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Non-Executive Directors

Volume 404: debated on Tuesday 6 May 2003

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11 am

First, I draw the attention of the House to my declared Member's interests, and to the facts that I have 16 years' experience as the finance director, chief executive and chairman of a FTSE 100 company and have served on a number of other boards in the United Kingdom. Fortunately, the Higgs report is blind to the role of Members serving on boards, but I do not doubt that if it had anything to say about that, it would be looking for an explanation.

The Higgs report has a distinguished ancestry that stems back to the Cadbury, Greenbury and Hampel reports. It is an important contribution to the tradition of voluntary and combined code compliance in corporate governance in the United Kingdom. As it represents a substantial change and a dimensional move forward in the nature of corporate governance, it is important that it attracts critical scrutiny before it is implemented. The report will have an important impact on a substantial part of the wealth-creating part of the economy. It will determine not only the way in which leading public companies are governed, but will set a tone and establish a style, and will determine the attractiveness of careers in public companies as non-executive directors.

It is important that the Higgs report receives critical analysis not only among company chairmen, the Financial Reporting Council, the Confederation of British Industry and so forth, but in Parliament. To date, the report has received no discussion in Parliament, except for a statement by the Secretary of State of which it was part of the subject. That may come as something of a relief to the business world, but it is not right that a shift of such magnitude, which will affect the future wealth-creating part of the economy, should not receive critical examination in the House. Therefore, I am delighted that we have this chance to give it that examination.

When the Higgs report was produced, the reaction to it was muted. Most people saw it as a response to the corporate difficulties of the past few years, including the well-known corporate failures. The Government seemed to be enthusiastic about the report's output: the Secretary of State warmly welcomed it, and appeared to recommend that it should be implemented in full and without substantive exception. She said that it would be referred to the FRC, which would consult on the precise wording. From the Government side, at no point has there been any questioning of the recommendations, even though they go down to detail that represents prescription in corporate governance that we have not seen hitherto. The Confederation of British Industry recommended that the report be read from cover to cover. In fact, it recommended that company chairmen should read it throughout and then read it again. Some may feel that that would be a soporific exercise. Nevertheless, the report makes quite good reading and there is no doubt that, in its recommendations and the nature of the arguments it advances, it is a distinguished report that merits the careful scrutiny of all non-executive directors.

In the weeks since the report was produced, growing reservations and arguments have emerged on points of substance and detail. Those must be taken into account.

We should give the Government and others pause to think again. There is a well-known and well-publicised CBI poll of FTSE 100 company chairman. These people are major practitioners; they know what they are doing and many of them have served on more than one company board.

The results of that poll are disturbing. About 82 per cent. of respondents agreed with the statement that the Higgs report undermines the role of the chairman, as the report has certain things to say about the role of the senior non-executive director. That amounts to substantial disagreement. About 56 per cent. disagreed strongly with the proposal that non-executive directors should meet once a year in the absence of the chairman. That would create a potential schism in the board and cut across the principle of the unitary board. About 87 per cent. disagreed, either strongly or otherwise, with the recommendation that the nominations committee should be chaired by an independent non-executive director. That substantial disagreement is far greater than when the Cadbury or Greenbury reports were introduced, although it applies to only one recommendation, not the entire report. About 50 per cent. disagreed with the idea that the chief executive officer should be disallowed from becoming the chairman of the same company. Such substantial and authoritative concerns merit serious consideration.

Digby Jones, the director general of the CBI, has referred to the damaging "unintended consequences" of the Higgs report. We should bear it in mind that such people are generally supportive of the thrust of Higgs's argument. No one believes that the central ideas set out in the Higgs report do not amount to good ideas on corporate governance. The question is should such things be incorporated in the combined code? The Association of British Insurers, the Institute of Directors and various company chairmen have made public their serious reservations.

To date, the Secretary of State has been dismissive of such concerns, but I hope that this debate will provide the Minister with a chance to give us a more reflective view on the Government's thinking. I hope, too, that she will find time to respond specifically to the issues that have been raised, and that she will not merely discuss the general background of the Higgs report. I introduce the arguments not in a spirit of partisanship, but because the report has made a valuable contribution and deserves to be heeded. There are substantial problems in corporate governance in the UK that must be dealt with.

Ministers have said that there were many reservations in the corporate community when the Cadbury report was introduced. That is fair—it was a groundbreaking move forward. About 40 per cent. of companies were non-compliant with the report, whereas 10 per cent. are non-compliant today. That reflects the fact that the report is accepted as part of the corporate governance tradition and that it has worked. There is, however, greater concern about specific issues in the Higgs report, than with the generality. We should not, therefore, simply rest on the idea that business people and directors always make a fuss, that things will settle down, and that we can then move forward. We are dealing with the stewardship and leadership of wealth-creating Britain, which is far more important. That should not be tinkered with unless there is an overwhelming argument.

Caution should be our watchword. We must not play with the way in which boards work because it seems a good idea. We must become involved only if there is a compelling and overwhelming reason to do so.

I endorse my hon. Friend's statement that caution should be our watchword. However, what would he say to those critics who suggest that caution goes hand in hand with complacency?

My hon. Friend makes a good point. There are no grounds for complacency. Profound issues, such as the way in which we lead, compensate and manage large companies in Britain, need to be addressed, but the question is, does the Higgs report deals with matters about which we should not be complacent? There is no question whether we should be holding this debate. I do not dispute that Derek Higgs, whom I have known for many years, has produced a distinguished report. We must give it our urgent attention, but we should be careful about implementing prescriptive changes that will have an impact on the way in which corporate governance works, and which may not result in a better outcome.

I shall cover the central issues that surround the report, after which I shall deal with three or four of the specific questions that have been raised. I shall deal first with my hon. Friend's point on whether it deals with the central issues of corporate governance, in so far as there have been corporate difficulties that should have been remedied in the past two years—for example, in respect of Marconi, Cable and Wireless or Abbey National. We all know those celebrated examples. Would the Higgs report have made a difference, or should we turn our attention to other matters? Has the Higgs report missed the point? I am not questioning whether Derek Higgs has missed the point, but did his brief do so?

Does the code enable good boards to become better? It is easy to think of ways in which to deal with the problem of weak boards, but if the code makes good boards less effective, not much has been achieved. The point is that a good code enhances the whole, and does not deal only with the problems of the weakest companies. Is the spirit of the combined code preserved? Most people consider that the voluntary nature of the combined code—the fact that companies have been able to conform broadly, unless there are good reasons not to do so—has been successful in the United Kingdom. Will the Higgs report change the entire way in which such matters are viewed?

It is my judgment that part of the problem was that the Government gave Derek Higgs a narrow brief. He was asked to deal with non-executive directors. The difficulty is that some of the real problems in corporate governance are not to do with non-executive directors. There is a presumption in the report that a few non-executive directors could have stopped the difficulties that have occurred. Let us consider some major corporate failures. Cable and Wireless, and Marconi, had distinguished boards of NEDs. They were made up of a high-calibre people. I know that, in most instances, the decisions that were made were subject to detailed scrutiny by the NEDs, who agreed with them. We should not rest on the idea that different non-executive committees will solve the problem. They will not.

There are other more fundamental problems. In the long term, the success of large companies in Britain depends on the quality of management and its long-term commitment to such companies. One of the greatest problems is our failure to attract people to management and to build up a long-term culture of commitment to business. Most executive directors are still incentivised on a far too short-term basis. Furthermore, Higgs was blind about pay, because it was not part of his brief. The Minister and I discussed conversation failure, a matter raised by the hon. Member for Twickenham (Dr. Cable). It will not be touched on in debate. It will soon be the subject of a consultation paper, and it goes to the heart of the present difficulties and the question marks that hang over our corporate culture.

In my judgment, the quality of management and the ability to attract good non-executive directors in long-term conversation are important issues that sit outside the Higgs report. To some extent, the report is what one gets when one applies a Rolls-Royce mind to the wrong problem. I am not saying that non-executives are not worthy of scrutiny. However, there are much broader issues to be discussed. My view is that the Government, in responding to recent corporate failure, saw the Higgs report as a fig leaf. They decided to get Derek Higgs—a terrific and experienced guy—to give them a nice report, and thought that that would solve the problem. Unfortunately, they defined the brief rather too narrowly. It is probably fair to say that Derek Higgs had quite a job to come up with the number of constructive recommendations that he has.

Will the Higgs report apply to all boards and improve the generality of boards rather than merely address the problems of a few? Here, I do not think that it will work. The net effect of the report will be to reduce, not improve, the quality of non-executive directors. The way in which Higgs-compliant boards will work post-Higgs is to have more committees, more training, more procedure and a more divided board. I do not think that that will attract NEDs. I can tell the Minister that from my experience—I talk to many company chairmen, directors and business people—such people will no longer wish to be NEDs of FTSE 100 companies. They will think that it is just not worth it. What attracts NEDs is the idea that they can participate in business decisions and work closely with good management. They do not want to sit on lots of little committees. They do not want to sit on a divided board with other non-executives. They do not, unfortunately, particularly want to spend their time with institutional shareholders who, equally, do not want to spend their time with them.

In net terms, the job will be made less attractive. It is not a question of pay. People who become non-executive directors for pay are the wrong people to have on a board. The people whom one wants are already paid substantial sums, or have made substantial money, in business and will do the job because they are really interested in the board and the people with whom they will work.

The proposals will reduce the chemistry of the unitary board. Boards that work well have great chemistry. That is important because it is always possible for executive directors to conceal from non-executive directors what is going on. A business can have the best non-executives in the world, who have much time and training, but if the executive does not want to tell them something, they will not know it. Boards work where the executives and non-executives are a team. The flow of information is then free and the informal contact great. Often the most valuable points are those made at the margins of a board meeting or over a sandwich lunch afterwards. That is when the information really flows. Unless that structure is created and enhanced, the effectiveness of boards is reduced. The Higgs report, with its committees, separate meetings and senior independent directors, is starting to erode that process.

Boards that work well have a long-term commitment to the company. Let us think about how Marks and Spencer and Tesco were created, or how Morrisons, which does so well today, and other great companies came into being. That happened because people, including the boards, had a long-term career commitment to those companies. Yet the Higgs report is on the margins of encouraging more short-termism. For example, it discourages the idea that non-executives should serve for more than six years.

Will the Higgs report improve the generality of boards? I think not. Not in any fundamental single way, but in aggregate, the effect of the report will be to dilute the way in which most effective boards in Britain have worked historically. It will cut across the quality of non-executives, the chemistry of the unitary board and the long-term commitment to companies.

How will the report affect the spirit of the combined code? I think it important for the Minister to recognise that that code does not work like regulation or law. It works because there is a majority consensus in the institution investing community and among directors. Generally, it is a pretty good thing and reasonable in its requirements. The difficulty with the report is that it takes that code into a further dimension in prescription and detail, and in the way in which it works. There is a real risk that, as a result, many companies will not comply with it. We will then be looking not at 10 per cent. of companies, in terms of the Cadbury report, but at 25, 30 or 40 per cent. Once that happens, the norm becomes to explain, not to comply. The power and influence of the code are then substantially diluted.

The point is that the code should contain minimum requirements to allow boards maximum flexibility. In this instance, it has gone beyond minimum requirements to, at the very least, covering good practice and, more than that, becoming a code of aspiration. Derek Higgs has said how a board should ideally work and not what is absolutely required, which was not envisaged when the combined code was introduced.

Is it not the case that in this area, above all others, one size of regulation does not fit all? It is important that we get a clear steer from everybody involved, including the Government, that some small companies would be wrong fully to comply with every aspect of the code. It would not be in the interests of their shareholders if they were to do so, because it would impose an excessive burden on them and cost their shareholders more. An explanation should be just as valid a way of dealing with the code as full compliance.

I agree 100 per cent. with my hon. Friend, who makes the important point that the code will affect small companies as well as large. The costs of compliance have been estimated at well over £200 million by leading accountancy firms, and that is the cost only in terms of non-executive directors and not the cost to the performance and effectiveness of the British economy. Ministers and Derek Higgs have said that companies do not have to comply because they can explain, but the combined code rests on the idea that it works if most people in normal circumstances comply with it. If explanation is the norm, all we will get is longer annual reports—my goodness, they are long enough already and hardly anybody reads them.

The combined code is pretty powerful. If people who are not conforming to it were to come to an annual general meeting, questions would be raised and institutional shareholders would pay attention. If, however, explanations proliferate, the code will become lax and will not work. Even worse, if the Higgs recommendations were to work, we would end up with a grey uniformity on company boards, which in many instances would be costly and bureaucratic, and fewer people would want to serve as non-executive directors, which would not help. I do not want to overstate the case, but we need to be mindful of what the combined code is meant to be and what compliance should look like.

I want to address four specific issues raised by company chairmen and business as areas of substantial concern. I reiterate that most business people and I are not opposed to the thrust of the Higgs report, which is outstanding. How some recommendations are enshrined in the combined code, however, requires careful debate. Like many semi-regulatory proposals, those in the report are accurate and it is difficult to argue against any of the individual paragraphs. However, the report's aggregate effect will be to change how boards work. More than that, it is regulatory in tone in the sense that it focuses on the means not the ends. In other words, good governance is the end and Derek Higgs is interested in prescribing exactly how it is achieved.

I want to start with the role of chairman. Strong chairmen who play an active role in a business and who are close to what is happening have led most successful British companies. They are often not the classic Cadbury-style, so-called non-executive chairmen who sit back and review the activities of executives; they are people who exercise leadership. They have often risen through a company or have worked in the same industry, and sometimes they are mavericks. They are people who expect to control, to run and to lead their boards. We want to encourage them. They should, of course, be restrained by checks and balances, but we need to make sure that the combined code enshrines the idea that we want strong leadership. In the Higgs report, the role of the chairman is substantially undermined in principle, and that may be only the beginning of the process. It is undermined first by the formalisation of the idea that there is a senior, independent director. Clearly, the assumption is that the chairman is somehow not sufficiently independent, and so there should be someone who is.

The idea of an independent director is interesting. I do not think that any director should be independent in the broad sense: I would want that director to be a partisan of the company. I would want anyone who serves on my board to fight for the business, not against it. I know that this is a question of language, but I find it difficult to accept that one director should be singled out as being different in some way from the others.

In many companies, there is, informally, a senior non-executive director. That naturally evolves. He or she is often asked to undertake tasks by the chairman. There is nothing wrong with that. The question is, should that post be designated formally so that outsiders can see who the person is? If we were to do that, we would almost inevitably start to break up the unitary board and undermine the authority of the chairman. It is almost inevitable, too, that those in the company, including executives and outside shareholders, will see that independent senior director as a court of appeal, a way of going round the chairman. That would be a damaging part of the process. Ironically, often the informally appointed senior non-executive director would be one of the longest-serving, but one of the recommendations in the Higgs report is that we should no longer have very long-serving non-executive directors.

The report goes on to recommend that the senior independent director should visit the shareholders once a year to elicit their views away from the chairman, presumably because the chairman might misreport. There have been occasions on which chairmen have been blind to the issues raised by shareholders. There may even have been occasions on which they have misreported them, although it is perfectly easy for shareholders to make their views known through other means. In my experience, when institutional shareholders pick up the cudgels and ring up the chief executive or chairman, he stands to attention by his desk. Chairmen are absolutely focused on what shareholders have to say. The problem is not lack of access to boards, but lack of activism on the part of the shareholders. If we can get shareholders to punch their weight, we have solved half the problem.

I should also point out the practical difficulties. Research shows that most institutional shareholders do not particularly want to see the independent senior director. That is not very interesting for them unless there is a particular burning issue to talk about. Otherwise, it is a rather boring discussion. Shareholders would rather see the chief executive and talk about how the business is going or meet the chairman. Meeting the independent senior director—some charming and doubtless distinguished fellow who wants to elicit any complaints and have a cup of tea—is not a good use of the shareholders' time or his.

The companies that I served have many large institutional shareholder bodies scattered throughout the world. This senior independent director will presumably have to make himself available to people in Chicago, San Francisco, New York, Geneva, Zurich, London and Edinburgh. He will have to have a great deal of spare time and a high boredom threshold. I do not think that the recommendation is extremely practical. I just do not think that it will be carried out; it will be honoured in form, but not in substance.

To come back to my central point, we need to get institutional shareholders to intervene directly with the chairman, and not to go round him. The idea of the divided and rather political board that would result is unacceptable, as it would be in other walks of life. I dare say that it would be unacceptable in ministerial teams if there were some senior independent Minister to whom we could complain instead of the Secretary of State. That would be nonsense.

Another issue is the idea that the chairman should not chair the nominations committee. One of the central roles of the chairman is to build a quality board, and to bring good people to it. Often that requires investment in personal capital. I know that chairmen get criticised for inviting people with whom they have had connections to serve on boards. However, I can say that persuading people to serve on a public company board is not that easy, and it is getting more difficult. Often, chairmen invest personal capital by persuading people of distinction to come and serve, and it does not stack up that they have to say to a distinguished industrialist, "We'd really like you to come and serve on our board, but I can't make the decision as I don't chair the nominations committee, which meets independently." That undermines the appetite of the chairman to build a strong board, and is a safety net for the worst.

We are trying to provide against chairmen recruiting their friends, neighbours and relatives in a way that is too close knit to allow the process to work. I do not think that that is a prevalent problem, and where it is, it is usually conspicuously obvious and can be dealt with through other means. It cuts across the idea that the unitary board undermines the authority of the chairman.

On the question of chief executive succession, the Higgs report recommends that chief executives should not become chairmen of the company in which they have served. Many people will have reservations about that, not as a general raising of an eyebrow or asking whether the right person will be chosen, but because it is part of a combined code of prescription. In the United States, 73 per cent. of Standard and Poor's companies have a combined chairman and chief executive. There is a different form of corporate governance. I make that point not because I am recommending that form, but because it demonstrates that in a successful economy there are different ways of cutting a board, and we should allow for that.

In the United Kingdom, 23 per cent. of chairmen of public companies were the chief executives in that company. We are saying that it is preferable that the chairmen in nearly a quarter of UK public companies should not be chairmen, which is a fundamental recommendation. If implemented, it would bring about a substantial change in the nature of leadership of British public companies. It would mean that distinguished chairmen would not be able to hold their posts in many companies, such as Ken Morrison, to take an extreme example, but there are many others.

When it comes to succession and someone reaches the age when they want to change role and diversify their career, we are saying that we will discard that person, with immense investment in experience, talent and knowledge of the company, and that those qualities will be lost to the company. That is a questionable idea. I accept the argument advanced in the Higgs report that there are chief executives who are not right to become chairmen because they cannot adapt to that different role. Equally, however, there are chief executives who can become chairmen. We can leave that to companies without any overriding guidance. It is undesirable to create a negative aura around chief executives who go on to be chairmen.

There is another inadvertent side effect. If one tells a chief executive that he cannot become a chairman, he will carry on as chief executive for far too long. We will provide a roadblock in succession. Instead of people gradually moving on through the company, and young blood coming through, people will stay on because otherwise they will have to leave the company that they love, and have worked for passionately for the past 10 or 20 years. As a result, we will slow up the process of development of talent. I am confident that the effect of the recommendation will be to increase the average age of leadership in British companies.

I should say that I became chairman of a company of which I had been chief executive, and I did so with the wholehearted support of the shareholders. If I had not been able to do that, Allan Leighton, who is now chairman of the Royal Mail, would not have been able to succeed me as chief executive. I do not think that that would have been in anyone's interests—myself, Allan Leighton, the shareholders, the company, or the people who worked in that company.

I shall move on to the question whether someone should serve as the chairman of more than one leading public company. The recommendation in the Higgs report is that chairmen should be rationed to one role only; in other words, one could be a chairman of Barclays or Lloyds bank, but that would be it. That is an unusual idea. Apart from anything else, it applies only to the role of chairman, not to other roles in life. For example, people could be a Member or have various other occupations that would preclude their effectiveness as a chairman and limit their time, but the report is blind to that.

It seems that we have confused the means and the ends. The idea is perfectly good, in that someone who is the chairman of a company must have sufficient time to devote to their duties. More than that—this is the important point—the role of the chairman is to be on tap, to be available in an emergency, to step into the breach. Therefore, it is important that chairmen have not only time but spare capacity available. In the event of a crisis in the company in which the chief executive has to go, the chairman must be able to step in.

The principle that the chairman must have time available and must be able to demonstrate his commitment should be enshrined in the code, but to say that chairmen cannot serve in more than one company is overly prescriptive. It will put the ends before the means and will lead to the loss of talent in British industry. We are not flush with great chairmen in this country, and distinguished people such as Lord Stevenson, Sir Victor Blank and others do an outstanding job in more than one company.

We should not kid ourselves by thinking that late in life many chairmen will spend all their time in the garden instead of acting as chairmen of companies. They want to do other things—they are not all geriatrics. In fact, there are very few who do not have the energy, drive and talent to make a major contribution to British industry and commerce. They should be encouraged to do so, not discouraged.

Finally, on the specifics, the Higgs report proposes limiting the term of office for non-executive directors to six years. Again, that is comply and explain. However, as I said earlier, explaining should not be the norm. The issue is not whether we have too many long-term non-executive directors, but short-termism, lack of experience and the rapid rotation of, particularly, the executive content on boards. With one exception in which practically everyone left, almost every public company board on which I have served included non-executive directors who had served more than six years. They were often the most valuable people because they knew the history of the company and the mistakes that had been made.

Once again, as is so often the case with regulation of this sort, we are getting the ends and means confused. We should be trying to achieve a board with a balance of experience, energy and refreshing new insight. We should be trying also to enshrine a guideline in the code that all boards should have a mix of new and long-serving directors. To turn that round and say to directors that after six years they will be under pressure to resign, and will have to explain themselves in the annual report and at the annual general meeting, is overly prescriptive and a confusion of what we are really trying to achieve. Many of the recommendations can be enshrined in the code in a constructive form, but they must be substantially less prescriptive and detailed.

Derek Higgs has produced an outstanding report. It is a major contribution that merits serious consideration and debate. I agree with the CBI that all 100 pages should be read at least once or, for those with a great appetite, perhaps twice. It should be compulsory reading for all new non-executive directors, as it is Management 101 in corporate governance, and it is very good on how boards should aspire to work. However, that is wholly different from saying that it should be incorporated in the combined code with only minor refinements to the wording, as the Secretary of State recommended.

Boards are made up of people, several different forms of leadership and many different forms of chemistry. What matters is how that chemistry works and the quality of people who are attracted on to the board, enabling the leadership—chairmen or chief executives—to be effective, and enhancing that leadership with proper scrutiny and questioning. That does not lend itself to a highly prescriptive format. There are many different ways of running an effective board, and the combined code should allow for those different ways. However, the Higgs report is in danger of adopting a "conventional is best" view. The code must be an aspiration to best practice, and not a required minimum. Similarly, the options to comply or explain should not change so that the explain option becomes the norm. If that happens, the authority of the combined code will start to erode.

Boards that work well are not divided but united. People work together, there is absolute openness and there is no need to meet behind closed doors. Such boards attract diverse and talented people, and others aspire to serve on them. They not merely attract people who are interested in procedure and governance, but practising business men who are fascinated by business. The charter is in danger of eroding the system of corporate governance. It will deter people from becoming non-executive directors. It will add cost, and reduce the substantive effectiveness of British management. I shall leave hon. Members with a quote from the CBI that sums things up:
"One-size-fits-all will not be good for British Business or wealth creation. This is the challenge for the DTI and the Financial Reporting Council but one to which they must rise if Higgs is to work in practice."

11.41 am

The Chamber has been treated to one of those rare experiences of listening to an hon. Member who knows what he is talking about. It is difficult to think of much to add to what he has said, and I congratulate my hon. Friend the Member for Tunbridge Wells (Mr. Norman) on addressing an important subject from his background of enormous experience. He has clearly given the subject a great deal of thought. I shall not trawl over the same ground because he has made his points adequately. However, I shall mention a couple of other points.

First, I draw hon. Members' attention to my entry in the Register of Members' Interests. I am a non-executive director of several companies, one of which is public. I am happy to say that only one of them is public because, if I were now invited to join the board of a major FTSE 100 company for £25,000 a year, I would seriously hesitate. It is not an attractive task as it is, and this report is likely to make the job less attractive. The Minister would do well to bear that in mind.

Let us consider what has happened to those who were directors of Equitable Life. The decisions that they took were no doubt taken on professional advice, but they turned out to be disastrous. Some businesses go wrong; some go right. Unfortunately, that one went badly wrong, and its non-executive directors are now being sued for billions of pounds. They will be ruined if those lawsuits are a success. There is no fee that a non-executive director could earn that makes that risk worth while. We should therefore be very careful about making the role of a non-executive director of a major public company even less attractive than it is at the moment.

I want to emphasise a point that my hon. Friend made much more effectively than I could: directors must be a team. It is a terrible mistake to set up two classes of directors, one of which is the in-house police force—the security cops who constantly keep a check on the executives. That will not work. The executive will not tell them things and it will make its decisions outside the board meetings at executive committee meetings. The non-executives will therefore find it difficult to perform their task. Unless there is openness between members and an identity of purpose, which is for the good of the business, and unless the board operates as a team, it will not work.

There is one circumstance in which non-executives always find themselves set up with a difficult role. Dealing with executive remuneration is a difficult task, and it is one of the issues that should be on the Higgs agenda, but it is not. The public are concerned about executive remuneration and corporate failures. We have seen Marconi here and Enron in the United States. Some failures have been the result of fraud and some are the result of bad business decisions. However, the problems will not be solved by tinkering with the role of non-executive directors.

I shall pick up on a point that my hon. Friend made in passing, as it is the reason for my involvement in today's debate. The problems of excessive corporate remuneration and the rewards of failure or major corporate failures, such as Marconi, will not be solved by somehow changing the role of non-executive directors. Doing that might lead to better corporate governance, but not necessarily to better management. That is what the debate is really about. We want the companies that employ so many people in this country, provide so many of the goods and services that we all buy and are responsible for much of the productivity gain and wealth creation in Britain to be better managed. That will not be done by creating a class of non-executive directors who sit there, riding shotgun for the people trying to do their job.

The issues of performance and executive pay come back to shareholders and to shareholder responsibility. The absentee landlordism that was rife in Britain for large parts of our history—certainly in the 18th and 19th centuries—and that led to enormous economic and social problems is what we now have with shareholders. Most shares are owned by collective investment schemes of one sort of another, such as unit trusts or pension funds. We are, through our pension schemes or savings, the beneficial owners of those, but the direct owners who run them on our behalf behave like the worst absentee landlord. They think that they can simply buy or sell shares on the basis of whether they like their performance or want to take the profit. They take no responsibility for the management and performance of the company. That issue should be addressed. I do not pretend to have a solution, but while shareholders think that they can subcontract that responsibility to a couple of guys on £25,000 a year who turn up at monthly board meetings, we will not get the results that people want.

Some big shareholders simply cannot sell the stock of a company, although they might pick one company that they do not like, and I guess that the smart ones sold out of Marconi before it went badly wrong. However, major institutional shareholders cannot simply claim that they do not own BT, the major drugs companies such as GlaxoSmithKline or the big supermarkets. In fact, they own large chunks of those companies. They cannot divorce themselves from the responsibility of management. I urge the Minister to examine ways in which the Government might try to get companies to behave like the owners of those businesses and take responsibility for executive pay levels. Hardly any of the institutional shareholders bother to turn up at annual general meetings, but give the chairman their proxy. We have seen a couple of shareholder revolts over executive pay recently, and I say good luck to them. Let us keep it up—it is a very healthy sign. However, 30 per cent. voted against the Barclays chief executive's pay deal, and it has just gone through as though that had not happened. When one of those deals is defeated, we will then see shareholder power.

Why is the matter being left to ginger groups such as the Pensions and Investment Research Consultancy? Why are the mainstream institutional shareholders not taking on that role? Is there a job here for a combination of the Government, the Financial Services Authority and the Bank of England—for the usual informal network that twists people's arms—or does the problem require legislation in the form of withdrawing tax privileges if shareholders do not exercise their votes? Unfortunately, the Government have taken away so many tax privileges from pension funds that that might not work, but some privileges still remain. Perhaps institutional shareholders should not be able to enjoy them unless they vote at meetings rather than simply giving their proxy to the chairman. I hope that we can return to examine the question of shareholder power and how it is exercised. Many shareholders behave like absentee landlords.

It is worth picking up on a couple of points. I do not see how a company can have a chairman and a senior non-executive director except in the unique circumstance in which the chairman is, in effect, the chief executive as well. Even then, I see some difficulties. I do not know whether my hon. Friend would acknowledge that that is a special case. Companies should be left to be managed and organised in the way in which their shareholders want them to be. Some companies have a history of what the Americans would call theory X management. General Motors was a good example of that, constantly renewing its own executive team from inside. It had a strong corporate culture. Other companies are led spectacularly by the strength, vision and commitment of one individual.

One cannot say into which category particular companies should fit. They ought to be allowed to develop in the way that is right for them. In some cases, that will mean a strong executive chairman; in others, an outsider who is already, effectively, the chairman of a board who can certainly perform the role of communicating with shareholders. I would be reluctant for yet another division to be introduced in the non-executive directors. It is bad enough that, for much of the time, they are forced into being box-checkers and taking on a list of corporate governance points that they feel obliged to make sure, in a rather self-defensive way, are complied with—and that is particularly so on audit committees. I would not want to introduce a division between the non-executives so that there would be not only two classes of directors, but two classes of non-executive directors. That would be a mistake.

The idea that the big corporate scandals or the huge unhappiness over executive pay will be avoided by tinkering with the roles of non-executive directors or non-executive chairmen is a fallacy. Such problems will be addressed only if shareholders demand that directors do not have more than one-year service contracts and do not give chief executives large golden hello payments, and if, as my hon. Friend suggested on another occasion, shareholders insist that it is written into contracts that the quality of a person's performance can be taken into account in assessing what their compensation for leaving office should be. Unless shareholders are prepared to use their power and exercise their responsibilities, we will not solve the problems. It would be a mistake to think that we will.

Order. I remind hon. Members that it is the convention for the first of the three wind-up speeches to start 30 minutes before the conclusion of the debate. I ask the two hon. Members who are seeking to catch my eye to bear that in mind when making their contributions and accepting or responding to interventions.

11.51 am

May I join in with the praise of my hon. Friend the Member for Tunbridge Wells (Mr. Norman) for his tour de force on all the issues? I entirely endorse what my hon. Friend the Member for Stratford-on-Avon (Mr. Maples) said about the importance of shareholder responsibility, an issue that I will touch on in my brief comments.

There is little doubt that, as ever, the devil is in the detail. Superficially, I agree that the intentions behind the proposals were good. Those intentions lie behind Derek Higgs's long-awaited review. However, there has been relatively little recognition of the already substantial strides that UK plc has taken in areas such as remuneration and corporate governance, but I appreciate that the review was quite narrowly defined. There is no room for complacency given the number of scandals on both sides of the Atlantic. Clearly, one considers Enron and WorldCom in relation to a whole range of corporate governance issues and concerns have been voiced in relation to the role of non-executive directors of those companies. We should not feel that somehow the regime is so entirely different in this country that such scandals could not happen on these shores.

I entirely agree that it is surely for shareholders, both institutional and personal, to take on a great deal more responsibility. My grave concern is that legislation is rarely the answer. I appreciate that Higgs may or may not lead to legislation. There may just be a report and a code that comes into practice. However, there has been a worrying trend—particularly in the last year or so—in the Government's relationship with business; they are considering more regulation and legislation. Let us consider the Higgs report and the concerns that have been addressed by the Secretary of State in relation to remuneration. It cannot be a coincidence that most Sunday newspapers in recent weeks have talked about new, stricter and more draconian powers being brought to bear.

No one in this House should seek to undermine the profitability of our companies, which are, after all, our life blood when it comes to ensuring that we have not only a successful economy, but job opportunities and the public services that all of us wish to improve. I am concerned that, ever more burdens—this is another example—will lead to yet more bureaucracy and regulation, especially in what promise to be somewhat more difficult times.

I understand that compliance will not be mandatory. My hon. Friend the Member for Tunbridge Wells rightly pointed out that, in relation to the Cadbury report, there was 40 per cent. non-compliance initially and that now simply one tenth of companies do not comply with the code. The reality is that there will probably be more regulation, and that will come at a cost. The onus will be on a company to provide a clear and plausible explanation in its annual report if it does not comply. The real concern is that there will be a new definition of independence that will lead to a great loss of talent from the boardroom. It has already been pointed out that too many skilled and potentially able non-executive directors will stay away from a new regime. Such a corporate backlash is, in my view, understandable.

The focus on the enhanced position of senior independent directors may be highly divisive. We have to examine the practical reality that the role of the senior independent director will potentially become key when results are announced. A high-profile company, which may have had well publicised difficulties, needs a strong relationship between the chairman and the chief executive officer to ride through the ebbs and flows of business. It is essential that such businesses have united boards. It is likely that that sense of unity will be undermined by the new, all-powerful, non-executive director role that is clearly envisaged by the Higgs commission. I am concerned that that role will become a hotline to shareholders and will undermine the position of existing executive directors. It will not undermine what might be described as the cosy relationship in the boardroom, but it might undermine a company's profitability.

I could speak for far longer on this topic, but I know that my hon. Friend the Member for Arundel and South Downs (Mr. Flight) wants to say a few words. I congratulate my hon. Friend the Member for Tunbridge Wells on introducing such an excellent debate. We look forward to hearing the Minister's views.

11.56 am

First, I draw attention to my declaration of interests. Secondly, I congratulate my hon. Friend the Member for Tunbridge Wells (Mr. Norman) on securing the debate.

In a non-party-political context, it is sad that there are no Labour Members in the Chamber apart from the Minister and her Parliamentary Private Secretary because the issue is important. It is perhaps a comment on the Government's large majority that there is a lack of interest in important matters such as securing the success of this country and ensuring that companies are run correctly.

The Higgs report aims to make non-executive directors discharge their responsibilities in a more professional way and to ensure that they are appointed properly. It has been said, however, that that will not guarantee good company performance. Like Marconi and Cable and Wireless, Equitable Life had one of the best quality non-executive boards, which in no way protected it against disaster.

Although my hon. Friend the Member for Stratford-on-Avon (Mr. Maples) made a good point about absentee landlords, it is slightly unrealistic to expect the international investment management industry to take on that role. Many equity positions in British businesses will be owned or managed by fund managers in New York or Hong Kong whose jobs do not involve ownership. There is a need for professional non-executives to play a greater role in protecting the interests of shareholders.

Some of the key points in the Higgs report seem to be greatly mistaken. First, on the principle of a board effectively being controlled by its non-executive directors, my fear is that that will lead to people going through the motions at formal board meetings while key decisions are taken outside the boardroom behind closed doors. If we want to go in that direction, it would be better to go the whole hog by adopting the German two-tier board approach. If anything, the principle will cause decreased, rather than increased, transparency in decision taking.

Secondly, it is crazy not to accept that senior executives aged about 60 are often the most appropriate chairmen of businesses. HSBC, Tesco, Unilever and Sainsbury's are examples of dominant British companies that have tended to follow that tradition and clearly intend to continue to do so. My hon. Friend the Member for Tunbridge Wells rightly made the point that there is a risk that chief executive officers may stay on too long. There is also the risk that other companies may poach people who cannot become chairmen and who retire as CEOs because such people might bring confidential information with them. The proposal is therefore unsatisfactory and, as has been said, is also inappropriate for small and medium-sized businesses. There is the risk that there will be a mere going through of the motions, and it is not a model that will suit most small businesses. With regard to whether it is intended to be a rule or just guidelines, the problem is that the listing authority is likely to treat it as a requirement, and to require a major justification for businesses that do not fall into line with these prescriptions.

There is a mistaken view—almost an assumption that executive management is not to be trusted. In my 30 years in the investment management industry and in participating in companies I have observed that successful businesses tend to have strong and effective executive leadership. My hon. Friend the Member for Tunbridge Wells pointed that out. Non-executive directors will—of their nature, and increasingly—be looking firstly to protect their own rears against the risk of being sued. They will not be looking to take bold executive decisions to lead companies forward and to create benefit for shareholders. Therefore, if we end up with businesses that are controlled by NEDs, that will be bad news for entrepreneurship in Britain.

I say yes to more professional non-executive directors. They have an important role, which they have not always played professionally enough, in looking out for the interests of shareholders. However, some of the key proposals in the Higgs report are contrary to that objective.

12.1 pm

I draw attention to my declaration of an unpaid directorship.

I agree with the hon. Member for Stratford-on-Avon (Mr. Maples): it was a privilege to listen to the comments of the hon. Member for Tunbridge Wells (Mr. Norman). He has not only a vast amount of experience, but he has turned round a major failing company. He made a success of it, and he enjoys great respect for that reason.

The problems about corporate governance that we are concerned with are old problems. There is an eloquent passage in Adam Smith's "The Wealth of Nations" that describes the conflict of interests between the people who own wealth and the people who manage it for them. That problem has recurred in different forms over the ages. When I was a teenager, I was introduced to American books by J.K. Galbraith and others, which talked about the death of shareholder capitalism. The issue has ebbed and flowed over the years. Although the particular set of problems that we are concerned with are immediate, they have a long lineage.

There are three immediate reasons why we have been concerned with reforms of corporate governance, which in part come from the other side of the Atlantic. One of them is the excesses of the 1980s—the conflict of interests between chief executives and chairmen, the Maxwell problem and the megalomania problem in companies. That triggered the Cadbury report and successive such episodes. Secondly, there are the more recent worries about companies such as Enron and WorldCom—about how interesting devices such as stock options, which were designed to incentivise managers to be more sensitive to their shareholders' concerns, had the opposite effect by encouraging them to manipulate share prices, and about the need for a new round of corporate governance reform. Thirdly, there is growing concern about executive remuneration and abuses thereof. I know that the hon. Member for Tunbridge Wells also has views on that, although the Higgs report does not directly touch on it.

The hon. Member for Tunbridge Wells praised the Higgs report and its spirit while criticising the over-prescriptive way in which it had been implemented. He drew that distinction. It is therefore worth while to reflect on two of the main themes that came out of the report, which I think that all of us—or, at least, most of us—can endorse. The first theme was a stress on the importance of independence on boards. That is independence that acts as a source of scrutiny of management on behalf of shareholders. Although the Higgs report is concerned that there may be significant non-compliance, one of the points that has emerged from recent research is how little real independence there currently is. Recent studies of perks suggest that, in terms of the Higgs report, only 20 per cent. of boards could be described as independent—in other words, with a majority of independent non-executive directors—so we are starting from a low base. One of the report's main contributions was to suggest increasing that figure. Whether it should be as high as 95 per cent. or 80 per cent. is secondary, but the importance of independence was the key factor.

The second point—it was an important contribution to the report, and was briefly touched upon by the hon. Member for Arundel and South Downs (Mr. Flight)—was that non-executive directors should be better trained, more professional and more specialised. The recruitment process should be improved, so that we do not have incestuous magic circles of non-executive directors recruiting each other, but can move the system of independent non-executive directors on to a more professional footing. That depends not on the code, but on the implementation of Professor Laura Tyson's report. Indeed, that may be one of the genuinely positive things that comes out of the Higgs report that does not require prescriptive procedures.

Finally, I turn to the criticisms that are set out in the report, which fell into several categories. The first set suggested that incorporation of the combined code would do harm. It is important to stress that we are not talking about regulation, at least, not regulation in the normal sense. We are talking about voluntary self-regulation, and comply and explain is not regulation. The Government could have gone down the regulatory route, but they did not. We are not talking about that damaging sort of regulation, but the Higgs report was right to say that damage could occur in two ways.

The first, which has not been emphasised, is the role of smaller companies outside the FTSE, where a tick-box culture might do harm. One can imagine institutional investors looking down a list of companies and finding that a significant number of boxes have not been ticked. They will not know much about the companies concerned and simply will not invest in them, thus making life difficult for companies to raise capital outside the major capital markets. That is a potential problem. Equally, I can see the force of what the Higgs report said about affecting the chemistry of boards. We have to take that advice on such matters.

The second set of criticisms is quite different. One of the problems is that it does not deal with the real problems, such as abuse of remuneration. I am not sure that that is a criticism of the report; we clearly need other things to follow.

The third criticism, which the hon. Member for Stratford-on-Avon raised, and which is also important, is to remind ourselves of the reason for independents. Their essential function is to represent shareholders, but what if shareholders do not want to be involved? One of the problems that we are already encountering is that the various shareholders' meetings on executive pay are dominated by institutional shareholders. Many of them are fund managers, and many of them suffer from the same forms of payment for failure as the companies that they are supposed to be scrutinising and criticising. There is a deep problem in creating an environment of shareholder activism and responsibility, which the Higgs report does not address but which non-executive independent directors are supposed to be aware of.

I conclude by saying that the Higgs report was a useful advance; it was positive and responded to a real need. I do not see enormous harm coming from implementation, which will be based essentially on voluntary self-regulation. However, important technical criticisms need to be taken on board, and the hon. Member for Tunbridge Wells referred to them eloquently and authoritatively.

12.9 pm

First, I declare the interests that are listed in the Register of Members' Interests. I also sat on the board of four public limited companies when not a Member.

I congratulate my hon. Friend the Member for Tunbridge Wells (Mr. Norman) on securing this debate. If not the best speech, his was certainly one of the best that I have heard in Westminster Hall. My hon. Friend's superb knowledge and talent were much in play. He explained clearly how we should move forward. He was right to say that the Higgs report could have a great impact on wealth creation in this country. There is a need for an extremely critical analysis. As my hon. Friend said, not enough discussion has taken place in Parliament. I understand that Her Majesty's Government initially welcomed the Higgs report. Referral to the Financial Reporting Council has been mentioned as well as the fact that all recommendations should go forward, without queries.

My hon. Friend was interesting when he referred to the view of business leaders. The Confederation of British Industry's survey showed that 80 per cent. of FTSE chairmen considered that the Higgs report will undermine the role of chairmen. He was also right to say that it was most important that a combined code was not undermined. As he said, the combined code works because nearly everyone complies with it. If 20, 30 or 35 per cent. of companies did not do so, the code would be discredited. The Government could then be tempted to consider other ways forward, such as legislation, and that would be a disaster.

I was impressed by what my hon. Friend said about the need to have a good constant supply of non-executive directors who do not want to become box-ticking apparatchiks, but believe in the company that they serve. The chemistry of a good board is difficult to make into a code, a recommendation or to put in writing. A good board is the result of strong leadership. It happens with certain companies and everyone knows exactly which companies they are.

I was also impressed by what my hon. Friend said about the role of chairmen and the need for the combined code to enshrine strong leadership, not to undermine it. I have certainly taken on board what he said about the role of senior non-executive directors being tabulated and defined clearly. As he said, the person who emerges does indeed from time to time set up links between major shareholders and will embark on other initiatives, with the support and concurrence of the chairman, other members of the board and the executive directors.

My hon. Friend made a good analogy when he said what would happen in a ministerial team if a special adviser or someone else was reporting the entire time behind the back of the Secretary of State and undertaking particular tasks. It is important for the ultimate appetite of chairmen to build strong boards. To remove even part of that role from chairmen would be a grave error.

As for succession, my hon. Friend referred to chief executive officers who could not move forward to the role of chairman. That does not happen often, but does from time to time in certain special companies. For example, Lord King of Wartnaby could still be chief executive of British Airways plc, if he had not gone forward to the chairmanship. What about Lord Hanson and what was then the Hanson Trust? It is now called Hanson plc. He could still be chief executive officer. There would be a roadblock. My hon. Friend could still be chief executive of Asda Group plc. It would have been a huge loss to the House if he had remained in that position and not gone forward to its chairmanship. There are many other examples. My hon. Friend the Member for Stratford-on-Avon (Mr. Maples) rightly said that the key to solving many of the problems lies with shareholders taking more interest and not just acting as absentee landlords. That is especially pertinent to the debate about pay packages. There has been much discussion recently in the press about the pay package of Philippe Varin, the new chairman of Corus, Jean-Pierre Garnier, the chairman of GlaxoSmithKline, and Eric Daniels of Lloyds TSB. Surely the shareholders could have got a grip of things. I have no difficulty with the idea of chairmen and chief executives having generous packages, but surely that should be linked to the performance of the shares of that company.

In the case of Philippe Varin and Corus, we had a company on its knees that might have been able to renegotiate its banking covenants, but whose shares were completely brought down. Only four years ago, that company was making profits of more than £1 billion, but it is now making substantial losses. A new chairman came in with a two-year pay package and a guaranteed set of options with various other significant benefits. I find it extraordinary that that whole package is not linked directly to the performance of Corus shares. One can think of many other examples. It is up to the institutional and retail shareholders to empower themselves and take more interest.

As my hon. Friend the Member for Cities of London and Westminster (Mr. Field) said, there is no room for complacency, but he was also concerned about bureaucracy and red tape, which as an Opposition we are very concerned about. I go along with what he said about the importance of attracting more talent and of having a united board. My hon. Friend the Member for Arundel and South Downs (Mr. Flight) made a point about Equitable Life, where there was a quality board in place, but that board, on its 25 or 30 grand a year per head, was not able to solve the problems of that company. The board is now being sued for its efforts, and all its members will be personally liable for a large amount of money that will not be covered by the insurance that the company has in place.

My hon. Friend made the point about key decisions being driven by the board as a whole, which is important. Decisions should not be moved out of the board context. If the process becomes too prescriptive, many decisions will be taken by executive directors that are outside the confines of the board. One can see an analogy with Cabinet government, particularly in this Government where most decisions are taken by the Prime Minister and a few advisers outside the Cabinet.

As an Opposition, we do not have any difficulty in supporting some recommendations set out in the Higgs report. We certainly have no difficulty in supporting the separation of roles of chairman and chief executive officer, although it is interesting that Derek Higgs is on the board of British Land, where the CEO and the chairman are the same person. We do not support the recommendation that the chairman should not chair the nominations appointments committee. The reasons for that are clear and were well expressed by my hon. Friend the Member for Tunbridge Wells.

We do not support the recommendation that chief executive officers should not be promoted to the chairmanship. That is rare, but such a move would stifle wealth creation in certain circumstances, and could well stifle the performance of one or two key companies in this country. We are against the recommendation that a chairman can take only one such chairmanship. It is a question of time and performance, which can be judged. It would be wrong to be over-prescriptive.

We are cautious about the position of a senior independent director because often such a person does emerge. However, I do not think that the process needs to be carefully tabulated and prescribed. That position could undermine the entire ethos and principle of a unitary board and drive a wedge between the non-executive directors and the executive directors. We are cautious, and surprised that Derek Higgs recommended that half the board should be independent. If, for example, one other director is connected to the company, albeit as a non-executive, there could well be a majority of non-executive directors. Boards could become too big and unwieldy, and there would be an unacceptable cost to small companies.

I know from my experience on the boards of two companies, before I came to the House, that the costs that those companies face in complying with existing corporate governance are difficult enough, without adding more. The Government have said that they want more companies to move on to the off-exchange market and the alternative investment market, and they want corporations to move from AIM on to the main listing, but they will have to consider carefully how those regulations will impinge on smaller companies.

As an Opposition, we are concerned about the short-termism in some of the Higgs report, particularly where it is said that there should not be, as a rule, more than two three-year terms, nine years being the exception. Prescribing particular limits is a mistake. The report comes close to proposing a maximum period of service, which would certainly be a mistake. We want to see more non-executive directors come forward, but as it stands, the report will have the law of unintended consequences, as the CBI has pointed out, and fewer people will come forward. People do not want to become box-ticking apparatchiks, putting their career and reputation on the line.

We wish Professor Laura Tyson well, but what we really want is for the Government to promote more debate and to examine carefully some of the points made this morning and in the press. We also want the Financial Reporting Council to pull out the best parts of the Higgs report, so that we can then move forward with a better combined code.

12.20 pm

The Parliamentary Under-Secretary of State for Trade and Industry
(Miss Melanie Johnson)

First, I convey to the hon. Member for Tunbridge Wells (Mr. Norman) my enthusiasm for his initiation of the debate. As he and others recognised in their contributions, the issue is highly topical and very important. The Government have placed a high priority on it recently. As other Members have commented, the hon. Gentleman has a great deal of first-hand knowledge, which was obvious from his contribution. I listened carefully to his points.

By way of background, I remind hon. Members of the setting in which these issues of corporate governance have been raised. The subject of this debate is central, but the Government have undertaken many other measures such as the co-ordinating group for auditing and accounting. The Higgs report is just one of a number of measures aimed at maintaining the UK's position as a leader in corporate governance. Recent discussions with authorities in the US and elsewhere in Europe have made it clear that we are still doing the work that is necessary to maintain that position. Other work was done by Sir Robert Smith, producing guidance for audit committees, and there has been a review of the regulation of the accountancy profession and reports from the group that I chaired with my hon. Friend the Financial Secretary to the Treasury, covering such issues as auditor independence and rotation. The Government have recently put in much work on such issues in response to the concerns that we all have as a result of the Enron, WorldCom and other situations.

The review by Derek Higgs of the role and effectiveness of non-executive directors has played an important part in that package of post-Enron initiatives and has served well its central purpose of examining how UK productivity through corporate enterprise could be improved. The hon. Member for Tunbridge Wells mentioned the importance of that in terms of wealth creation and the wider economic agenda. The review was not aimed at taking a swipe at companies or their chairmen, as some would now have us believe, but was about enhancing the effectiveness of non-executive directors in maintaining the best regarded framework of corporate governance in the world and providing a badge for UK business through improvements to the best practice doctrine, rather than a rules-based approach.

I do not think that the hon. Gentleman, his hon. Friends or the hon. Member for Twickenham (Dr. Cable) would disagree with any of that. I do not think that much has been said, in terms of the major, overall objectives, on which any of us would disagree. In a statement to the House on 29 January, my right hon. Friend the Secretary of State for Trade and Industry strongly welcomed the Higgs report and emphasised its importance. She highlighted Derek Higgs's conclusions that at least half the board and the chairman at the time of appointment should be independent, that all members of audit and remuneration committees should be independent and that the separate roles of chairman and chief executive should be reinforced. She stressed how crucial she thought it was that appointments be made on merit, not, as is the case for more than half of appointments at present, through personal contacts and friendships. However, she also said—I repeat this in light of contributions made by Opposition Members—that that was not a regulatory approach.

The way to raise corporate governance standards is to use the existing successful approach of the combined code guidance and the principle of comply or explain. That means that if a company, such as a small listed company of the sort that the hon. Member for North-West Norfolk (Mr. Bellingham) mentioned, considers that particular provisions are not relevant or manageable, it can, as now, simply explain why it is not complying. Its shareholders and the market will judge whether that explanation is reasonable. I will go into more detail on comply and explain later.

Since the publication of the Higgs report, there has been plenty of media coverage of its implications, and some concerns that have been raised were mentioned again today. We are well aware of the responses to the selective questions asked by the Confederation of British Industry, and of course we note the concerns. However, the institutional investor community is generally supportive of the report, and many in business support the majority of the report's findings. That agrees with the view I expressed that the majority of those who contributed to the debate have also, broadly speaking, supported the report. Indeed, the hon. Member for Tunbridge Wells said something to the effect that its central ideas are good, but that substantive issues need to be addressed. We share that view.

On making good boards better, the Higgs report mandate was to improve company performance and productivity—I thought that the hon. Member for Tunbridge Wells was rather unkind to suggest that the report was a narrowly drawn exercise—in particular, through the progressive strengthening of quality in the role of non-executive directors. However, it was to do so in a wider setting. The approach is based on best practice and builds on the Cadbury and Hampel reports as well as the best practice developed by leading companies, which raises the gain for some but does not diminish the effectiveness of many.

In response to the hon. Member for Stratford-on-Avon (Mr. Maples), I point out that the report is an attempt to solve problems using a much wider package. It is not as narrowly focused as he suggests. My right hon. Friend the Secretary of State made it clear to Parliament, and confirmed in her Mansion house speech and her address to the Association of British Insurers, that the Government welcome the Higgs report. It marks an important contribution to corporate governance and to restoring investor confidence.

Of course, I am aware of the main concerns that have been raised, as well as of the broad support for the report, but I regard it as inappropriate for the Government to comment on individual proposed changes to the combined code. The hon. Member for Tunbridge Wells is smiling, but I do not think that it will come as an enormous surprise to him that the changes to the combined code are the responsibility of the Financial Reporting Council, not the Government. As the hon. Gentleman knows, the FRC is studying the responses to its consultation. The debate is timely because it can contribute to the FRC's considerations. I will say a little more about some overarching issues, but I should also remark that if the Government were to comment in detail at this stage, we would be criticised by the hon. Gentleman and his hon. Friends.

The new combined code will operate under the comply-or-explain approach, which, as Derek Higgs observes in his report, has served UK corporate governance well. I recognise that the hon. Gentleman accepts its success. The question is, will the report's recommendations change the whole approach? The hon. Gentleman is arguing strongly that there will, effectively, be a compliance target. I disagree strongly. We are still resting, as we have been doing, on the strength of comply or explain, which was established by the Cadbury report more than 10 years ago. That is an integral part of how corporate governance operates in this country. Listed companies are required to report on whether and how they apply the detailed provisions in the combined codes principles, and if not, why not. That approach confers responsibilities on companies to examine their adherence to the code and to give adequate explanations when they do not, and on their shareholders to give proper consideration to such explanations to avoid—