companies and memberships without professional human resources departments. They might have one person who does finance and HR or something like that. I think that it would cover the whole thing. Clearly, employment law is more of a worry for companies who do not have in-house lawyers, for example.

Alexander Ehmann: Employment law has been the most significant area of regulatory concern among our Members, certainly for as long as I have been working for the institute. There is an awful lot of evidence to suggest that the UK has moved backwards over the past few years in its competitiveness in this area. The World Bank’s “Doing Business” report in 2010—the last time that it evaluated labour market flexibility—saw the UK down in 35th when in 2007 it was in 17th.

Specifically on the measures on employment law that are in the Bill, we would say that on issues such as settlement agreements, which we may well get on to, 60% of our members say that the changes would relieve a burden on their business. Importantly, about a quarter of them say that they would be more inclined to take on staff as a result of these changes. The critical point that I want to convey to the Committee is that a lot of the measures that are discussed around dismissal and tribunal changes are actually measures that slightly counterintuitively incentivise employment on the part of employers. They are not measures to try to reduce the size of work forces or to arbitrarily dismiss staff.

Q 16

Alexander, could you and the other witnesses talk a bit about the benefits or any concerns that you have about the amendments that the Government are likely to put forward on settlement agreements?

Tim Thomas: Yes, the better use of compromise agreements, making them settlement agreements and refocusing them are all welcome from the perspective of the EEF as an employers organisation. We would like to see there being a single statutory provision for settlement agreements. Currently, when you look at a compromise agreement, the back of it usually lists many, many  statutory provisions cast around in the statute book. Bringing them all together in one place would be of benefit. Making sure that they are a full and final settlement—where the parties agree—of all matters that are in dispute would be another plus.

Making agreements available when there is no need for a dispute between the parties would also be a benefit. It may be that the parties just want to untie the knot, go their separate ways and have no active dispute between them. In some cases, the current provisions actively encourage, almost, the creation of a dispute between the parties to make sure that they come within the current legislative framework. All those things are areas in which we would like to see progress.

Q 17

The Beecroft proposals, which you will be very familiar with, suggested that compensated no-fault dismissal was a potential way forward. I am pleased to see that it has been rejected by many major organisations. Indeed, a poll today shows that many employers are rejecting that approach, too. It seems that the settlement agreements in the Bill that were trailed on Second Reading by the Secretary of State and the Minister can be put in place before any formal dispute arises. Is that not compensated no-fault dismissal by the back door?

Tim Thomas: No, because compensated no-fault dismissal is a model that does not require the consent or agreement of the employee, whereas a settlement agreement, by its very nature, requires agreement.

Q 18

But is there not an issue in that an employer can offer a settlement and suggest that it might have to be withdrawn or reduced as the time scales pass, and so can potentially bribe an employee to leave the company?

Tim Thomas: It is not “bribe an employee”; it depends on the level of settlement—of compensation—offered by the employer. In the current framework, employees receive independent advice in any event. As long as there is something that enshrines the employee’s ability to assess the realistic nature of the agreement, or potential agreement, I do not see that as a difficulty.

Alexander Ehmann: The Institute of Directors would have preferred to see the Government pursue compensated no-fault dismissal, because evidence among our membership base showed that more than a third of our members would have been minded to employ extra staff on the basis of such a change, whereas the settlement agreement proposal generates only about 25% greater willingness to employ. On those grounds, the distinction between the two is pretty clear.

As Tim said, compensated no-fault dismissal is a unilateral decision on the part of the employer to award, effectively, a minimum sum for the termination of a contract. As we understand it, the settlement agreement proposal enables both parties to discuss whether they can reach a form of compensation that they are content with, which stops them from having to go through a tribunal process. It is important to recognise that tribunals very rarely get someone their job back, so all we are doing is front-loading a form of compensation that ensures that both parties can move on with both their business and their personal lives in a reasonable way.

We have about 13 minutes, and there are a lot of questions.

Q 19

I have a very quick question: we welcome the early conciliation process, but is ACAS properly funded to carry it out effectively?

Katja Hall: I think it needs to be, and I hope it is for now. Over time, we hope that we would need less money to put into the tribunal system because we would have fewer cases going to tribunal, so some of that money, if needed, could be reallocated to ACAS. I want to say on record that we support settlement agreements and the proposal on them.

Q 20

Ian has asked the main question about how ACAS is going to cope. I hope that we will tease out from the Minister whether there might be additional funding, because the tribunal system is so clogged up that it is unable effectively to serve people. I do not think that is the fault of ACAS. Katja Hall, when you said that you would like to take this further, did you mean the compromise agreements that Tim Thomas was talking about or would you like to see something else?

Katja Hall: Yes, it was more to do with the functioning of tribunals themselves. Our concern is that when tribunals were initially set up, they were meant to be informal, non-legalistic vehicles for resolving disputes in the workplace. Now they are anything but; they are highly legalistic, often complex and expensive, as you have said. We think there is a case for looking at how we could make tribunals into what they were originally intended to be, namely a way for the employer and the employee to resolve disputes without huge amounts of legal complexity and cross-examinations in a very formal environment. One of the ideas that we are working on, which we will continue to develop, is whether there is a case for having a tribunal chair hearing cases in an informal setting, perhaps in the conference room of a hotel. Both sides would submit their case; that would be taken as read, and then the judge would ask questions for clarification. That is just a proposal, but it perhaps gives you some idea of how radical we think reform needs to be.

Q 21

I think there were 19 pieces of legislation in the Queen’s Speech. This is the great hope for the economy. We have just entered a double-dip recession. Within this Bill there are six parts, and one of those six parts makes it easier and speedier—streamlines the ability—to sack workers. Is that your priority? Of all the things that could have been included in this Bill, or indeed other Bills, is the ability to sack workers the No. 1 priority? Is it within your members’ top six priorities? Is that what is slowing down growth in the British economy?

Maybe a quick answer from each of you.

Alexander Ehmann: I would never accept the characterisation of this measure as a licence to sack workers. Employment law has become the single largest area of constraint on businesses taking on staff. Our members have told us consistently that if employment law were simplified and if they were able to finish contracts with employees more easily, they would be more willing to take risks in the first place.

Q 22

Is it the top priority?

Alexander Ehmann: It is one of our top priorities, absolutely.

Q 23

In the top six?

Alexander Ehmann: It is definitely within the top three.

Katja Hall: Our top priority on employment reform would be reform of tribunals.

Tim Thomas: Our top priority, from EEF’s point of view, is to be able to resolve disputes in the workplace without having to go to tribunal in the first place.

Q 24

Can I ask Mr Ehmann if he could supply the statistics for that?

Alexander Ehmann: Absolutely. I can show you that our members are in favour of those changes.

Q 25

What information have the panel seen about the growth in the number of tribunals over the past 10 years, the percentage of those claims that are successful or upheld at tribunal, and the size of the claims? Are the panel aware of the view of a lot of businesses that do not want to go to a tribunal because they feel that even when you win you lose, given the huge costs of time and money to the employer?

Tim Thomas: In terms of the number of claims, the latest figures I saw from BIS—in fact, they were published last year—indicated that there were about 400,000 cases in the ET that were unresolved. The ETs have some KPIs, including, I think, resolution within 26 weeks, and there are many cases that do not reach resolution within that time period. There are, therefore, many claims floating around the ET that are unresolved. To an extent, the proposals in the Bill are an admission of that state of affairs, given the suggestions for rapid resolution and early conciliation. We are talking about preventing claims from getting to the ET in the first place. I have to say that we support that idea.

In terms of the wider aims of what we should be doing in the ET, we should be incentivising settlement at the earliest possible opportunity. There are various other measures that could be used in conjunction with this Bill, and the one that I would highlight is fees for litigants. That is a consultation that closed with the Ministry of Justice some time ago. The use of fees to incentivise earlier settlement is another tool that can be used to attack the large number of litigants that go to ETs. They may think twice if they have a fee to pay.

Alexander Ehmann: From memory, I think that one in 10 cases that are filed for tribunal make it to tribunal. From memory again, I think that about one in 10 of those are actually successful on the part of the claimant. That demonstrates to us that the tribunal system at present is broken and it needs substantial reform. The measures in the Bill go some way to improving that system.

Q 26

The key problem for business at the moment, in my evaluation, is low consumer demand for products. In that context, businesses are looking to reduce overheads. Do you feel this change will create a cultural shift whereby businesses feel that they can more  easily move towards reducing their headcount in a way that they could not before? Will they say, “We have got to get rid of some costs so we will get rid of Anne and Andrew”—or whoever it happens to be—“even though they are not really doing anything particularly wrong.” Is this, therefore, a retrograde cultural change that will breed fear rather than hope in the workplace?

Alexander Ehmann: Our evidence showed that on both settlement agreements and compensated no-fault dismissal it would result in an increase of employers’ propensity to performance-manage individuals out of their business. The net contribution, however, as I said earlier, is to increase the overall number of staff within businesses. There would be a change—there would be employees let go—but all of our evidence demonstrates that individuals would be replaced in those roles and that businesses would be more minded to take on more. We see no evidence whatever for a desire to press down on overall headcount as a result of employment law changes.

Q 27

Would it make it easier, if an employer wants to reduce cost, which is quite understandable if demand has been deflated, to reduce headcount in a less damaging way to the business?

Alexander Ehmann: It will make it easier to remove poorly performing members of staff; it will not just be arbitrary usage to reduce headcount.

May we have quick responses, please? We are running up against time.

Katja Hall: The key test is making sure that we increase confidence for employers, confidence to take on an extra person.

Tim Thomas: In that sort of context you have the manufacturing sector. Many of our members invest in the skills of their work force and have done so for many years. They are unlikely to want to get rid of those members of staff precipitously in any event.

Q 28

This follows on from that point. I think, Mr Ehmann, twice you said that you had evidence that 25% of your members would be prepared to take on more workers as a result of the Bill. I wonder if the CBI and the EEF had any similar quantification of the impact.

Katja Hall: No, we have not asked directly in a survey what the impact would be on job creation. What we ask about is the threat to competitiveness in the UK from employment regulation, and then we talk every day to companies about what is preventing them from hiring more people or what is worrying them, and employment regulation does come up there, in particular tribunals.

Tim Thomas: We are in a similar position. We speak to and survey our members regularly, and one of the top areas that they highlight other than the deficiency of skills development in the UK is the burden of employment regulation.

Q 29

How often should shareholders get to vote on directors’ remuneration?

Alexander Ehmann: I should say that the Institute of Directors is in favour of the remuneration policy having a binding vote.

Q 30

Annually?

Alexander Ehmann: We had considered that annually would be an acceptable period but, on further consideration, three years, as suggested elsewhere, strikes us as allowing a slightly longer-term analysis of remuneration policy, unless that policy changes, in which case it would be necessary to have a subsequent vote.

Q 31

So three years.

Alexander Ehmann: Three years is our favoured option.

Katja Hall: Three years would be our favoured option as well. We, too, have accepted that there may be a case for a binding vote for shareholders, although recent events suggest that shareholders already have quite a lot of influence. We can accept the principle of a binding vote. The issue of how often to do it is a practical one, and most companies would not expect to change their policy annually—investors would not expect it either—so three years seems about right.

Tim Thomas: I have nothing to add.

Q 32

Do you agree or disagree?

Tim Thomas: I broadly agree with the comments of my colleagues.

Q 33

Regarding the directors’ remuneration, how many companies do you think will actually take the opportunity of changing their articles so that there could be a binding vote? How would we ensure that shareholders are sufficiently educated to make a sensible rather than a knee-jerk reaction when they vote?

Katja Hall: The second point is important, and that is about good engagement and good dialogue, and it is about good engagement and good dialogue in the run-up to the AGM, not about leaving it all until the AGM. Increased transparency and better disclosure are important in getting more information to shareholders, to enable them to do their job. On the binding vote, we will wait to see what the amendments say, but it seemed to me from the consultation that the proposal was to make binding votes a legislative requirement.

Q 34

Do you think that FTSE executives are paid too much? Is there a disconnect between pay and performance and, if so, what should the measures in the Bill be doing to address that?

In just seconds for each of you.

Katja Hall: I think that high pay for exceptional performance is perfectly justified. I do not think high pay for mediocre performance is justified, and failure should never be rewarded. I think the link between pay and performance needs to be clearer, strengthened, and to stand up to scrutiny.

Q 35

I am afraid that that brings us to the end of the time allotted for the Committee to ask questions of these witnesses. I thank them on behalf of the Committee. We will now hear oral evidence from British Chambers of Commerce and the Federation of Small Businesses.