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Directors To Have Regard To Interests Of Employees

Volume 980: debated on Monday 3 March 1980

The text on this page has been created from Hansard archive content, it may contain typographical errors.

I beg to move amendment No. 61, in page 56, line 34, at end insert—

'(2) Any trade union which is recognised by the company for the purpose of Part I of the Employment Protection Act 1975 may in a representational capacity petition the court on behalf of any or all of the persons employed by the company to enforce the duty imposed upon directors of subsection (1) of this section.
(3) No such petition should be filed without leave of the court which may be obtained upon application to a judge of the High Court.'.

With this we will take amendment No. 62, in page 56, line 35. leave out subsection (2).

In Committee, the Minister of State said that he had spent a considerable time wrestling with the problem. For some reason he identified himself with the problems of a young man in a harem who on this occasion knew what he wanted, how to start his operations and accomplish his objectives. I do not agree with the conclusions that the Minister has reached in arriving at the so-called solution that he has presented to the House. It was interesting to observe that the Minister of State during the last debate represented to the House a thoroughly naive and idealised view of the sort of democroacy which operates in companies and which led him to this erring conclusion on this very important issue.

Clause 46(1) seeks to provide a mandatory duty on directors to have regard to the interests of employees, and then all the good work that that seeks to do is ruined by the addition of subsection (2) which will ensure that the employees have no way whatsoever of enforcing that obligation. There is to be no civil remedy for them. One is bound to ask why the Government bother to impose this mandatory duty at all if, in fact, it is incapable of enforcement.

I must say that the Government remind me of the practice indulged in by some people in their very early youth—that of ringing doorbells and running away when there is the slightest chance of the door being opened. That is what this is like.

In Committee the Minister ran away from all the real issues. I suggested to the Committee, as I do again today, to the House, that the role of the law on this subject is extremely important. Should the law be seen as an instrument of change or as a rather useless desiccated instrument which is insulated from the real needs of a dramatically changing society? That is very germane to the subject we are considering.

My complaint about the clause is that it simply pays lip service to the expansion of the concept of co-partnership about which the Government prate so often. The clause perpetuates the inadequacies of the existing law.

The Minister of State often suggested to the Committee that the Government were proud to be even-handed on this matter. There is no even-handedness about this proposal. A shareholder can enforce the obligations which are imposed on directors. Minority shareholders have their rights strengthened under clause 71 of the Bill, but the employee must rest on the goodness of heart and the sense of propriety of the directors.

As my right hon. and learned Friend the Member for Warley, West (Mr. Archer) said in our last debate, not all directors are so munificent in the pursuit of their legal obligations. We heard of a number of companies where there had been no such pursuit at all.

Can the hon. Member tell me what he means by the phrase "to enforce the duty" which is part of the amendment? Does it mean that the court should impose a penalty on directors for failure to discharge their duties, or does it mean alternatively that the court will undertake a supervisory role and direct the directors to act in future in a specified manner?

The Government have imposed a duty in subsection (1). This would not enable a criminal sanction to apply, but it would enable an employee to ensure that by resorting to an action in the courts the directors would fulfil their duty. That would be a matter for the courts to determine. I shall come to the question of vexatious litigation in due course.

The Government assert that they have somehow miraculously had a change of heart about all this. At one time—back in 1973—there was to be a permissive measure imported into the law. There was not to be a mandatory requirement for directors to take account of employees at all. Now the Government boast that they have fallen into line with some of the more modern thinking. But if the provision is needed, who is it needed for? It must be needed for the company directors who do not fall into line with that naive concept of what a company director is all about, as outlined by the Minister of State. If he has said this once he has said it a dozen times during our debates. He claims that in well-run companies boards of directors further the interests of their shareholders by making sure that the interests of their employees are properly taken into account.

7.15 pm

Obviously the Government did not think that in practice, otherwise they would not have found it necessary to have this clause. What they are really saying is that they were wrong about this matter, that there are some laggards and therefore there must be legislation. Therefore, if there is a need to legislate to provide for rights of members of the company, why is it not right to see that employees have the same rights as well?

The Minister of State posed a number of arguments against this. He said that there would be an inducement to vexatious litigation. We have sought to provide a reasonable safeguard against that. We provide that:
"No such petition should be filed without leave of the court which may be obtained upon application to a judge at the High Court".
One wonders whether legal aid is so bountiful that there will be a flood of litigation on this matter. It is all part of the way in which the Minister of State misleads himself. I believe that a flood of litigation on this score is absolutely fanciful. It is not a course to which most trade unions or employees will readily resort. But, on the other hand, one must take account of those workers to whom the Government proclaim so much fealty—those who are not trade unionists. Not all these people enjoy the benefits of collective bargaining arrangements which the trade unionists are able to enjoy. Why should they be shut out and be barred from a legal remedy?

We would say that people who work in an industry should be provided with at least similar rights to the sort of people who in the early 1970s played a substantial part in British industry—the asset-strippers. They claimed to be acting in the best interests of shareholders, but all too often they were denying ordinary folk the rights of jobs and of a future in the work force. I would have thought that the elementary right that should be enjoyed by a member of that work force should at least be equal to that of the asset-stripper.

I believe that the Minister made another assertion when he said:
"the duty to consider the interests of the employees is enforceable in the same manner as is any fiduciary duty, that is, by the company,"—[Official Report, Standing Committee A; 27 November 1979, c. 361.]
That is a strange way of articulating the law because, as we shall see in a later debate, we know that breaches of fiduciary duty can be validated by ordinary resolution in a general meeting. This is just one of those duties that could be so validated. It does not fall into that area of duty that cannot be validated or into the area of fraud, to which we shall refer later. Is it not certain, almost beyond peradventure, that if there is such a breach the shareholders would obviously validate the acts of the directors in refusing to take account of the interests of the work force? I can hardly imagine the contrary happening.

The Minister said that to provide employees with the sort of rights that he contemplates would put the employees in a precarious position as compared with the shareholders. That bodes well for amendment No. 126, which we shall discuss later. That amendment is designed to provide employees and others with rights under clause 71, where provision is made for granting relief against a company where members are unfairly prejudiced. The Under-Secretary of State cannot have it both ways. I hope that he will either repudiate what his Minister has said, or at least acknowledge that he will subscribe to the views that we are expressing on clause 71. There is a huge gap between both sides about employee rights. We ate offering genuine rights. The Government are offering an empty and wholly bogus gesture.

Clause 46 as presently drafted imposes, by subsection (1), a duty on company directors to have regard in the performance of their functions to the interests inter alia of the company's employees in general. By subsection (2), this new duty is submitted to the existing fiduciary duties of company directors, in the sense that breach of it is made actionable in the same way as any other fiduciary duties owed by the directors to the company. I shall come to the point raised by the hon. Member for Hackney, Central (Mr. Davis) on this matter in due course.

I wish to show how far these two amendments would have the effect of changing the persons who would be able to sue for a breach of the new duty created by subsection (1). In the first place, it would be clear that the duty would be actionable at the suit of trade unions recognised by the company for the purpose of part I of the Employment Protection Act 1975—that is, for the purpose of collective bargaining on behalf of the company's employees.

Secondly, it is unusual to have a duty created by statute which is enforceable by one person on behalf of others, but not by those latter, and because of the common law principle that a statutory duty created for the protection of given persons is usually to be construed as enforceable by those persons, it is highly likely that these amendments would permit individual employees of the company concerned to sue for breach of the duty created by subsection (1).

Thirdly, because a director's duties in the performance of his functions are owed to the company of which he is a director, and those duties are enforceable, in accordance with the exceptions to the rule in Foss v Harbottle, by a member on behalf of the company, it is highly probable that these amendments would leave the duty created by subsection (1) actionable in this way by a member of the company.

Broadly, therefore, the effect of these amendments would be to make the duty of directors to have regard to employees, interests created by subsection (1) of clause 46 enforceable by the company's members, the company's employees and, on the latter's behalf, by trades unions recognised by the company for the purposes of collective bargaining.

The hon. Gentleman may have thought that he had brought forward a proposal which was simple, and which would even make a positive contribution. With respect, I ask him to consider the position that would be created were these amendments to be brought into effect. I hope that I have demonstrated that the consequence of his amendments would be to give rise to the possibility of a multiplicity of actions. The directors of a company would become something of a sitting target for actions brought by a whole range of litigants.

Will the Minister address his mind to subsection (3) of amendment No. 61, which provides the sort of safeguards—which apply already over a wide range of litigation—to avoid vexatious and frivolous litigation? It emphasises markedly that point.

I understand the hon. Gentleman's thoughts in that respect, but I do not think that they are watertight. I wish to emphasise that there is great importance attached to collective bargaining by many Opposition Members. They would not, I believe, think that court proceedings were by any means the best way to—

I cannot understand the Minister's logic. He is saying that collective bargaining arrangements would prevail, and that people would not pursue remedies in the courts, but the next moment he is saying that there would be a multiplicity of vexatious and frivolous actions.

I am indicating that one would have reservations about the line of thought pursued by the hon. Gentleman with regard to the availability of the right of action. I am pointing out that the right of action would be very much more widespread than he contemplated at the time that he drafted the amendments.

Another example of the potentially disruptive effect that these amendments would have stems from the fact that a union recognised for collective bargaining purposes may represent only a small percentage of the employees of a given company, and there may be several of them so recognised. Any one of them could sue on behalf of all employees if it were thought that all employees' interests had been disregarded. However, there is no way of knowing what would happen if one only of several recognised unions wished to sue and the others did not wish to do so. There is, further, the possibility that each union could take separate actions. Either way, there would be a grave risk that vexatious actions would be encouraged.

The Opposition amendment represents a substantial change of approach. Until last May, their policy was to make the duty to have regard to the interests of employees owed, in some sense, to those employees. The hon. Member for Oldham, West (Mr. Meacher) who was a Minister at that time, explained, in relation to the clause introduced by his Government, that
"The principal effect of the clause will therefore be—this is very much inherent in our reasoning—to give directors a shield against attack where they act with due regard to employees' interests, rather than to give employees a sword to use against them when they do not."
The Opposition's arguments in Committee against clause 46 were not consistent with that statement. The hon. Member for Oldham, West said that his Government did not wish
"to encourage employees to look to the courts as a natural forum for the resolution of industrial relations disputes."—[Official Report, Standing Committee F, 8 March 1979; c. 856–8.]
That was the point that I was trying to make to the hon. Member for Hackney, Central at an earlier stage.

Under the terms of these amendments, there is created a real danger of disruptive effects upon the activities of companies. The effect of these amendments would be to lessen the prospect of investment in and success of our companies, and, consequently, would be against the long-term interests of employees.

In seeking to resist the amendments recommend that clause 46, as drafted, provides precisely what is needed. It emphasises that a company's best interests are served when the directors have regard to the interests of employees and it does so in a way which makes it part of the directors' fiduciary duty which is owed to the company. The clause does not aim to give employees a cause of action, because we think it right that the enforceability of the directors' duty to the company should remain clear and unambiguous and, as with other fiduciary duty, it should be the company which has the right to take action.

7.30 pm

It must not be forgotten that employees have many rights to take action against directors under various other statutes. We are, therefore, not trying in the clause to create a new right of action for employees. What we want to do is to encourage directors to take seriously the need to take a broader view of the interests of the company so that their consideration of their employees' interests will improve to the standard of the best companies.

It has been generally recognised that the extent of the directors' obligation to take account of the interests of employees has for some years been unclear. That is the reason for the clause. I hope that hon. Members will agree with me that the clause properly redresses the situation and thereby makes a contribution to the success of our companies, upon which the well-being of our economy so much depends.

I have the feeling that the hon. Gentleman is drawing to a close and he has not dealt with my argument about the validation of breaches of the provision by directors. That validation can occur at a general meeting with an ordinary resolution. Does not that render the whole thing a farce?

The hon. Gentleman underrates the sense of obligation properly experienced among the great mass of companies. The purpose of the clause is to declare the true position. In those circumstances it is unlikely that the sort of case that the hon. Gentleman envisages will develop.

I agree with the comments of my hon. Friend the Under-Secretary about the nature of the amendments, which seem to be a recipe for industrial guerrilla warfare. I am sure that the hon. Member for Hackney, Central (Mr. Davis) is well aware of their implications. Litigation does not have to be vexatious or frivolous in order to snare a company and prevent it from being properly managed.

I wish to make two brief points. I am concerned about the new duty that the clause imposes on directors. My concerns are not entirely technical. First, the clause does not exclude action brought by an employee, as distinct from an employee or shareholder, to enforce the duty owned by directors to a company. Subsection (2) says that the duty is enforceable "in the same way" as other fiduciary duties. It it, therefore, conceivable that an employee or a trade union might be entitled to enforce the duty and to produce the litigation about which my hon. Friend is right to be worried.

My second point arises out of the words "enforce the duty" in the amendment and relates to the position of directors when the interests of employees and shareholders conflict, for example, in the case of a takeover or when a branch of a company's business that was highly labour-intensive was making a loss.

Are the directors to close the branch or business even though the employees argue that it would become more profitable with further capital investment? I see a posibility of conflict there. I hope that my hon. Friend will consider my concerns and perhaps give me some reassurance.

The hon. Member for Dorset, North (Mr. Baker) has missed the bus. All that directors have to do is to take account of the interests of the work force. They must not dismiss matters lightly or ignore those interests, but if they properly take them into account and come to a conclusion that the work force does not find agreeable they could not be held liable under our provisions.

I hope that the Under-Secretary will not take my remarks as being personally offensive, because he knows that I have a high regard for him, but his emollient explanation was thoroughly unconvincing. Of course, he has to pass on what is handed down by the Minister for Trade, but what he was handed was a sham.

There is no question of an evenhanded approach. I cannot accept that what we are doing would lead to industrial guerrilla warfare. There is a satisfactory safeguard in subsection (3). We feel that the Government should have met us on this point and the fact that they have chosen not to do so means that we shall divide the House.

I shall reply briefly to my hon. Friend the Member for Dorset, North (Mr. Baker). I must emphasise the importance of the fact that the duty is subsumed in the fiduciary duty of directors to the company as a whole. That is a proper answer to my hon. Friend's first question.

On my hon. Friend's second point, the hon. Member for Hackney, Central (Mr. Davis) pointed out that directors are under an obligation to take account of the interests of workers. It does not mean that, automatically, all problems could be solved. I urge the House to accept that the clause sets out the basis of the best principle that applies in companies and I believe that its incorporation in our law will have a beneficial effect.

The hon. Member for Hackney, Central usually asks whether there has been consultation with the TUC. He did not do so on this occasion, but I can tell him that in July my right hon. Friend the

Division No. 208]

AYES

[7.40 pm

Alton, DavidField, FrankMitchell, R. C. (Soton Itchen)
Anderson, DonaldFlannery, MartinMorris, Rt Hon Charles (Openshaw)
Ashton, JoeFletcher, L. R. (Ilkeston)Moyle, Rt Hon Roland
Atkinson, Norman (H'gey, Tott'ham)Fletcher, Ted (Darlington)Ogden, Eric
Barnett, Guy (Greenwich)Ford, BenPalmer, Arthur
Beith, A. J.Foulkes, GeorgeParker, John
Boothroyd, Miss BettyFraser, John (Lambeth, Norwood)Powell, Raymond (Ogmore)
Bradley, TomGarrett, W. E. (Wallsend)Prescott, John
Bray, Dr JeremyGraham, TedRadice, Giles
Brown, Ronald W. (Hackney S)Grant, John (Islington C)Roberts, Ernest (Hackney North)
Buchan, NormanGrimond, Rt Hon J.Rooker, J. W.
Callaghan, Jim (Middleton & P)Hamilton, James (Bothwell)Sever, John
Campbell-Savours, DaleHamilton, W. W. (Central Fife)Silverman, Julius
Carmichael, NeilHarrison, Rt Hon WalterSmith, Rt Hon J. (North Lanarkshire)
Carter-Jones, LewisHaynes, FrankSnape, Peter
Cartwright, JohnHogg, Norman (E Dunbartonshire)Spearing, Nigel
Clark, Dr David (South Shields)Home Robertson, JohnSpriggs, Leslie
Cocks, Rt Hon Michael (Bristol S)Homewood, WilliamStewart, Rt Hon Donald (W Isles)
Coleman, DonaldHughes, Mark (Durham)Stoddart, David
Cook, Robin F.Hughes, Robert (Aberdeen North)Straw, Jack
Cryer, BobLamond, JamesSummerskill, Hon Dr Shirley
Cunliffe, LawrenceLeadbitter, TedTinn, James
Davis, Clinton (Hackney Central)Litherland, RobertWelsh, Michael
Davis, Terry (B'rm'ham, Stechford)Lyon, Alexander (York)White, Frank R. (Bury & Radcliffe)
Deakins, EricLyons, Edward (Bradford West)Whitehead, Phillip
Dormand, JackMcCartney, HughWhitlock, Williiam
Dubs, AlfredMcDonald, Dr OonaghWigley, Dafydd
Duffy, A. E. P.McKay, Allen (Penistone)Willey, Rt Hon Frederick
Dunwoody, Mrs GwynethMaclennan, RobertWilson, William (Coventry SE)
Eadie, AlexMcNamara, KevinWinnick, David
Eastham, KenMarks, KennethWoolmer, Kenneth
Edwards, Robert (Wolv SE)Maynard, Miss Joan
Ellis, Raymond (NE Derbyshire)Mellish, Rt Hon RobertTELLERS FOR THE AYES:
English, MichaelMikardo, IanMr. Joseph Dean and
Evans, John (Newton)Millan, Rt Hon BruceMr. George Morton.
Faulds, Andrew

NOES

Adley, RobertBlackburn, JohnBrowne, John (Winchester)
Alexander, RichardBlaker, PeterBruce-Gardyne, John
Alison, MichaelBoscawen, Hon RobertBulmer, Esmond
Ancram, MichaelBowden, AndrewBurden, F. A.
Aspinwall, JackBoyson, Dr RhodesCadbury, Jocelyn
Atkins, Robert (Preston North)Braine, Sir BernardCarlisle, John (Luton West)
Baker, Nicholas (North Dorset)Bright, GrahamCarlisle, Kenneth (Lincoln)
Beaumont-Dark, AnthonyBrinton, TimCarlisle, Rt Hon Mark (Runcorn)
Bell, Sir RonaldBrocklebank-Fowler, ChristopherChalker, Mrs. Lynda
Best, KeithBrotherton, MichaelChapman, Sydney
Bevan, David GilroyBrown, Michael (Brigg & Sc'thorpe)Clark, Hon Alan (Plymouth, Suttton)

Secretary of State wrote to the general secretary of the TUC to inform him that it was our intention, following discussions, to introduce such a clause. The general secretary replied on 4 July:

"You said that you would be prepared to look again at the case for including in the Companies Bill a clause on the duties of directors to state the principle that directors should have due regard, inter alia, to the interests of employees. This would fit naturally into the present Bill and would constitute, as I think we both agreed, a long overdue opportunity to bring company law more into line with good company practice."

Those were true and accurate comments and on that basis I ask the House to reject the amendment.

Question put, That the amendment be made:—

The House divided: Ayes 102, Noes 160.

Clarke, Kenneth (Rushcliffe)Knox, DavidPeyton, Rt Hon John
Cockeram, EricLawrence, IvanPollock, Alexander
Cope, JohnLawson, NigelPowell, Rt Hon J. Enoch (S Down)
Corrie, JohnLe Marchant, SpencerPrice, David (Eastleigh)
Critchley, JulianLennox-Boyd, Hon MarkProctor, K. Harvey
Dean, Paul (North Somerset)Lester, Jim (Beeston)Raison, Timothy
Dickens, GeoffreyLewis, Kenneth (Rutland)Rathbone, Tim
Dorrell, StephenLloyd, Peter (Fareham)Rees-Davies, W. R.
Dover, DenshoreLyell, NicholasRhodes James, Robert
Dunn, Robert (Dartford)MacGregor, JohnRhys Williams, Sir Brandon
Edwards, Rt Hon N. (Pembroke)MacKay, John (Argyll)Shepherd, Colin (Hereford)
Elliott, Sir WilliamMajor, JohnSkeet, T. H. H.
Eyre, ReginaldMarlow, TonySpeed, Keith
Fairgrieve, RussellMarshall, Michael (Arundel)Speller, Tony
Fenner, Mrs PeggyMarten, Nell (Banbury)Spicer Jim (West Dorset)
Fletcher, Alexander (Edinburgh N)Mather, CarolStainton, Keith
Fookes, Miss JanetMaude, Rt Hon AngusSteen, Anthony
Fowler, Rt Hon NormanMaxwell-Hyslop, RobinStewart, John (East Renfrewshire)
Gardner, Edward (South Fylde)Mellor, DavidStradling Thomas, J.
Garel-Jones, TristanMeyer, Sir AnthonyTebbit, Norman
Glyn, Dr AlanMiller, Hal (Bromsgrove & Redditch)Thompson, Donald
Goodhew, VictorThorne, Nell (Ilford South)
Gorst, JohnMills, Iain (Meriden)Townend, John (Bridlington)
Griffiths, Eldon (Bury St Edmunds)Mills, Peter (West Devon)Townsend, Cyril D. (Bexleyheath)
Griffiths, Peter (Portsmouth N)Moate, RogerTrippier, David
Grylls, MichaelMolyneaux, JamesVaughan, Dr Gerard
Gummer, John SelwynMonro, HectorWakeham, John
Hamilton, Hon Archie (Eps'm&Ew'll)Montgomery, FergusWaldegrave, Hon William
Hamilton, Michael (Salisbury)Morrison, Hon Charles (Devizes)Walker, Bill (Perth & E Perthshire)
Hawkins, PaulMorrison, Hon Peter (City of Chester)Walker-Smith, Rt Hon Sir Derek
Hawksley, WarrenMyles, DavidWall, Patrick
Hayhoe, BarneyNeale, GerrardWaller, Gary
Heddle, JohnNeedham, RichardWard, John
Henderson, BarryNelson, AnthonyWarren, Kenneth
Hicks, RobertNewton, TonyWatson, John
Hill, JamesNormanton, TomWells, Bowen (Hert'rd & Stev'nage)
Hogg, Hon Douglas (Grantham)Nott, Rt Hon JohnWilliams, Delwyn (Montgomery)
Holland, Philip (Carlton)Page, Rt Hon Sir R. GrahamWolfson, Mark
Hunt, David (Wirral)Page, Richard (SW Hertfordshire)Young, Sir George (Acton)
Jessel, TobyParkinson, CecilYounger, Rt Hon George
Jopling, Rt Hon MichaelParris, Matthew
Kaberry, Sir DonaldPatten, Christopher (Bath)TELLERS FOR THE NOES:
Kellett-Bowman, Mrs ElainePatten, John (Oxford)Mr, David Waddington and Lord James Douglas-Hamilton.
Knight, Mrs JillFattie, Geoffrey

Question accordingly negatived.