Order for Second Reading read.
I beg to move, That the Bill be now read a Second time.
In a world of change and competition, the Government work to create the conditions for business success, helping the United Kingdom to respond to the challenge of globalisation. We support successful firms by working with business to identify and tackle market failures and to overcome barriers to growth. We promote world-class science and innovation by supporting our science base and by ensuring that those ideas can be turned into high-value products and services. We also encourage a competitive energy market to deliver reliable, sustainable and affordable energy for business as well as for domestic consumers. We ensure fair markets by promoting open markets and creating the frameworks within which companies can compete freely and fairly, giving UK consumers more choice and better value.
It follows that the corporate law framework is a fundamental aspect of all that and the strengths of our company law have helped make this country a prime location for incorporation by companies. Indeed, since 1997, new incorporations have risen by 60 per cent. and the number of EU firms incorporating in the United Kingdom has more than quadrupled in the same period. I note that a recent World Bank survey found that it was quicker and cheaper for companies to set up in the UK than in any other part of the EU.
We want to continue investment in the UK and we want investors to retain their confidence in our system of corporate governance. We have been extremely successful in attracting our share of global business because overseas investors recognise those strengths, as well as our macro-economic stability, our science base, high skill levels, high rates of enterprise and our competitive markets. Our overall objective is to ensure that the country remains an excellent place to do business.
As many hon. Members will know, the Bill is designed to consolidate and update company law. It is the result of a great deal of thinking done by the company law review in the late 1990s and early part of the present decade. It was followed by two White Papers in 2002 and 2005 and a great deal of consultation. The Bill has also benefited from close scrutiny in the other place, which has improved it in many respects. I pay tribute to my right hon. Friend the Member for Cardiff, South and Penarth (Alun Michael). When he was a Minister in the Department of Trade and Industry, he made a substantial contribution to the legislation.
It may help if I set out the general approach that we have taken. Over many years, existing company law was built up by layers of additions that often obscure its meaning. Any student of company law will know that it is often less clear than it should be. The Bill thus restructures and redrafts, in clearer language, about two thirds of the Companies Act 1985 and the Companies Act 1989, which had, in turn, consolidated the 1948 legislation, including all the provisions most frequently used by small companies.
We said in the other place that we hope to restate without substantive change those parts of the Companies Act 1985 that have not until now been incorporated in the legislation during the passage of the Bill through this House. We do so simply because it has been put to us that it would be convenient for practitioners to have as much of our corporate law in one place as possible. I understand from discussions between the Minister for Industry and the Regions and the major Opposition parties that there is broad agreement with proceeding in that way. If we can—I do not think that it is a matter of any controversy—those who have to implement the law would appreciate it if what I hope will become the Company Law Reform Act before the end of the year codifies as much law as possible in one place.
I confirm that the Liberal Democrats certainly support the proposals for consolidation that the Government conceded in the other place. Our concern relates to the Government’s programme motion and whether sufficient time is being given to scrutinise the new clauses that will have to be tabled to get the codification through. Will the Secretary of State elaborate on his thinking? Does he really believe that the House and the Committee can properly scrutinise the hundreds of clauses that will probably be needed between 15 June, when the Committee is scheduled to start, and 13 July?
As I understand it—I may be wrong—the timetable was agreed through the usual channels, though they are not always foolproof. I certainly said to the hon. Member for Rutland and Melton (Mr. Duncan), who speaks for the Conservative party, that we would like to complete the Bill, which has come so far, in this parliamentary Session. I do not adopt a hard-and-fast rule about the matter and I agree that we need to ensure that there is adequate time for consideration of a Bill that comprises more than 900 clauses.
I am not the usual channels, but I will give way again to the hon. Member for Kingston and Surbiton (Mr. Davey). As long experience tells me, it is a bad idea to fall foul of one’s own Whips too often. If there is a particular problem, I undertake to speak to my Government colleagues who arrange these matters, as it is important that what will be well in excess of 900 clauses are properly examined.
I am sure that the Secretary of State will not fall foul of the usual channels on his side, because he is held in such high esteem by them. There are already 925 clauses for the Committee to scrutinise. Consolidation will mean hundreds more, which outside practitioners in particular will want to scrutinise and which will not have been scrutinised in the other place. May I present a simple proposal to the usual channels, through the Secretary of State? I suggest that the Committee stage be split into two parts, the first between now and the summer recess to deal with the 925 clauses, and the second during the wash-up period. When we return after the recess, we shall have benefited from examining the earlier clauses and will then be able to deal properly with the new clauses for codification.
Wherever discussions between the usual channels may be held, it is probably best that they do not take place across the Floor of the House. However, I understand what the hon. Gentleman has said. That approach will work only in relation to the clauses that involve merely a restatement rather than substantive changes. One of the advantages of the Bill’s long gestation has been widespread consultation and, although not everyone will be happy at the end of the day because there are some strong views on the legislation, it has benefited from a degree of consensus that I should like to maintain. Nevertheless, I will pass on the hon. Gentleman’s suggestion.
Members on both sides of the House genuinely want to maintain the consensus. In view of that, and given what the Secretary of State said, may I invite him not to move the programme motion? That would enable us to decide how to proceed with the Bill in a mature, grown-up way.
I am not in a position to give that assurance. Even if the programme motion is moved, if it turns out that other arrangements would be more appropriate we can still have discussions. We do not want to find ourselves with no timetable for the Bill. However, I will pass on what has been said to those who negotiate these matters on behalf of all the political parties and we will see what we can do. That is about as far as I can go.
My point arises from the discussion that has just taken place. Clearly, consideration in the other place benefited hugely from not being curtailed by a programme motion: there was an enormous amount of helpful debate.
The Secretary of State spoke of incorporating parts of the Companies Act 1985 in the Bill. Until a recent concession, that was not going to happen. One of the problems initially identified was that so much interpretation in the courts had been based on phrases in the 1985 Act. Importing some of that precedent into consolidated legislation that would also apply was seen as one of the main difficulties. Is the Secretary of State taking enough advice to ensure that it will be catered for?
As I have said, we want, where possible, simply to restate the law in what we hope will be the 2006 Act. We do not seek to change the law, which would require not a consolidation measure but a new measure. I think that Members on both sides of the House would consider that substantially different. I am anxious to do as much as possible on the basis of consensus. What we are asking the House to accept—the incorporation of a large amount of earlier legislation into a new Bill to consolidate it—is unusual, but I hope that we shall be able to be as accommodating as possible. I repeat that such matters as the timetable are best dealt with through the usual channels.
Let me return to the Bill. It has a number of broad themes, to which I shall return shortly. It deals with better regulation, shareholder engagement and a long-term investment culture, which is particularly important. It also provides for some flexibility in the future.
At the heart of the Bill is a new approach to directors’ duties and what is known as narrative reporting. The Bill recognises that to achieve sustainable success for the benefit of shareholders, directors must have regard to a wide range of factors. For the first time, the Bill includes a statutory statement of directors’ general duties. It provides a code of conduct that sets out how directors are expected to behave. That enshrines in statute what the law review called “enlightened shareholder value”. It recognises that directors will be more likely to achieve long-term sustainable success for the benefit of their shareholders if their companies pay attention to a wider range of matters, which are set out in clause 158.
Directors will be required to promote the success of the company in the collective best interests of their shareholders, but in doing so they will have to have regard to a wider range of factors, including the interests of employees and the environment. That is extremely important. It has been recognised by successful companies for a long time, but the Government believe that it is important that all companies recognise their wider obligations. Under the Bill, they will have to have regard to those in reaching their decisions.
That is a major step forward. I recognise that it is controversial. It was opposed in another place, certainly in the earlier stages, by the Conservatives, but I hope that, during the passage of the Bill, we can reach some unanimity on that matter because it is a major step forward in corporate governance.
The Secretary of State mentioned the new codification of the responsibilities of a director. Can he tell us why he has decided on the “have regard to” formulation rather than the “duty to” formulation, which was suggested by many members of the Trade Justice Movement?
We decided on that after a great deal of consultation. We are trying to put into statute something that is workable and that makes it clear that directors have to have regard to a wide range of issues, which are set out in the Bill. However, we want to do it in a way that does not open directors up to a range of claims or litigation. It has to be workable. We need to bear it in mind that companies do not have to incorporate in this country. By reaching a degree of consensus, which I think would not have been possible a few years ago, we have legislation that could put a duty on directors—it is not stated at the moment—and that enables them to take into account a wide range of matters, about which many people, including the Trade Justice Movement, feel strongly. We are doing it in a way that allows regard to be had to all those things. We should not get ourselves into a situation where the legislation is over-complex and wide open to litigation, which could result in it not having any effect at all, with companies choosing not to act.
On the point of the world Trade Justice Movement, I, along with many other hon. Members, have received lots of postcards from Christian Aid, Traidcraft, War on Want and the World Development Movement, which are clearly not satisfied that the Bill addresses the concerns that constituents have. What discussions has the Secretary of State had with the Secretary of State for International Development about the impact of the Bill on international development issues?
There have been wide-ranging discussions both within Government and between Government and many of the organisations that the hon. Gentleman mentioned. Indeed, my right hon. Friend the Member for Cardiff, South and Penarth had many such discussions in past weeks. Like every other hon. Member, I have had many letters and cards from constituents. I have also seen the letter written on behalf of all those groups that was sent to the Prime Minister today. They make three demands. The first is that companies be
“legally required to report on their social and environmental impacts.”
That is to a large extent covered in clause 399, under which companies are required to report on their performance, which will include the environmental and social impacts.
In relation to the second demand that those groups make, it is true that they want to go further. We say that directors should have regard to the wide range of measures that are set out in the Bill, whereas the campaign talks about “a legal duty”. I am concerned that we do not get ourselves into a situation where, whenever a company takes an individual decision, it has to go through legal hoops and a great deal of red tape, and establish almost an audit trail to examine each and every possibility to ensure that it is covered.
We are trying to strike a balance.
The third element is that those groups want people in other countries who believe they have been harmed by a UK company to have the right to take legal action in a UK court, and to have access to legal aid in order to do so. We would have some difficulty in accepting that proposition. I understand that many people want to go further, but the hon. Member for Kettering (Mr. Hollobone) will recognise that many in his party in another place opposed this measure, and do not even want what is in the Bill. We are trying to steer a sensible middle course.
If I am successful in catching your eye later, Mr. Speaker, I should like to develop the following point. Does my right hon. Friend agree that the consequence of giving in to the suggestions from the Trade Justice Movement would be to reduce the clarity of the accountability that it seeks, which would not help it to achieve its ends? As someone who has been involved in the Trade Justice Movement for many years, it seems to me that it is barking up the wrong tree.
I should say at the outset that the broad objectives of the Trade Justice Movement, particularly the Make Poverty History campaign, are supported widely throughout the country. Members of this House, including many Opposition Members, also support those aims. However, we must recognise that company law has a specific purpose, and has its limitations. There are many different ways in which we will make poverty history, and in which we can meet environmental concerns and concerns about what companies do in different parts of the world, but it is not possible to do all that in a companies Bill.
I will give way to all Members who are standing, but I want first to answer the points that have already been made.
The second point that my right hon. Friend the Member for Cardiff, South and Penarth made is also important. It is vital that we in this House make it clear to whom a director is responsible. We do not want a director to be responsible to everybody in theory, but in fact to nobody. That would result in good directors—people acting in the best of faith and with the best will in the world—being unclear what they are supposed to do and to whom they are answerable. Bad directors—if I might use that term loosely—could easily play one side off against the other.
Those who actually have to operate the law—all Members present must have received letters on this issue—get extremely fed up when Parliament puts on the statute book a measure that is not clear. The main knock-down point is that such a provision would not achieve the very things that many people behind the Trade Justice Movement want to achieve. I do not want a British company to look at British law and say, “If that is the case, I shall incorporate in France, where perhaps there are not quite so many restraints.” The Bill strikes a sensible balance that meets people’s legitimate concern that directors should have an explicit duty to consider all such issues, but at the same time, it is clear and workable.
The Secretary of State is of course right to say that directors have a duty primarily to their shareholders. Why, therefore, does he think it necessary to ensure that when they are dealing with financial risks, they give very clear reportage to their shareholders, whereas when they are dealing with equally important non-financial risks—particularly of an environmental and social kind—there is not the same legal requirement? It is that distinction that many of us find difficult to take.
If the right hon. Gentleman looks at clause 399, which deals with the reporting requirements, he will see that it makes clear that directors have to report on a range of matters, and have to draw attention to the fact that they are not reporting on a particular matter. If any ambiguities come to light that can be resolved when these measures are examined line by line in Committee, obviously the Government will consider them. I am anxious to ensure that when the Bill leaves this House and is put on the statute book, it is clear and understandable and does not provide huge scope for litigation, from whichever angle it might come.
May I bring my right hon. Friend back to the environment? It is somewhat ironic that taking place today is the annual general meeting of the all-party group on Nigeria, of which I am a member. When I visited Nigeria, and in particular the Niger delta, I witnessed at first hand young children being choked almost to death by the gas flaring of major oil companies, including Shell. Where in the Bill will protection be provided for those people?
I am not sure that I would quite share my hon. Friend’s view, but when he has a chance to look at the Bill he will see that it sets out clearly the matters to which the directors have to have regard. However, as I said a few moments ago, we also have to ensure—whether through international agreements and treaties or local legislation—that environmental and other concerns are met. While we can achieve a lot through company law, it is not possible for the Bill to deal with all the problems that might concern us. While I do not wish to labour the point, it is important that the duties imposed on directors are clear, and that they know to whom they are accountable and what they are supposed to take into account. The more complex the requirements become and the more wide-ranging the duties imposed, the more difficult it will be in practice to achieve what we actually want. The Government have sought to put before the House a Bill that is workable, represents a major step forward and will deliver what most of us want.
I am with the Secretary of State on what he is trying to do to strike the right balance. I am a company director, but not of the kind of business about which I wish to ask. Clause 158 states that directors must
“have regard…to…the impact of the company’s operations on the community and the environment”.
Would that provision give people living near a quarry, a coal mine or a nuclear power station the right to take the company in question to court because they did not like the activity, even though it was legal and had all the health and safety permissions?
No, it would not. The requirement is for the director, in reaching a decision, to have regard to all such matters, including the impact on the community. We cannot have a situation in which, essentially, two groups of people are running a company—one being the directors and the other being people who like or do not like what the company is doing and ask the courts to second-guess the company’s decisions. If we as a society decide that we do not want quarries, the best way to achieve that outcome is to pass legislation forbidding them. If quarries are legal, and provided that all planning permissions are obtained and other legal obligations are met, directors are entitled to reach that decision, because their duty is to the company. However, they do have to have regard to what they are doing. This is an important step forward and many in the other place were deeply opposed to it, but I hope that the House will support it.
To return to the point made by the hon. Member for Paisley and Renfrewshire, North (Jim Sheridan), is there not an argument that allowing legal action to be taken in the UK against UK companies by people abroad would provide them with an avenue not otherwise available? In many foreign countries where British companies operate, it is almost impossible to take legal action in the local courts. It is right that if a company is causing environmental degradation—the hon. Gentleman mentioned Shell and the Niger delta—it should be held responsible for that in the UK courts.
I would be very reluctant to encourage widespread litigation in the UK courts simply because remedies might not be easily available in some countries. There are many problems in various countries, but they cannot be resolved by simply opening up the jurisdiction of UK courts. The duties that we will impose on directors and the greater openness and transparency—so that people can see what is happening—will put more pressure on companies. Directors will be in no doubt about their duties, but the demand that we should open up the UK courts and, for good measure, provide legal aid to people bringing cases is not one to which the Government can accede. It would lead to substantial difficulties for British companies, and it would not be long before many decided to decamp to a jurisdiction more amenable to what they wanted to do. Belonging to the party that he does, the hon. Gentleman sometimes has difficulty with the concept that we live in a global economy, but he should be aware that companies can come and go very easily.
I accept much of what the right hon. Gentleman has just said, but I want to return to the contents of the business review, as set out in clause 399. Many people are worried that that clause is too narrow, and subsection (2) states:
“The purpose the business review is to inform members of the company and help them assess how the directors have performed their duty”.
Is not another legitimate public purpose of the review to allow potential investors in the company to know whether it has been acting ethically? Does he agree that it is important for this House to try to make a better and more stable market for ethical investment?
A business review produced under clause 399 by an oil company working in Nigeria, for example, would contain a formal report from the directors to company members, but it would also be available to the public. As I said a moment ago, the fact that companies will have to set out what they are doing and the effect that that is having will focus public attention on their activities. That is very important.
I want to ask another question about the business review outlined in clause 399. The transparency requirement means that company directors will have to make clear any negative social or environmental impact that their companies might cause, in the UK or overseas, but what will happen if the directors deliberately omit from the review matters that might be of concern?
Clause 399 will legally oblige directors to say why they are omitting information. When the Committee comes to consider that clause, I hope that it will accept that we have tried to draft it in a way that requires companies to report what they are doing, yet at the same ensures that people who might otherwise be tempted not say what is happening must explain what is going on.
A moment ago the Secretary of State said that the information in the business review would be a valuable guide for investors. However, Lord Sainsbury of Turville said in the other place that the purpose of the review was to inform members of the company. He said:
“It is not designed to help individuals decide on investment decisions, nor is it targeted at the wider public in the sense that they should feel entitled to rely on it.”—[Official Report, House of Lords, 10 May 2006; Vol. 681, c. 920.]
Does not that exactly contradict what the right hon. Gentleman just said? Does it not define the problem involved in shifting from an operating and financial review to a business review?
I do not think that it does. As I said at the outset, a director’s duty is to the company and therefore to its members—its shareholders. A company’s annual report or business review is primarily for its members, but it is also something that would-be investors or outside groups can read, and so form judgments about what the company is doing. The hon. Lady illustrates why we must make sure that the Bill makes it clear to whom a director is responsible. If we do not have that clarity, all sorts of difficulties will arise, both in getting directors to make sensible decisions and in achieving our objective. Clause 399 will provide much more openness and transparency than is available at present, and will also meet requirements other than those specified under clause 158. I believe that we have struck the right balance. It is inconceivable that what large public companies publish in their business reviews will not be very widely studied.
The Secretary of State seems to accept that many people increasingly take social and environmental factors into account in their purchasing and investment decisions—I am sure that that is backed up by the contents of our postbags—so it is vital that people have clear information. However, does he not also accept that the Government have missed a huge opportunity in abandoning OFRs in favour of the business review? The business review is much narrower, applies to far fewer companies and will not be subject to the clear mandatory standards that would allow consumers to compare like with like.
I do not accept that. I agree that many members of the public want to make informed decisions as to where they buy their goods and services. The Bill will help, as will other measures. The reason why the Government decided not to proceed with the OFR was that we were anxious to minimise the regulatory burden on companies in general. I forget whether the Liberal Democrats have a policy on that— I suppose it depends who they are talking to at the time. I do not accept the point that the hon. Lady makes about the business review. It will allow ample scope for all the things that need to be reported on to be set out as fully as possible.
In Committee there will obviously be a great deal of scrutiny of the two clauses relating to the business review, as of others. The Government have sought to put on the statute book a major step forward. I accept that it is controversial, but it provides clarity, and something that will actually work and, in the years to come, will influence companies’ behaviour. Let us be in no doubt: the duty is certainly intended to affect a company’s behaviour so that it behaves ethically and has proper regard for all the matters set out in the Bill. I also want to make sure that the business review is properly understood. I believe that it will encourage directors to provide information that will enable people to make decisions.
I shall now say a word about a small part of the Bill that was controversial in another place. It relates to derivative actions. We recognise that occasionally directors of a company may put their own interests ahead of those of the company. We have sought to introduce a new procedure that means that claims lacking merit will be thrown out at an early stage.
We have provided a two-stage process. First, any applicant has to make a prima facie case. At the second stage, still before the substantive action begins, the court has to consider whether the decision of the directors was one that the company could reasonably and independently have taken. I believe that what the Government have done here will ensure that the process is not open to misuse, but will avoid the situation that we have seen in the past whereby a small section of the shareholders have felt that the directors have done something to the company’s detriment. Until now the remedy in such a situation was not clear. It is time that the remedy was put on the statute book.
A lot of the Bill is designed to regulate companies better. It is essentially a deregulatory measure. Much of our companies legislation was put in place with large companies with numerous public investors in mind. It is worth bearing in mind the fact that more than 90 per cent. of companies have five shareholders or fewer, and that many shares are not publicly traded. The Bill will help smaller companies. It will make it more straightforward to set up a company. It will remove the prohibition on private companies providing financial assistance to purchase their own shares. It will simplify the way in which they take decisions, they will no longer have to have annual general meetings, and it will allow greater use of written resolutions.
The Bill will also help bigger companies. It produces significant savings by removing obstacles in the way of electronic communications. We believe that the saving could amount to about £50 million a year for FTSE-listed companies alone.
The Secretary of State talks about private companies. Concerns have been raised with me about the provisions that allow a private company to do away with the post of company secretary. While I understand that in a small private company, such as a husband-and-wife operation, that is sensible, there are some very large private companies. Has the Secretary of State given any consideration to whether the provision should relate to the size of the company rather than whether it is private or public?
We did consider that, and came to the view that the right distinction was between private and public. Of course, not having a company secretary does not mean that someone does not have to be authorised to take decisions. But just as there does not have to be a company chairman—although there usually is a chairman, for private companies as well as for public companies—we thought it best to remove that requirement. As the hon. Gentleman says, for a very small company that is properly run, some requirements are excessive. A husband and wife may have to hold an AGM in their front room once a year.
The hon. Gentleman makes a fair point, in that some private companies are quite big, but for that reason, and because of the amount of money that they handle, they probably would take up the option of having a company secretary. It is not mandatory not to have one, but we are giving them that option. If he is lucky enough to be on the Committee that will scrutinise the Bill, he may want to press that point further.
For the purposes of dealing with company secretaries, I declare my registered interests. The answer that the Secretary of State has just given betrays one of the fundamental misunderstandings about the proposal for getting rid of the requirement for a company secretary in a private company: a company secretary, as opposed to the chairman of a board, is an office holder—otherwise we would not even have the term “directors’ and officers’ liability insurance”. An office holder is a completely different species from the chairman of a board, who is another co-director, chosen by the board to chair that board, and who has the accountabilities that go with that. I hope that I will be able to develop some of those points if I get the chance to catch your eye, Mr. Speaker. As we develop the debate on the requirement for a secretary, it is important to recognise that the secretary is, uniquely, an office holder. That was not part of the Secretary of State’s answer.
I think that I acknowledged the fact that the secretary of a company performs an extremely useful function in many companies. The point of the legislation is to remove the requirement for private companies to have a secretary—although they may still choose to have one. Certainly they will probably want to designate somebody to authorise signatories. If the hon. Gentleman or I were dealing with a company, we would want to be sure that whoever was entering into an agreement with us had that company’s authority to do so. Those safeguards exist in the Bill—but I am sure that he will return to the matter if he catches your eye, Mr. Speaker, and that he will return to it in Committee if he catches his Whip’s eye. We look forward to hearing what he has to say.
Will the Secretary of State explain why the Government are trying to improve their own cash flow at the expense of private companies by reducing the accounting period from 10 months from the end of the financial period to only seven months from the end of the financial year?
Again, we thought that that was the right thing to do. Perhaps I will come back to the hon. Lady if she wants that to be explained further. What the appropriate accounting period should be is always a matter of judgment, but I will happily come back to her on that matter.
We think that the Bill will save businesses about £250 million a year, of which £100 million will benefit small businesses—so the deregulatory measures are important. In relation to the engagement of shareholders and encouraging long-term thinking, the Bill also carries forward the long-established principle of enabling shareholders to be the primary regulators of corporate behaviour. It is designed to encourage and enable companies to create internal structures and controls that will promote trust and transparency and lead to better performance.
The Bill also contains a number of other provisions, to which I want briefly to turn. The first seven parts relate to the fundamentals of a company and how it can be formed. Later in the Bill, there are clauses that remove any obstacles to electronic incorporation. There are a number of measures on shareholders and management generally. Part 8 provides a balance between, on the one hand, the public right to know who a company’s members are and how to contact them, and, on the other, protecting members from attempts to defraud or harass them.
There is one important measure that I hope will be supported on both sides of the House—the part of the Bill that is designed to protect directors and shareholders in companies that have been targeted by a tiny minority of people who threaten or intimidate them simply because they do not agree with them. The measure will allow directors’ names to be withheld and will also mean that if a company suspects that someone is trying to get hold of its register of shareholders for an improper purpose, it can get the protection of the court. The measure has been widely welcomed by the industry, and I hope that it will be welcomed by everybody in the House, because it is important that we show our unconditional support for people who are exposed to that totally unjustified behaviour.
We totally support those moves, although we will suggest in Committee that the Government need to go further to protect individual shareholders. In the other place, the Government appeared to create the offence of using the register for improper purposes. However, surely the Secretary of State will admit that people who wish to access the register for bad purposes are not worried about another criminal offence, given that they are accessing the shareholder register to commit a crime. The protection that he is giving shareholders appears to be weak, so will he be prepared to be open-minded and examine the matter again?
If there is a feeling that we need to do more to help companies in such circumstances we will, of course, do so. However, we will want to ensure that any proposal is workable, strikes the right balance and is not open to abuse, because there has been worry about that. If the hon. Gentleman can make proposals that would help people who would otherwise be subject to such harassment, the Government will consider them. He might be interested to know that we had quite extensive discussions with several pharmaceutical companies about the matter, and as I understand it, they are happy with our approach.
Part 9 of the Bill deals with the ability of indirect investors to exercise governance rights. It might be helpful if I tell the House—especially the official Opposition—that the Government intend to reverse an amendment that was successfully made in the other place, which on the face of it extends the exercising of members’ rights for shareholders who hold shares through nominees. I understand perfectly well what the official Opposition were trying to do, and I am not against extending the democratic process in such a way, but subsequent to the passing of the amendment, many representations have been made suggesting that the measure now in the Bill would be pretty unworkable and expensive. We thus propose to table a further amendment, and my right hon. Friend the Minister for Industry and the Regions will hold discussions with the spokesmen for other parties in the House with a view to trying to get a measure that is actually workable.
We are already holding discussions with sections of the industry, and there will be discussions in the House with a view to trying to address people’s understandable desire that the franchise should be widened, without imposing an unjustified burden on companies by causing them to go to huge expense for no obvious purpose. In keeping with what I said earlier, it is important that we get a system that is workable.
Part 10 of the Bill will tighten up the law on child directors. Many people will find it strange that in this country a director need not be a person, so long as it is a legal person, and that anyone of any age can sit on a board. It may be novel to stick a toddler on a company’s board of directors, but that can be done at present. We propose to change the law so that a director must be over 16. There will be regulations to provide for exemptions—for example, a charitable company might want a young person as a director—but I think that the change to the law is welcomed.
We are also simplifying the decision-making process and making changes on accounts and auditing, especially regarding auditors’ liability, which people think are sensible. There will be a new offence for those who knowingly or recklessly cause misleading, false or deceptive material to be included in audit reports.
There are measures in the Bill on the raising of share capital and takeovers. There are also provisions that preserve the independence of the takeover panel, which has worked well in this country. On the regulatory framework, there are provisions to provide for the greater use of electronic communications. Part 36 of the Bill includes changes that will make procedures a bit more transparent.
A measure on institutional shareholders’ voting was discussed in the other place. I think that I am right in saying that both Conservative and Liberal Members of the other place voted to remove a provision that would have allowed the Government to make it compulsory for institutional investors to reveal how they voted. I am not sure why they did that, but the Government believe that transparency is important. I can think of no reason why companies’ institutional investors should withhold such information. The provision would have allowed us to introduce measures to make such transparency mandatory—albeit at some point in the future, because we would like to encourage a voluntary approach. As the Bill stands, institutional investors who do not wish to disclose what they do could remain in such a position for ever, but that would not be in keeping with the modern view that companies should be as open as possible.
Although there is no Member representing a Northern Ireland constituency in the Chamber at present, I should say that the Bill does extend company law to the whole of the United Kingdom, which I think will be welcomed by Northern Ireland businesses. Until now they have always had to wait to get what the rest of the United Kingdom has been getting.
This is an important Bill. It may be lengthy, but if we pass it I believe that it will add to the value that people see in investing in this country. The Bill is deregulatory; it aims to simplify. It also aims, crucially, to give investors a greater say and greater access to what companies are doing. As I have said, the changes that we are making in relation to directors’ duties are, I believe, a major step forward and should be accepted. I hope that we shall be able to continue to discuss the Bill in a largely consensual way. It will make a difference not only to corporate Britain, but to Britain’s well-being overall. I commend it to the House.
I welcome the Secretary of State to his first Second Reading debate in his new role. I had the pleasure of being his opposite number in my previous role as shadow Secretary of State for Transport.
The Secretary of State went to great lengths to explain what is in the Bill. Although I do not agree with him on some aspects of it, I am grateful for his explanation. Furthermore, I appreciate the way in which he took many interventions during his speech. I am sure that the Bill will receive detailed scrutiny in Committee, as far as we are able to engage in it.
We broadly support the Bill. As it has nearly 1,000 clauses, it is pleasing that we have to disagree with only a handful of them. We are glad that the Government have moved towards our position on some of the issues that remain before us.
The reports, consultations and reviews on which the Bill is based argued for putting deregulation and a “think small first” approach at the heart of company law. The Bill that has come to us, much amended in another place, is broadly to be supported. In many areas it deregulates and simplifies existing law, for which companies will be grateful.
The Opposition have some concerns about a number of the provisions in the Bill. I hope that the Secretary of State will not sweep aside our concerns on the ground that the overall effect of the Bill is to be deregulatory. We must examine the specifics.
Our shared objective with business is that it should achieve sustainable economic growth. That is why, under the leadership of my right hon. Friend the Member for Witney (Mr. Cameron), Conservatives have put ideas such as corporate social responsibility very much at the heart of the agenda that we wish to champion. Company law forms the framework in which business must operate. Achieving our aim of seeing a growing, competitive and high productivity economy depends on the legal framework being right. It has to be comprehensive and effective yet simple to understand and as unburdensome as possible.
Against those measures, much of the Bill stands up very well. Existing companies legislation certainly needs revision so that it better reflects modern business practice and technological developments such as electronic communications. Businesses have rightly complained that existing law involves unnecessary formalities and creates administrative burdens that no longer have any corresponding benefits. The Bill does good work in tackling some of these issues. We therefore congratulate the Government on realising how important such matters are.
Small business and private companies have in the past suffered from having to comply with requirements that were designed for larger public companies. The Bill goes some way towards rectifying that. We support, for example, the provision that one person alone can set up a company and that he will not have to appoint a company secretary, although they may choose to do so if they so wish. The requirement to hold an annual general meeting was a burdensome formality—it was a nuisance for some small firms. It is the recognition of these issues in the Bill that we thoroughly support.
I should offer my thanks to their lordships for their admirable work on the Bill. They took a long time, quite rightly, to consider it. I particularly thank Lord Hodgson of Astley Abbotts, Lady Noakes and Lord Freeman, who on behalf of the Opposition put in an enormous amount of work to improve the Bill. More than 1,600 amendments were considered in the other place. We are pleased that, on some issues, the Government took our suggestions on board. For example, the removal of what was part 31 was a sensible victory for the principle that the law should be clear to those who must abide by it. The idea that the fundamentals of company law should be changed by a Government without the full scrutiny of Parliament was deeply disturbing to people who know how difficult this area of law is. We are pleased, too, that the Government have agreed that the Bill should fully replace the Companies Act 1985. It was absurd to expect to be able to repeal of three quarters of that Act, leaving behind a stubby remnant and making cross-referencing impossible and company law even more complex.
We welcome the extension of shareholders’ rights to ensure that someone who invests in a company has the same rights regardless of whether they invest in their own name or do so through an individual savings account, personal equity plan or nominee account. I heard what the Secretary of State said a moment ago, but we must debate the issue in Committee. I hope that between us we can find a workable solution that will extend shareholder democracy without placing an unwarranted burden on company administration. The wording of the relevant provision requires significant work, and during the passage of the Bill we will go to great lengths to consult interested parties to achieve the workable solution that we all want.
Other significant improvements have been made to the Bill, and I hope to come on to them shortly. Elsewhere, however, serious problems arise from provisions that add new burdens and from clauses that confuse existing practice. In the other place, a number of controversial issues became clear. One that attracted significant public notice was the codification in statute of directors’ duties. We support the principle underpinning the relevant provision. Good directors take account of a range of long-term factors when acting in the best interests of their business. Good business involves making assessments of short and long-term risks, and using them to achieve success for the company. Furthermore, we entirely agree that a successful director pays close attention to the factors listed in clause 158, as well as many others. Fulfilled employees and satisfied customers are good for business, and a concern for the environmental impact of one’s activities may attract consumers and investors who are increasingly conscious of corporate social responsibility. Our anxiety is not that part 10 fails to fit with an ideological position, but that it is inflexible and will lead to confusion. In flagging up the issues associated with part 10, the Opposition were initially on their own, but now, largely as a result of the work done by my noble Friends and my hon. Friend the Member for Huntingdon (Mr. Djanogly), we have received the support of the Financial Times, The Economist, the Law Society and the CBI.
The existing common law position holds that directors’ duties are more complex than simply maximising profit from a given transaction. The provision appears likely to reduce the courts’ ability to develop the law to suit changes in business practice, so we must look at what the codification adds.
I am surprised by the position that the hon. Gentleman’s noble Friends took in the other place. Is he not aware, for example, that in section 309 of the Companies Act 1985, a Conservative Government legislated to ensure that employees’ interests had to be taken into account by directors when pursuing the company interest? The position that he has outlined marks a return to the position that applied many years ago, when corporate practice was not as good as it is today.
That is a red herring—the Government removed that provision, and we will probably take steps to restore it. The codification provides a list of just six factors, so it is a little like a written constitution—if we try to codify something in simple terms in clause 159 there is a danger that we may lose the wealth of experience and practice that has built up over time. Some people believe that the list is designed entirely to replace the greater number of fiduciary duties in common law. That would be a simplification—but, in our view, a bad one. The courts would be unlikely to consider themselves bound by this simple list, and in any case it is clear from Government guidance attached to the Bill that that is not what they intend.
Clause 158 states that directors must have regard to the matters set out there, but it adds “amongst other matters”. I cannot see how on earth passing the Bill will curtail the courts’ consideration of these issues. Furthermore, if the hon. Gentleman speaks about green issues, he might think about how such aims are to be achieved.
The problem is that there are about 650 “other matters” which have built up over time as considerations that guide the behaviour of directors. By picking out a mere six, the simplicity of the codification may make matters worse. It seems clear that directors will have to look, as the Secretary of State said, at both statute and case law to find out what their legal duties are, and perhaps at guidance as well.
Yet more confusing is the lack of clarity about how the list of factors provided in clause 158 should be approached. Are they listed in order of precedence? If not, what happens when there is a conflict between them? Ministers have given assurances that decisions taken in good faith will not be subject to review by the courts. The Secretary of State stated that yesterday in the Financial Times. However, the Law Society and many leading lawyers think otherwise. If it is not the Government’s intention that decisions taken by directors in good faith should be hauled through the courts, we urge them to work with us to tackle a provision that we think will lead to confusion. After all, it is what is in the Bill that matters, not what Ministers say they meant by the Bill.
Confusion in this area will inevitably lead to costly litigation. As Miles Templeman of the Institute of Directors cautioned,
“The Government has to make sure that the proposed legislation does not fundamentally change the current law. There is a danger that some of the drafting of the Bill could well have this effect, leaving confusion and uncertainty until the provisions are interpreted by the courts.”
I am following my hon. Friend’s argument with great care. Mr. Templeman does not want the present law to be changed because he does not want to take seriously issues of the environment and social concerns. That is a different position from the one that my hon. Friend is advancing. I hope that he will not quote the IOD on the matter, as it wants to restrict the responsibilities of directors, whereas he wants to clarify those responsibilities. That is a different issue. If he is doing the one, I support him. If he is doing the other, there is a real difference.
I imagine that if Miles Templeman were standing in my little shoes at this moment, he would robustly say that as a responsible businessman he would, in everything he does, wish to take seriously issues of the environment. If I may leap vicariously to his defence, I am pretty sure that that is what he would say in riposte.
We are perfectly willing to work with the Government to improve the clause and will table amendments in Committee. Our preference is for the Government to issue a single document of non-statutory guidance, which they have indicated they are willing to do. That would give directors a greater measure of certainty and clarity than does the current drafting. If, instead, the Government insist on the new statutory statement of duties, it must be drafted so as to make it clear that, as the Secretary of State wrote yesterday,
“directors are not required to keep additional records as a result of the statutory duties; and directors who act in good faith will not be held liable”.
Is my hon. Friend suggesting that, in the case that I put to the Secretary of State, if a business successfully applied for planning permission for, say, an opencast coalmine and met all the regulatory and other legal requirements, the local community could take an action against the directors under clause 158 if it did not approve?
No. To be fair, the Secretary of State answered that and, however reluctant I might be to do so, I largely go along with his attitude. In Committee we will have to consider the detailed working of all the clauses. This is a crucial Bill that the House must scrutinise word by word to make sure that every potential unintended and intended consequence is foreseen and properly understood, so that as a result of this mammoth piece of legislation we do not end up with a legislative corporate nightmare.
Those concerns about part 10 relate closely to concerns about part 11, which sets out a new procedure for individual shareholders to bring claims against directors. We are pleased that that procedure requires that the shareholder obtain the permission of the court to continue a claim, but we wait to see how high the bar is set when allowing such cases. This is, to some extent, an answer to my right hon. Friend the Member for Wokingham (Mr. Redwood). We believe in the principle that shareholders who suffer from the negligent actions of directors should have the right to bring an action, but because there is confusion arising from the statement of directors’ duties set out in the Bill, this part is problematic.
Under the new procedure, a pressure group could purchase a relatively small number of shares in a business and attempt to sue a director for a decision that he took with which the pressure group disagreed. If that decision had some environmental consequence, for example, the pressure group could reasonably argue that insufficient regard was given to that. Even if the case failed at the first hurdle, the damage done to the company could be significant, but if the court did allow the action to proceed, the company could find itself paying the legal costs of both sides, leaving the pressure group with no financial risk. The same procedure would be open to employees and ex-employees who owned shares, whereby decisions taken by directors that affected their jobs would be open to challenge in the courts. It seems likely that this part of the Bill will increase the likelihood of litigation without sufficient safeguards. It is possibly a recipe for disaster.
I am surprised by the hon. Gentleman’s remarks, because I thought that his colleagues in the other place had been fairly pleased with the Government’s approach. The standard by which the courts will have to form a judgment is whether there is prima facie evidence that a tort has occurred. That is quite a high standard. The hon. Gentleman is in danger of scaremongering on this issue when there has been a degree of compromise and consensus in the other place.
We will see. No doubt it will be discussed in Committee. Nevertheless, the provision opens the door for generously funded single issue pressure groups to try to use corporate law to undermine companies rather than to do what a company’s shareholders should, which is to try to make it a success.
There are two points here. First, it is already possible to bring such an action; the difference is that we are putting on to the statute book the rules that will govern it. Secondly, there are two stages: first, as the hon. Member for Kingston and Surbiton (Mr. Davey) said, there would have to be a prima facie case; and, secondly, the court would have to consider whether the decision was one that the directors could reasonably and independently have taken. That is a very high standard. People may not like the decision, and may come to the view that they would have taken a different one, but if it was found that the company could reasonably have taken it, an action of this sort would fail.
The other danger, though, is that the winners from the new procedure might well end up being not shareholders but insurers who offer to indemnify directors against such claims. Premiums are already shooting up. There is a risk, too, that the losers are likely to be British companies. As the provisions add to the liability of directors and the likelihood of litigation against them, it will become increasingly difficult to attract high-calibre candidates to be directors of UK companies. In extremis, it would make certain companies incorporate in another jurisdiction.
I should like to turn my attention to the growing concern regarding the uses to which registers of shareholders are being put. The issue hit the headlines most recently with shareholders of GlaxoSmithKline being targeted by animal rights extremists. In typical fashion, that led the Government to ensure that they were seen to be doing something; to be fair, I think that in the end they did. It is essential that the Bill contains the necessary protections on members’ register. We have called for that repeatedly, and as the Bill progresses we will be looking to see whether the Government’s specific proposals are the right ones. The UK Shareholders Association certainly thinks that so far the changes have not been thought through. We want to make absolutely sure that those who face potential intimidation from animal rights extremists are thoroughly and comprehensively protected.
This morning, we learned from the Financial Times that the Government are planning to reintroduce provisions in the Bill to compel institutional investors to disclose how they voted. The Committee will have to examine that in detail to ascertain exactly how it will be achieved and what it will achieve. We shall consider the Government’s proposals in detail to ensure that they are proportionate and avoid unnecessary burdens.
Clearly, the Bill deserves proper scrutiny. We are concerned that the Government still intend to move a programme motion for such a large measure about which there is so much agreement. We appreciate that the Secretary of State does not want it to spill over into the next Session and we understand that that is the bookend for the debates. However, in another place, three days were allowed for Report and one for Third Reading—a total of four days. It would therefore be unfortunate and dismaying to allow only one day for the House to consider the Committee’s work on Report. We understand that the Committee will have to debate more than 1,000 amendments. Given that we will work hard until we rise for the summer and then have the summer to examine everything that has happened, I hope that the Secretary of State will consider a proper extended period for Report and Third Reading, probably when we come back in October.
There is much to commend in the Government’s aims for the Bill. The consultations and reviews that preceded it have been long and detailed. We want company law to be brought up to date and we want to give firms in Britain a legal framework that promotes their success. In recent times, some British businesses have struggled under an ever greater burden of regulation and red tape. On productivity, the rate of growth has slowed since the Government took office. In competitiveness, Britain has dropped from fourth to 13th in the World Economic Forum’s league table. Our trade deficit is at a record high and our deficit with China jumped by 20 per cent. last year alone. Britain’s tax burden is rising to all-time record levels while many other countries are lowering theirs.
That is why we believe that the Bill is important and repeat our offer to work with the Government to improve it, and why my hon. Friends will table amendments in Committee to give British business the best chance of succeeding by giving it the best legal framework in which to operate.
I am pleased to be able to use the freedom of the Back Benches to commend the Bill to the House and to congratulate my right hon. Friend the Secretary of State for the manner in which he introduced it.
The Bill focuses on modernisation and simplification. As I have said on several occasions, it is long because it is simpler. When I became involved with it in May 2005, it became clear that the time—some seven years or more—since the days of the company law reform group and the time invested by Ministers and interested parties from every sector of business and the third sector had been well spent. That dialogue continued over the past year as clauses were published. I commend the approach as an example of especially good practice, open debate and confidence on the part of Government in discussing the way forward on an important measure.
I especially commend the officials whom my right hon. Friend has inherited. A particularly good team has worked on the Bill and that has enabled the discussions in the House of Lords to be well supported. I also commend the people who are described as stakeholders, although I am not sure whether that term does them justice. They come from all sorts of fields, including accountancy, law and investment as well as large and small businesses. In my time at the Department of Trade and Industry, I found the discussions intellectually stimulating and even entertaining.
The hon. Member for Rutland and Melton (Mr. Duncan) praised the Bill graciously, although I believe that I detected gritted teeth in some parts of his contribution. On the timetable, I remind him that there have been seven years of discussion before the Bill’s introduction. It has not appeared out of the blue and many people, certainly Labour Members, have taken the opportunity of being involved in the discussions that led to the measure.
The hon. Gentleman referred to the dangers of bureaucratic record keeping that could arise from the advice that some lawyers seem impelled to give. That would involve taking an excessively legalistic and bureaucratic approach to the way in which company decisions are taken, and it is somewhat divorced from the real life situations in which decisions are made and business done.
We experienced a similar problem with data protection. I well recall making it clear, when I was at the Home Office, that data could be shared between the police and local authorities for the purposes of crime reduction, and the legal experts advised that that was already what the law said. However, even after we had put a clause to make that abundantly clear in the Bill that was to become the Crime and Disorder Act 1998, some people still said, “If in doubt, don’t share the information.” That was bad advice. It is bad law, it is inappropriate and it is wrong. Data protection seeks to ensure that people share information appropriately and responsibly. Similarly, this Bill is about helping directors to know where they stand, to take good responsible decisions and to understand how they will be held accountable for their actions by their shareholders.
The law will not require the kind of bureaucratic record keeping that the hon. Gentleman suggested is feared by some people. He was also wrong to suggest that there was a danger of increased litigation, although that might have been the case without the amendments that have arisen from the considerable contribution made to the Bill in another place by the Attorney-General. Far from discouraging high-quality people from coming forward to serve as directors, the measures seek to make it clear that only when there is a genuine case to be made and evidence to be considered by the courts can such cases go forward to consideration or even disclosure. It was irresponsible and inaccurate of the hon. Gentleman to suggest that such dangers existed, or that the Bill might discourage high-quality people from acting as directors. Given the more consensual way in which he concluded his speech, I suggest that it would be in the interests of us all to ensure that the Bill does not threaten responsible directors, and that it encourages good practice by the directors of companies.
The principle of “think small first” is absolutely right, but I would counsel my right hon. Friend the Secretary of State that there will be pitfalls to be avoided when the Bill becomes an Act. Many of us remember occasions on which the House has got the legislation right, only for the detail of its implementation—through regulations and so on—to move away from what was intended either by the Bill’s authors or by the House. The Bill must be about enabling and encouraging business and enterprise to flourish.
I was pleased to see today’s visit to No. 10 by the corporate leaders’ group on climate change. The group comprises business leaders who recognise the global challenge to the environment—as well as to trade—as an opportunity and a challenge, rather than as a cause for panic and alarm. They recognise that sustainable development that balances and integrates economic, environmental and social considerations involves a joined-up approach that is good for business as well as for the wider community. That leads to a win-win-win opportunity for us, in regard not only to encouraging business and our competitiveness abroad but to environmental and social issues.
There is a lesson here for the CBI, because there is a temptation to argue that attacks on the Government are good and attractive to its membership. I would contrast that argument with the work that has been done on the Bill by representatives of the CBI, including those on its manufacturing council—which makes a massive contribution to the manufacturing forum—and on its small business council. I would also draw the House’s attention to its initiative on information technology security. Those are significant contributions, and they are much more important than the public face of criticism of and confrontation with the Government. Such activities might satisfy some of the CBI’s members, but they are not in their best interests. The kind of co-operation that we have seen on the Bill certainly is, however, and I commend it as best practice.
Does the right hon. Gentleman agree that it was a pity to hear the CBI on this morning’s radio attack the position of the Aldersgate group and not be prepared to go along with a proper estimate of the necessary degree of cut that would be required to reduce emissions by 60 per cent. by 2050?
Without any gritted teeth whatever, I am happy to agree with the right hon. Gentleman and to say that the development of that sort of consensus and leadership within business would be a welcome development, which we should encourage on both sides of the House.
I want to focus on a concern that is peripheral to the Bill, but is likely, as we saw from earlier interventions on the Secretary of State, to prove an irritation as our debates on the legislation develop. The long-standing effort to achieve consensus has been largely successful, as illustrated by the Opposition’s response, but there is a risk of our debate being hijacked by a mistaken attempt by the Trade Justice Movement to introduce an inappropriate burden on directors of companies registered in the UK. As I have told people in that movement, of which I have long been a part, I am particularly sad about that.
If we were to place in company law a burden in respect of environmental and social issues, when the Bill is about the vehicle of the company rather than the activities of companies, it would have two effects. First, large international companies, which see Britain as a good place to be located and to do business—in an environment, incidentally, where good business practice and responsibility on environmental and social issues is encouraged—will move to Paris, New York or Tokyo. The burden of the legislation would then fall on small and medium-sized businesses, which generally do not have that choice.
Secondly, accountability will be diminished rather than increased. The Bill is clearly focused on the vehicle—the company—and how to simplify and make more effective accountability to shareholders. That is what enlightened shareholder value is all about. The Bill makes it clear that directors have to consider the interests of employees and the environment in carrying out their duties to shareholders, but it would be a mistake—I underline the fact that it would be a mistake from the point of view of those who care about trade justice as well as shareholders—to dilute that clarity.
Let us remember that we are all shareholders now—by our pension funds, if not directly—and participating in the practice of enlightened shareholder value is the way to work as citizens. Creating confusion about who directors are accountable to—as my right hon. Friend the Secretary of State rightly said earlier, being responsible to everyone is being responsible to no one—will not help the interests of trade justice. Securing international agreement and making progress on the Doha round are the right ways for the Government to move.
I am particularly disappointed by today’s letter because the point has been explained to campaigning organisations. Indeed, I had the unique experience of participating in a debate in St. Mary le Bow, a church with two pulpits. I am not sure what happens when sermons are given—perhaps two approaches are debated—but I had the opportunity of speaking from one pulpit while the Trade Justice Movement spoke from the other. The key point is that it is like muddling up a piece of legislation about a vehicle such as a car—or in this case, a company—with legislation about a journey, the map, the purpose and where one wants to get to by using that vehicle.
To put it another way, a company and its directors have responsibilities to employees. They fall, in general terms, within the range of responsibilities that they have to consider as directors, but placing specific responsibilities on them should not be done through a companies Bill, but through employment law or health and safety at work legislation. To take another example that the voluntary organisations should well understand, enacting a charities Bill is a way of dealing with the vehicle and trying to ensure its roadworthiness. If requirements about child protection, animal welfare or cancer research were built into such a charities Bill, everyone would understand that that meant losing all sense of the distinction between legislation about the vehicle and legislation about a series of specific policy issues—the sort of destination a charity might wish to pursue and would specify in its constitution, but not something that should be placed in charities law. With respect to those in the Trade Justice Movement, such an approach is neither sensible nor democratic, because the Bill is designed to ensure that there is accountability to company shareholders.
The Bill introduces a major reform of company law: it makes it clear that the company’s directors must consider its long-term viability—the future interest of shareholders—rather being under an imperative just to make a quick buck. In running the company for the long-term benefit of the shareholders, the directors must have regard to factors such as the impact on employees, the environment and so on and report on the wider context of the business review. I believe very strongly that that is the right approach to take.
Trade justice issues are so important to me that the only campaign event that I organised during the period before last general election was on trade justice, under the title “Poverty is Political”, but I have always stressed that there are three ways in which citizens can campaign for trade justice: first, by pressing MPs and Ministers, as electors and constituents. Indeed, the Trade Justice Movement has been very grown up and effective in the way that it has done that in recent years, and it has affected and strengthened Britain’s hand in the world as a result.
Secondly, people can influence companies as shareholders. The Bill will help to provide the right environment by creating a long-term context for a company’s decisions and enabling shareholders to play a greater role in holding directors to account. Thirdly, people can influence companies by buying fairly traded products and influencing the thinking of companies as consumers. Incidentally, in that context, I commend the House authorities for the way in which fairly traded products are made available in our canteens. Those in the Trade Justice Movement should welcome the Bill without amendment. They should certainly raise the issues that they are raising in a mature way but not pursue the amendments that would weaken the cause of trade justice.
The Government have rightly sought to promote business, and that means promoting enterprise, so we need to make it easier for people to set up a company. Let us consider the statistics. We are told that, if we had the same number of women running companies in this country as in the United States of America, we would have 750,000 more companies than we have at present. Let us consider the need to promote youth enterprise. Great success has been achieved with enterprise week and a number of other recent initiatives. Let us consider social enterprise, which has a developing place in our economy and makes extremely constructive social and business contributions.
I very much welcome the changes made in another place to protect companies and their shareholders against spurious derivative actions, while ensuring that genuine challenges on good grounds by shareholders can proceed. The Bill is about nurturing good practice and enabling Britain to go on being the best place to do business and increasingly the best place to set up a company. The Bill will provide good practice and a sound basis for the future, and I commend it to the House.
It is good to follow the right hon. Member for Cardiff, South and Penarth (Alun Michael). The House and the people who will have to use the law owe him a debt for the work that he did on it during his time at the Department of Trade and Industry. I half agree with the points that he made about trade justice. With respect to directors’ duties, he is right: the idea proposed by some campaigners that directors should have two, three or four duties to wrestle with at the same time would be a mistake. It would be like asking directors to speak from both the pulpits that he mentioned at the same time and therefore not to lead their companies correctly. However, he is wrong about the financial reporting of companies, particularly the narrative reporting of companies—a point that he did not cover with respect to the Bill and what the Trade Justice Movement wants.
I enjoyed our exchange during a Statutory Instrument Committee on 16 March, when we talked about how the Government had got themselves into a bit of a tizz when the Chancellor suddenly did a volte-face on their previous position on operating financial reviews at the CBI conference at the end of November last year. The right hon. Gentleman, who was the Minister, had a wry smile during that debate, and I had hoped that he might feel liberated on the Back Benches and say a little more about what he really felt about the Chancellor’s move.
I think that my wry smile of amusement must have been prompted by the hon. Gentleman’s speech rather than anything else. My position remains the same: I approve of the simplification that has taken place, and I favour a proper discussion about the way in which the business review should develop. I do not think it sensible for there to be two vehicles.
The right hon. Member for Cardiff, South and Penarth (Alun Michael) may think that, but do not most progressive business men take exactly the opposite view? They had prepared for the operating and financial review and were ready to carry it through, and found themselves entirely disadvantaged—to the benefit of those who were not doing the job properly—by the Chancellor’s very peculiar action.
The right hon. Gentleman is absolutely right. I did not mean to make light of the point. I think that the anger expressed by the right hon. Gentleman was felt throughout the country by people who paid attention, in the commercial sector, the trade unions and the campaigning movements. It was a hugely retrograde step. I shall say more about it, as, I am sure, will my colleagues.
In my interventions on the Secretary of State thus far, I have been remiss in not welcoming him to his position and congratulating him. Some say that his new post is a preparation for another that he will occupy in due course. We enjoyed hearing the emollient tones for which he became famous in his previous Department. When he was Chief Secretary to the Treasury and I shadowed him, he was slightly less emollient, but I am sure that he was pleased to begin his new job by presenting a Bill that commands a great deal of consensus.
On behalf of the Liberal Democrats, I can give the Bill a warm welcome. The enlightened shareholder value that is at its heart represents exactly the right approach. The deregulatory aspects are incredibly welcome; the concept “think small first” is incredibly important, taking company law to a new generation and recognising that modern companies are normally relatively small. The simplicity is also incredibly important. Even non-lawyers such as me can read some of the Bill and understand it. I doubt that I would have been able to understand the earlier Companies Acts.
Some have criticised the process adopted by the Government for being lengthy, but I think that that probably resulted in the quality of the legislation. The procedures here and in the other place have shown both Houses working at their best. There is no doubt that the Bill deserves the support of the whole House tonight.
On occasions such as this, however, we have to highlight a few of the differences between us. I want to discuss two, relating to the environmental, community and social aspects. We have one difference with the Chancellor, and another with the right hon. Member for Witney (Mr. Cameron). In the context of two key aspects of the Bill, those would-be emperors have no clothes.
In relation to corporate accountability reporting, the Chancellor was originally fully clothed, but at the CBI conference that I mentioned earlier he performed a very unsightly striptease. To please the crowd, he threw off an election promise to make firms report properly on their activities and their impact on the environment. That was a huge disappointment, and I think that the Chancellor will rue the day. He often likes to portray himself as the champion of poorer nations and of the environment, but in this important instance he was found lacking. I consider the Government’s U-turn on OFRs to be not just a retrograde step but a huge missed opportunity. I welcome some of the moves in the other place to strengthen the business reviews that we were already going to have as a result of the European Union directive on modernisation of accounts, but the strengthening has not gone far enough. We want the OFRs back, as they were originally proposed by the Government, and that is what we shall argue for.
As for the Leader of the Opposition, some of us doubt whether he ever had any clothes when it came to corporate accountability and the environment, but the Tory peers have left him stark naked by voting to oppose the requirement for directors to have regard to the impact of companies’ operations on the community and the environment. That was astonishing.
Of course that is the case. There are many ways of pursuing environmental policy. This one has the support of many people in business and it has support among environmentalists. The Conservatives in the other place sought to oppose it. I find that astonishing. The hon. Gentleman will have to do rather better if he is going to persuade us that the Conservatives have not recently been rather dishonestly sporting new green credentials. If, in this place and in the other House, they vote in exactly the opposite way, their claims to be the new environmentalists will lack any substance.
It is possible that Tory Members will reject the views of their colleagues in another place. So far, judging by the remarks of the hon. Member for Rutland and Melton (Mr. Duncan), it does not seem that they will. However, perhaps we will see a U-turn. Perhaps he will become his leader’s new chauffeur, driving behind him carrying a spare set of clothes to hide his leader’s embarrassment. We will wait and see, but the Conservatives better be on notice that the people looking at this debate and the attempts by the Conservatives to rechristen themselves as the new environmentalists will not be impressed.
I want to deal with those points and other disagreements later, but it is important in the bulk of my remarks to focus on what unites the House on these matters. I have talked about the process already. Can the Minister say how the Bill’s benefits will be communicated to small business? She will be right to say that small businesses are major beneficiaries of the Bill. They need to know that. Large corporates will have their sections briefing their chief executives and boards on the implications of the Bill, but it may pass small businesses by. They are not tuning in to today’s debate.
The process on the Bill has been excellent up to now, both prior to the Bill coming to the House and during its passage through the other place and here. I hope that the Government will reflect carefully on my intervention on the Secretary of State about making sufficient time available for consideration of the draft new clauses that the Government will have to table on full codification. That is an important point. If we are going to continue the excellent process that we have had to date, that needs to be taken forward.
Another positive point that has not yet emerged in our debates but which is important is the Bill’s move on dematerialisation. Under the Bill, documents such as registration certificates will be acceptable electronically. It will be easier to set up a business because one will be able to do it online. That process will lead to huge savings for business, which is incredibly welcome. In many ways, it is not before time. That is not meant as a criticism of the Government, because this is a step forward.
As the hon. Member for Rutland and Melton said, the Bill’s further protections against extremists, particularly animal rights activists, are welcome. As I said to the Secretary of State, they could be stronger, particularly with respect to shareholders. The Government have made it an offence—I think that it is in clause 118—for people who have access to the shareholder register to use that information for illegal purposes. I do not think that that is much of a deterrent for the sort of people we are talking about. The Government need to look at that again to see if the protections can be stronger.
I put forward one option. I cannot say that we have thought it through in terms of the legalese, but it may be possible to allow firms to keep their register of shareholders confidential, as long as there are safeguards for the public interest. One option would be to alter the threshold at which a shareholder can require the company to circulate information to other shareholders. That will strike a balance between protection against animal rights extremists and the public interest, ensuring, for example, in the case of a takeover, that all the shareholders can understand the terms of that offer.
There are a number of areas where the Government made concessions on the original Bill and where there is now wide cross-party support. It is worth flagging those up, too. The tightening of the political donations measures had cross-party support. Under the original proposals, the Government intended to bring in super-affirmative procedures to fast-track company law changes. They have been taken away because, as the Lords rightly said, such changes were constitutional and should not be included in company law itself. Again, progress has been made.
The tighter rules on derivative claims, which have already been debated, are also welcome. The restrictions on auditors’ liability, which can now be expressed in non-monetary terms, is a very important measure that came about because my noble Friend Lord Sharman proposed it and the Government were willing to listen. There has been much progress and agreement.
Where do disagreements remain? The Secretary of State flagged up one: the idea that we and Conservatives in the other place were concerned about the Government’s proposal to require certain institutional investors to disclose how they voted. The Secretary of State made a lot of that in the press, but I think that he has pressed his case too far. I have spoken to my colleagues in the Lords and their concern was not so much the principle of disclosure, which they agree with, but how greater disclosure should be brought about. Let me flesh out where we agree and where there is room for compromise, because it is important that we engage in that spirit.
We agree with the Government that we should take the voluntary approach first for disclosure of how institutional investors vote. I think that we also agree that the Government should take only a reserve power to force disclosure if the voluntary process does not work and that Ministers would have to return to this House before taking up that reserve power. Our concern is whether the one-size-fits-all approach that seemed to be in the original drafting would in fact work. We want to avoid over-prescription and to ensure that business is fully consulted about how a flexible regime for disclosure might be introduced, building on the best practice learned from voluntary disclosure. I say on the record that we are keen to discuss with the Government how we can take that forward. There are public interest cases for regulating institutional investors in this way so that they do disclose. The Government are therefore, in principle, broadly right. As my hon. Friend the Member for Cambridge (David Howarth) said, there is a case for boosting the market for ethical investment, and disclosure is important for that.
There is also a general point about transparency and accountability. It is important that people can be held to account for the way they vote on behalf of citizens—in some cases, millions of citizens. It is ironic that some of the investment institutions that do not want such disclosure are demanding extra disclosure and transparency in respect of corporates—the ones that they invest in—but they are not prepared to have the same principles of transparency applied to themselves. They are in danger of double standards in that respect.
There is a third public interest reason why we should at least have this reserve power: the confidence of investors and savers. They should be able to know what they are investing in, and to look at the track record of how that investment institution has voted and behaved in the past. I say to the Secretary of State that we may need to meet to thrash out that issue and to see how we can make progress on disclosure. I do not think that the difference between us is very great.
Where there is a difference—given the Secretary of State’s remarks today, there might be room for compromise—is on the enfranchisement of shareholders who hold shares through nominee accounts. The Liberal Democrats and the Conservatives in the other place tabled an amendment that would require the compulsory enfranchisement of shareholders where they hold their shares in that way. It is important to understand the benefits of that approach. First, it would enable shareholders to receive all the information—annual reports, notice of meetings, resolutions—that other shareholders currently receive. Surely they should have that right. It would give them the right to attend, speak at and vote at general meetings, and to vote on resolutions. Why should they not have that right? It would give them the right to be treated equally with shareholders who hold their shareholdings directly during corporate restructuring. We saw in the cases of O2 and Shell that shareholders who held their investments through nominee accounts were not given the same priority and benefits as other shareholders. There was also the case involving P&O, which gave shareholders various perks that did not go to shareholders holding their shares through nominee accounts. There are a lot of reasons why we should enfranchise this group of shareholders.
Key principles are at stake—this is about shareholder democracy. If the Secretary of State changes the Government’s position, he could enfranchise more shareholders than Baroness Thatcher. I am sure that he would like that to be one of his many epitaphs. He says, in his rhetoric, that he is in favour of shareholder engagement and accountability, and that is the way to do it.
We must also consider the key practical benefits for business of that approach. Often, when the institutional investors are giving guidance or making their voices heard at a general or other meeting, they have conflicts of interest because they are employees of very large institutions. They do not always talk common sense. It is often the individual shareholder who says what needs to be said. On issues such as the remuneration of directors, it was not the institutional investors who chased the so-called fat cats, but the individual shareholders who asked why directors were paying themselves so much. The voices of individual shareholders are important, and that is why the Government should embrace that change.
The arguments about cost do not stack up, because we live in an e-world and costs can be minimised. The companies are already making savings to the tune of £100 million thanks to the dematerialisation of documents and they could share that with some of the shareholders who put money into their companies. Ministers need to engage with that issue and not say that they will overturn the Lords amendments at all costs. I hope that the Secretary of State will consider the issue in a spirit of co-operation.
We can deal with some of the practical difficulties that have been outlined. For example, we could put more of the burden on the people operating the nominee accounts, so the costs could be shared between the businesses and the people who are the nominees. We could try to make the Lords amendment less prescriptive, because there must be room for debate. We could also consider difficult cases, such as employee share ownership schemes.
Whatever practical problems are raised by those who oppose such enfranchisement, we can deal with them, if we have the will. It is up to us all to do so, because we must end shareholder apartheid. It is wrong to have second-class shareholders and it would do the country a real service to change that. More than 50 per cent. of shareholders hold their shares in that way, and that percentage is likely to grow in the next few years. We need to act now.
I mentioned two more major disagreements earlier. The first is the OFRs, on which I fear we have less room for negotiation. Let us be clear about how we got here. Just a few months ago, the Government were very much in favour of OFRs. They dreamed them up and consulted on them, and worked with business and the accounting standards boards. The OFRs had been thought through perfectly. Indeed, the 2004 annual report of the DTI said that OFRs were at the heart of the Government’s policy to improve corporate governance. Suddenly something changed, but what was it?
Thanks to the excellent work of Friends of the Earth, we know what changed. A senior official at the Treasury’s enterprise unit met a fund manager from Hermes last summer. They had a general chat about how the Government were doing and what they could usefully do. The fund manager suggested that if the Government wanted a quick win, they could get rid of the OFRs. It would, he suggested, be a good deregulatory measure that would go down well in the City. The official worked up the issue and sent a memo to the Chancellor, who ticked the right box, so other officials were told to work it up further. The officials then sent another memo to the Chancellor, dated 29 September—I have a copy if the Secretary of State wants it—suggesting that he talk to colleagues in the DTI before going ahead with any announcement at the CBI conference.
The Chancellor did not engage with the DTI. He received another memo, dated 23 November that stated:
“Urgent. Action required this week…It is anticipated that a number of Ministers will have concerns about this proposal, given their departments’ specific interests in the initiative.”
The Chancellor made his speech five days later, on 28 November, and it is clear that there was a shambles in the Government. The Chancellor of the Exchequer took a unilateral decision and went against all other Cabinet Ministers without informing any of them. Most Ministers do not believe in the business review: their hearts are not in it, because they believe in the original proposal. Our aim is to give the Secretary of State a way to save the Chancellor’s face and return to the Government’s original position.
The Accounting Standards Board put a great deal of work into developing accounting and audit standards for OFRs. Does my hon. Friend agree that that was an enormous waste of effort, given the fact that they are no longer part of the Bill? Will not the result be that companies are less transparent in their reporting and that reviews will be more expensive because companies will have to develop those standards themselves?
My hon. Friend is exactly right. He is something of an expert in this area and we intend to table an amendment on the subject.
The business review proposals arose out of European legislation. The Chancellor put the DTI in some difficulty and, in an attempt to put matters right, the Government tabled amendments in the other place, We welcome the progress that has been made in strengthening the proposals, but the Government have not gone far enough, especially in respect of reporting standards.
The hon. Gentleman may recall that the former Secretary of State called OFRs the last piece in the jigsaw when she introduced them. She is now Secretary of State for Health, and the phrase might be applied more aptly to that Department. She was very proud of OFRs, which the official Opposition decided would not present an extra regulatory burden, but would benefit both citizens and companies. No pressure was exerted by business or the CBI to get rid of OFRs—it was one of those strange instances when business was rather compliant and accepted the proposal—but it is clear that the Chancellor wanted something to announce at the CBI conference. The new proposal satisfies no one.
The hon. Gentleman is exactly right, although he has given a clear indication to the House of how the Conservatives keep changing their position. The Labour party does that too, whereas we Liberal Democrats have been consistent throughout in our support for OFRs.
Despite the amendments in the other place, the business review proposals remain unsatisfactory. My hon. Friend the Member for Cheltenham (Martin Horwood) mentioned reporting standards, and noted that they had already been worked up by the ASB, but the Bill contains no mandatory requirement that they should be adopted. If they were adopted, compliance would be easier, as would comparability, with the result that narrative reporting would be of greater use in meeting the objectives set out in the Bill.
Moreover, the Government’s amendments in the other place also fell far short in respect of applicability. The business review proposals will not apply to large, non-quoted firms or medium-sized enterprises, and the audit requirements applicable to narrative accounting are nowhere near stringent enough. One would expect auditors to have to check that narrative reporting is accurate and ensure that it is consistent with the facts, but the Bill does not require them to do either.
Another problem has to do with coverage. I believe that about 1,009 large quoted firms will have to compile business reviews, but they will not have to detail their relationship with suppliers. That may seem a minor point but, in some countries, British companies subcontract much of their work. There is evidence that they subcontract some of their social and environmental obligations to people who are less well known and who are not covered by the business review requirement. That alarms many people concerned about the proposed changes. The Government have made themselves look shambolic over OFRs and I hope that they will change their proposals between now and Third Reading.
My final major point concerns director duties, which are at the heart of the Bill. Clause 158 has already been discussed. Liberal Democrats agree with the Government. We think that Ministers have struck a good compromise. We are astonished by the position now advocated by the Conservative Front Bench, which seems to go against previous Conservative legislation. The hon. Member for Rutland and Melton did not seem to appreciate that section 309 of the Companies Act 1985 says:
“The matters to which the directors of a company are to have regard in the performance of their functions include the interests of the company’s employees in general, as well as the interests of its members.”
That was in 1985 under Lady Thatcher.
My hon. Friend the Member for Rutland and Melton (Mr. Duncan) did not mistake the position. Section 309 has not been included by the Government in the current Bill. It was not removed by the Conservative party in the other place. We think that it should remain in the Bill and we shall be proposing amendments that it should be included.
We may have seen the first of many U-turns by the Conservatives in this House from the position taken in the other place, where no doubt some of their lordly donors were keeping a rather close eye on their activities. I refer the hon. Gentleman to clause 158(1)(b), where the interests of the company’s employees are specifically mentioned. Clause 158 ensures that section 309 of the Companies Act 1985 is read across. Conservative peers’ attempt to get rid of that was a serious mistake and I hope that the Conservatives in this House will apologise and stand up to their rebellious peers.
This is a good Bill. It deserves a Second Reading. My colleagues who will sit on the Committee—my hon. Friends the Members for Caithness, Sutherland and Easter Ross (John Thurso) and for Solihull (Lorely Burt)—will work hard to make it an even better Bill, so that when it comes back on Report, we can give it a hearty send-off.
When a Government Bill is praised with faint damns by the Conservatives representing the vested interests in business, and then even more lavishly by the Liberals in some kind of deteriorated Sharmanese language, we must believe that there is something wrong with it. What is wrong with the Bill is that it is a disappointment because of what it does not do rather than what it does. Indeed, the number of dogs that do not bark in this Bill is a deafening cacophony of examples where action should have been taken but has not been.
The Bill is a particular disappointment to those who felt in 1997 that an incoming Labour Government would be able to change the climate in business and ensure that companies were run with the participation of the workers and the stakeholders, and above all, that there was for accountancy and audit a framework of independent regulation along the lines of the Securities and Exchange Commission. Indeed, we promised such a framework in our business manifesto. Somehow, it never materialised. We were told that there would not be time, and that a foundation that was to be set up would fill the bill. We have now said RIP to the foundation; it accomplished nothing and was abolished fairly quickly.
We proceeded not to restrict or regulate the activity of auditors but to give them more power and independence. We proceeded to limited liability partnerships. Now in the Bill we proceed further in that direction by giving what amounts to a capping power based on an agreement between the auditor and the company. This is at a time when effective proportionate liability is already being established, as in the Barings case. Deloitte’s liability was cut down from a claim of £1.3 billion to £1.5 million on the ground that others were more largely responsible for the losses than they were.
In effect, we are seeing a dilution of the responsibility, role, power and effectiveness of audit. Audit is now used—particularly by the big four, but this is common over the whole profession—as a kind of foot in the door or market stall from which to sell other services. Companies can get a foot in the door by underbidding on the audit and then they can sell other services, where the profit is made. Most of the profits of the big four now come from the sale of other services—to audit clients; it is a fairly closed market. That means that the audit itself is debased. In order to bring the audit in at a low and competitive price, untrained staff are overworked and standards are not maintained. That way lies disaster, because the audit is not effective. I know of no other field where the limitation of responsibility improves performance. We have high standards for manufacturers and we demand that they live up to them. For audit, we have low standards, which we do not enforce in any case.
In the United States, Mr. Stiglitz, a Clinton appointee, argued that when an expensive campaign by the audit firms forced him to reduce auditors’ liability, that led directly to the Enron, WorldCom, Xerox and Global Crossing scandals and all the rest of it. That is what happens. If the standards are lowered and effective enforcement is not provided for, the audit is debased. In that way, we have no idea of the real health of the company. I am worried because the big four have been so much the spoilt darlings of my party in power and have benefited so substantially from us that I am surprised that we have not issued them with a request to affiliate to the party, as the trade unions do.
The machinery and regulation—the Financial Reporting Council—that we have been forced to set up in the wake of Enron, after denying that it was necessary for so long, essentially consists of one man and a dog to regulate extremely powerful bodies with a global income of £70 billion and an income in this country of £5 billion. The budget of the FRC is £12 million. That is pathetic compared with the role of the SEC. The FRC cannot regulate the big four effectively. In effect, the big four dominate it, just as they dominate the professional bodies and the DTI—the department of timidity and inaction, as it has sometimes been described—which, in my experience, after long sessions with various Ministers on these issues, always tells us what the big four want it to say.
We have the regulation of the big four, by the big four, for the big four, and that is not healthy for the public or for industry. We should not allow the mafia to regulate the mafia, as we have. The Government have been cosseting the big four. Ministers tell us, “We don’t want competition to be restricted by one of the big four”—the big five, as they were—“collapsing in the same way as Andersen collapsed.” Andersen collapsed because it was cheating; it was crooked. It provided Enron with all kinds of methods of financial manipulation that should never have been provided in the first place.
We are protecting the big four. It rings somewhat hollow in the mouth of a Labour Government to protect those four enormously powerful and wealthy institutions. Last December, KPMG partners got a bonus of £550,000 each. A senior partner at Deloitte is paid £3 million. The money is rolling into the big four accountancy houses. They have benefited richly from a Labour Government, but are they trustworthy? Are they the paragons of virtue that we treat them as? They are part of multinational organisations, which are all based in tax havens and very secretive. We do not know who runs them, who owns them, or what is going on.
We find that branches of all four organisations in the United States have been involved in various undesirable practices. KPMG has been fined $456 million in the States for tax evasion that was described as the biggest tax fraud in American history. The head partner confessed to the fraud and thus pulled the rug out from under all the other partners who were contesting the accusations. Ernst and Young was banned for six months from taking on new business for breaking the rules on independence. PricewaterhouseCoopers was asked to use a self-reporting system to give some account of violations of the rules. In one month, there were 8,000 violations. The big four are the bodies that we are trusting, but they have all been sued by federal and state authorities. Here, however, we concede more and more power to them. We make no effort to limit their power or to stop them selling other services to audit clients, which must be a form of collusion between the auditor and chief executive, or certainly the top executives.
If the hon. Lady does not mind, I will not, because with my back condition I feel that if I sit down I shall never get up again—and that would be a disservice to the House. Once I am standing up, I would rather stay stood up.
Effective regulators such as the SEC can strike and strike hard. The Enron cases came to court within about five months of the company’s collapse. The two men who were mostly involved have now gone on to serve long prison sentences. The same happened in the cases of WorldCom, Tyco and other offenders. However, our country’s machinery of regulation allows cases to drag on for ever. There have been no inquiries into the Accident Group, Equitable Life, Barings, Resort Hotels, Mayflower or Langbar, which is a Yorkshire company. There were no effective inquiries into the Bank of Credit and Commerce International and Maxwell, and the insolvency matters are still proceeding after all this time, so fees continue to be earned for insolvency practices. In fact, because we do not have a machinery of effective independent regulation in this country, scandals emerge only when a company goes belly up and everything emerges. However, inquiries are still not held to show what the root of the problem was and to build up a body of information that will tell us how British companies are following the mistakes and malpractice of American companies.
All the procedures that were involved in the failure of Enron—the use of offshore companies, shell companies and off-balance-sheet accounting, which is part of this country’s system of government—are available and sanctioned here. They are used widely by British companies, but we do not know the damaging effects of that because as long as a company does not go bankrupt, we never find out what has been going on.
I fear that there has been a change in the climate, in that corporations are no longer entitled to the respect that they once had as national champions, the producers of British products and the employers and trainers of a work force to serve their purposes. That is all failing, and they are becoming money-spinning machines instead. That is happening because of the unchecked and uncontrolled power of chief executives and boards. There is no restraint on their activities and no effective control by shareholders, but how could there be? We have no Sarbanes-Oxley requirement, but that should have been provided for in the Bill. People should have the personal responsibility to pledge their position on the authenticity of the accounts of their company. That should be the responsibility of chief executives and chief financial officers.
We have not done anything about it, and we should. As far as I am aware, there has been no inquiry into the subordinates of Enron, Parmalat and all the other companies that have gone bust, including those in this country. The financial interest is increasingly dominant. The means of financial manipulation by uncontrolled chief executives and boards are becoming more and more numerous and more and more common. This is because accountancy houses, especially the big ones, are selling all sorts of services to directors. They are telling them how to hype the share price and how to use various ways of increasing profit. They tell them how to use tax havens, share options, trusts and subsidiaries for their own purposes.
The top 100 companies in this country have 15,000 trusts and subsidiaries. The US Treasury and the general administration office have both said that trusts and subsidiaries of that kind, which have multiplied, are the biggest source of criminal activity and tax fraud, because they are a means of hiding profits. That development has gone a long way in this country.
Admittedly, the deterioration into financial self-interest and into regarding a company as a money-spinning machine to put into the back pockets of top people has gone further in the United States than here, but here it has gone a lot further than in Germany, where there is still a pride in building up a company, building up its production, serving the customer and making a better product more cheaply. That has led to a real revival of German companies, with which we are competing. Instead of doing all that, our companies bathe in financial froth.
There are too many instances of companies, rather like Vodafone, that are run by a self-interested clique at the top, which owe a duty of care to no one—not to stakeholders, employees or shareholders. That is why there are obscene salaries, with the gap widening between salaries at the top and those at the bottom. It is why we get such fat-cat pension schemes showering money on those who have got enough already. At the same time, there are raids on company pension schemes. Companies did that in the 1980s by taking pension holidays. In fact, they took £19 billion from company pension schemes by giving themselves pension contribution holidays. The moneys went directly into profits and into the pockets of the top board.
There are also share options and manipulation of moneys overseas—all being carried on at a time when companies are trying to increase their profits by downsizing, by transferring production overseas and by squeezing the salaries and conditions of their employees. It is an indecent spectacle. It is even more indecent that a Labour Government—I shall try to echo Neil Kinnock’s intonation of that phrase, “a Labour Government”—are not doing anything much about it in this Bill, which is our first opportunity to do so since 1997.
It is odd that the DTI seems to have consulted so little with the Treasury. Here we have the Chancellor of the Exchequer waging a campaign against tax evasion and the use of tax havens to launder profits so as not to pay tax in this country. Companies are using more and more such devices to avoid their obligations to this country, where their profits were generated.
We have only to look at how slowly the Government’s revenue from corporation tax is rising compared with their revenue from income tax. One is rising rapidly, but the other very slowly. Why? Because so much money is being laundered overseas so that tax is not paid in this country. We have only to look at News Corporation and how little corporation tax it pays in this country. Why do not we do something about that, given the enormous profits that the company generates here? People are being cheated.
The Chancellor’s aspirations are good, and we need to help him. The Sunday Times estimated recently that we are losing tax revenues of between £97 million and £150 million a year, and that the loss is increasing exponentially. The Bill does little to help the Chancellor control that, determined as he is. I suggest that we should have a requirement, as proposed by Lord Lea in the other place, to publish the names, locations, profits and tax liabilities of all the trusts and subsidiaries run by a company. Why should that not be part of the information provided to shareholders and hence to the public?
The head of the inland revenue service in the United States has expressed his desire for such a framework of legislation, as has Henderson Global—a big investor—which says that such legislation would make it much easier to understand the affairs of a company. Why should it not be provided? Why should companies not publish their tax—
I am sorry, I must decline to give way. I do not know whether the hon. Gentleman wants me to advise him on the machinery of tax evasion. If so, I am not qualified to do so. I would rather not sit down, as I would have to if I took an intervention; I apologise.
Why should companies not be required to publish their tax computations? At present, companies keep at least two sets of books. There is one set to fool the shareholders and another set to fool the tax authorities. Perhaps there is another set of books to set out the true state of affairs, so that it is known how much to loot from the company. Why should not those books be published? Why should the tax computations not be published at the same time as the official financial publications? That would allow non-government organisations and the public to invigilate and investigate what companies are doing. It would seem that the task is too great for Revenue and Customs.
Companies should also be required to publish in their reports their transfer pricing policy. That is the way in which money is fiddled and laundered from one section of a company to another.
The Bill is supposedly to deal with openness and accountability. We are all told that we have a shareholder democracy and that it is the responsibility of shareholders to ensure that their companies are properly run. That is a myth, because only the big funds can take a close interest in and have influence in a company, but they have much more interest in spreading their investment than in invigilating any particular company. The small shareholders are not organised and do not have the time or information—and are also steamrollered by proxy voting. It is useless to think of shareholder democracy being effective. We must therefore strengthen reporting requirements so that the public, NGOs, the universities and the press have access to what is going on, and can therefore comment and report on it.
Various suggestions have been made about environmental duties, responsibilities to the developing world and to world trade—and fair trade. It is my view that there should be publication of wages and salaries from top to bottom, with the numbers in each grouping. We should have information about training policies and investment policies, because a company is responsible for improving its work force. We should have information about perks and pay-offs. Mainly, we should have information about all the things that contribute to building up a strong, healthy and competitive company that involves its workers and makes a contribution to the economy and to the nation. I am disappointed that there is so little requirement to increase reporting in all those respects. Changes to that effect should be moved, and no doubt will be moved at a later stage.
The Bill is useful in small ways. It will accomplish some things, but my main feeling is disappointment that it does so little, particularly in tackling the major problems of the transformation of British companies from production machines to money-spinning machines in a financial bonanza. Unless we ensure that there is better, more effective control and regulation, we are paving the way for a series of scandals. If auditors, companies and boards are kept up to the highest standards they will cheat, and the resulting failure and collapse will be blamed on the Government, and our failure to intervene at this stage and regulate effectively.
It is almost impossible to follow the hon. Member for Great Grimsby (Mr. Mitchell), who is the authentic voice of Labour. He expressed his party’s real view of companies—not the view that is generally expressed—which is entirely false and unacceptable. I declare an interest as a company director and as the chairman of a company that helps major businesses to discharge their corporate social responsibility. The hon. Gentleman described a world that does not exist, as companies do not behave like that and auditors could not behave as he suggested. That does not mean that all companies are perfect or that auditors are delightful—some of them are not—but we ought to live in the real world.
The Government sometimes fail in the detail of what they try to do in the real world. I want to agree with the Trade Justice Movement, but its proposals are wide of the mark. I do not wish to suggest that its members are not good-hearted or that they do not want to do the right thing, but—and I am embarrassed to admit that I agree with the right hon. Member for Cardiff, South and Penarth (Alun Michael), which I rarely manage to do—they have chosen the wrong vehicle to achieve their ends. People who care about trade justice—no one would suggest that I do not—must remember that it is extremely important to get the facts right and achieve the correct mechanisms to avoid the reverse effect. I am sorry that we cannot go along with all the Trade Justice Movement’s proposals, but I hope that we can find a way of incorporating in the Bill those that are applicable. The large majority of its proposals can be examined on another occasion.
We should look at what can be done, and at what the Government have failed to do. I have some sympathy with Trade and Industry Ministers, who have been sidelined by the Chancellor’s discussions of the issues. Yesterday, he made a speech that took one’s breath away, in which he talked about globalisation as though it were wholly beneficial. The way in which he discussed globalisation, which is a fact of life, not a good or a bad thing, was intolerable to anyone who genuinely understands the way in which it affects poor communities throughout the world. If I were a member of the Trade Justice Movement, I would be very cross if I thought that there was a chance that he would run the country, because he entirely lacked sensitivity to the issues about which most Conservatives feel strongly. I hope that every member of the Labour party will read the Chancellor’s speech to the CBI yesterday, because if that is what he believes, I do not think that many of them will vote to make him leader of the Labour party. If they do so, they have not read the speech, which expressed a view of capitalism that has long been out of fashion, except among the neo-Conservatives of the United States of America. I heard the tones of Mr. Perle in every sentence of that speech, and there is little one can say that is ruder.
Embarrassingly, for the second time I must agree with the right hon. Member for Cardiff, South and Penarth, who said that we are all shareholders now. That is true: we have shares or pensions based on shares, but we also live in a country where the effects of share prices and the efficacy of company performance change our lives for better or worse. We are all shareholders—I prefer that word to “stakeholders”, which is a self-defining word. I can claim to be a stakeholder in anything, and I may, or may not, have grounds for that claim. The people who matter are shareholders, and that means everyone, because we are all shareholders. In those circumstances, we must look carefully at the Bill. As shareholders, we require the information necessary to make a proper judgment about the companies in which we have shares, which is why we have a raft of financial regulation, some of which is improved and made clearer and less onerous by the Bill. I welcome those provisions.
Curiously, the Government have not taken the opportunity, as the hon. Member for Kingston and Surbiton (Mr. Davey) pointed out, to reintroduce the operating and financial review. There is a simple explanation for that. When the OFR was introduced, Conservative Members and others were concerned that it would be onerous and difficult to implement. I did not share that attitude, but it was widespread and reasonable. After five or six years, however, it became clear that the OFR was not onerous or difficult—companies generally found it perfectly possible to implement and almost all of them were ready to do so, particularly after the work done by the Accounting Standards Board, which the hon. Member for Cheltenham (Martin Horwood) mentioned.
Suddenly, out of the blue, in incredible circumstances, the Chancellor of the Exchequer announced to the CBI that he would ban or abolish the OFR as a deregulatory measure. I cannot vouch for the accuracy of the story about how he reached that position, but Friends of the Earth is usually accurate in its understanding of such matters. Many members of the Government were only too ready to tell Friends of the Earth precisely what happened, so furious were they about the manipulation of Government systems. Interestingly, a representative of Hermes initiated the event—what a pity that the civil servant concerned did not talk to Henderson or another fund manager, who would have said that it is a matter not of deregulation, but of obfuscation. Without the OFR, an increasing number of investors and investment funds that look at corporate social responsibility and the way in which people deal with non-financial risk as an important guide to investment are in a difficult position. The OFR was not a matter of over-regulation, as it provided the transparency necessary for their work.
It was therefore bad luck that that civil servant should have been friendly with someone from Hermes, as he ought to have known other representatives. He shall remain unnamed, because I blame not him but the man who took him seriously, and chose to act without talking to anyone else.
That brings me to the key issue in relation to the OFR—the fact that the Chancellor of the Exchequer appears never to talk to anyone else. For example, the OFR is supposed to be of interest not only to the Department of Trade and Industry, but to that famous Department, the Department for Environment, Food and Rural Affairs. DEFRA is supposed to be responsible for the environment. I spend a great deal of time arguing that the environment should not have been shoved off in a corner with animals and trees. Much as I like animals and trees, the environment is the central issue for the entire Government.
When the Prime Minister took office, he said that he would put sustainability at the heart of his Government. Instead of that, he shoved it to one side, in a Department that no one seems to listen to at all, certainly not the Chancellor of the Exchequer. What was he doing, abolishing a matter that was fundamentally an environmental issue, without a word to the then Secretary of State for Environment, Food and Rural Affairs, now the Foreign Secretary? A word or two with her might, I should have thought, at least have been a courtesy. She is an intelligent and, I think, thoroughly nice lady. Why did he so dislike her that he did not think a word was necessary?
I can understand why the Chancellor of the Exchequer did not have a word with the Department of Trade and Industry: he could not remember who was the current holder of the office of Secretary of State. So soon do they change that I imagine it is difficult to keep up, and the telephone directory is not always up to date. No doubt that was the reason for it. But he did not talk to any of the people involved, and threw out what most people had seen as a valuable and proportionate way of bringing to the heart of businesses what the best businesses are already doing—issuing a statement that enables their shareholders to see whether they appreciate the real risks of the business.
In that respect, I find the Government difficult to understand. No one is asking for the OFR to be brought back as an incubus on business. We are asking for it to be reinstated because it is an extremely important mechanism—I referred to my declaration of interest—for the management of a business. If one does not understand one’s non-financial risks, one does not understand one’s risks. Many non-financial risks are more important than direct financial risks. If one has a large area of contaminated land, if one has concerns about the viability of the business because of inherited costs that are not financially accounted for, one is conducting the business without revealing sufficiently to those who own the business the terms of their ownership.
My right hon. Friend is setting out a powerful argument. It is ironic that notwithstanding the misgivings that many of us initially had about the OFR, most businesses, especially those that are managed best, now produce such a report anyway. They conform to the aim of the OFR. My right hon. Friend is right. Control of risks identified as non-financial define whether a business is managed well or badly.
My hon. Friend, who has considerable professional experience of these matters, is right. I hope he will go further and join me in saying that if the best businesses are doing that, it behoves the Government to ensure that those that are less good do so too. Why should our good companies, which conduct a review because it is good for them, find themselves at a disadvantage because their competitors are unwilling to do so, which may give them a short-term advantage?
Why are the Government so afraid? What is the deal that has been done in the Digbyisation of the Government? There is a closeness—a kind of relationship—with a particular bit of the CBI that I find difficult to understand. While Ministers are defending their indefensible position in the House, the leaders of British industry are in No. 10 discussing with the Prime Minister exactly the kind of attitudes that we are asking for in the Bill. All the people who really care about climate change are there, explaining to the Prime Minister why the Government must do more in that regard. All the people whom we rely upon to set the standards in British industry are there saying the opposite to what the Government are saying in the Bill.
There are, sadly, at least two Governments in the House: the Government of the public face and the Government of the Bill—a Bill that does not do what it should. It does not do what it was intended to do, and what it could do by setting a standard and giving the Government a leadership role.
The hon. Lady ought to read the debates carefully and see the basis on which Members of the House of Lords sought to discuss those issues. I shall come to them. I am dealing now with the non-appearance of the OFR and the belief that those bits make up for it.
We need the OFR. The Government say that they cannot demonstrate leadership in that respect because companies will go elsewhere. I want to say something tough to the Minister, which will not be loved by all members of my party. One of the things we ought to be doing is taking a lead in the European Union. I have not heard the Government say they want an OFR—but a more detailed one—for every part of the EU. What about us setting in Europe the same standards as the United States seems able to do in the Sarbanes-Oxley Act? That is enforced throughout the world, whether we like it or not. The United States does not say, “Oh dear, we can’t do that. It would be very embarrassing.” Of course not. It has, admittedly, an unpleasant imperialistic way of doing it, but it says, “This is what we’re going to do,” and it does it because it thinks that is right for the United States.
The OFR is right for Britain. I happen to think it is right for Europe. I would like the whole of Europe to have a sensible policy towards corporate social responsibility, and I would like it to be possible to understand how companies throughout the European Union operate, in order that when people wish to invest their own money, their pension money or other people’s money, they can do so with the safety of knowing that the company knows not just about its financial risks, but about its non-financial risks.
That leads me to the attitude of business. I took the opportunity of intervening on my hon. Friend the Member for Rutland and Melton (Mr. Duncan) on the subject of the IOD. There is a difference between the business leaders who have understood that issues of corporate social responsibility, particularly environmental and social attitudes, are part of the future and necessary for our competitiveness, and those who are still stuck in the past.
My hon. Friend is a wise man and in his discussions will, I know, distinguish between those two groups. I shall merely tell him of my experience when I was Secretary of State for the Environment and was approached by the paint industry about some rules that we wanted to introduce to protect people’s safety. One of the things I discovered was that the good companies that had already sought to get that right supported the rules that we proposed. The noise that was coming from the so-called representatives of industry was not on their behalf, but on behalf of the less good companies, which did not want to make the change, had not made the change and wanted to have the advantages, temporary and short-lived though they were, of continuing as they had been doing. It is important to bear in mind the distinction between those who were in No. 10 earlier today and those who sometimes speak as the representatives of the whole of industry, although they are not. Very often, those who speak in that tone are talking about people who do not want change.
My hon. Friend the Member for Rutland and Melton, being a very busy man, was no doubt unable to hear this morning’s discussion on Radio 4 involving Adrian Wilkes, representing the Aldersgate group. I declare an interest as a sponsor of the group, which has very sensible views, shared by my hon. Friend, about how the requirements on companies as regards environmental and social progress are a necessary part of our ability to compete. There are whole areas of new business to be got for Britain if we are seen as leaders in this respect. We have a remarkable opportunity—a business opportunity. I come from business—my whole history is in running businesses. I do not oppose business, but I know that it will shoot itself in the foot unless it puts itself in a position to compete on the highest level, particularly given the British circumstance. We cannot compete on cheap labour or on long runs—we can do so only if we can be at the cutting edge not only of technology, but of meeting the environmental demands of a world that is increasingly concerned about them.
I hope that in his discussions with business, my hon. Friend the Member for Rutland and Melton will right the wrong that this Government have done. They have, I am afraid, taken the view of the reactionaries in business against the view of its leadership. It is increasingly embarrassing to hear what real leaders of industry say when they talk about the Government. They feel genuinely let down. They think that the Government promised so much but have gone back on their word at almost every step. The Minister will not have to live much longer before his children, leave alone his grandchildren, if he has any, will be asking him what he was doing about climate change—not what he was talking about, what his attitude was, or what his Government vaguely thought about it, but what he actually did about it. For example, did he do the simple thing of saying that every business ought to tell its shareholders how it is exposed to the risk of climate change? A company can get its listing on the stock exchange as a major mining company without mentioning the risks of climate change. It can be a huge user of water in a water-stressed area, and nobody asks it to reveal that that is an issue. It does not have to do it, and the shareholders do not know.
My problem is that to start with, I believed you. [Interruption.] I beg your pardon, Madam Deputy Speaker—I meant the Government. I have always believed you and continue to do so. I believed the Government to start with. I thought that it might be bad enough to have a Labour Government, but at least they believe in this. Yet here we are, nine years later, and in every single area they have failed to act. They have talked, brilliantly sometimes, less brilliantly at other times. They have suggested, discussed and consulted—they have done everything bar action.
In that, they are exactly parallel with the CBI spokesman on today’s radio programme. He said how much he wants to help with reducing emissions, that the CBI is supporting the Government’s goal of achieving a 60 per cent. reduction in carbon dioxide emissions, and that that is not at odds with the business leaders who submitted their letter to the Prime Minister today. When the interviewer asked whether the CBI wanted targets for reduction to be set closer to 8 million tonnes instead of the 3 million tonnes that is the bottom level, he replied:
“Targets need to be challenging but fair. The existing work undertaken by companies needs to be taken into consideration along with the activity undertaken at a European level. Responsibility needs to be shared between business and the community and between the UK and the rest of the world.”
In other words: “We are doing absolutely nothing but saying all the right things.” It is like trying to get agreement on fishing. Fishermen will agree to every conservation measure that does not work. I am afraid that that is a truth that we cannot gainsay. Our big problem is to bring home to the whole of this society that all businesses, big and small, have to play their part in changing our ways of thinking and living with risk, because the risk that we face with climate change is far too great to ignore.
I am so pleased that the Leader of the House has entered the Chamber. I hope that he will not leave for the moment, because I would like him, in his new position, to hear my last words. He understands the situation because as Foreign Secretary he fought hard for the whole world to recognise the reality of climate change. But while he was out there fighting on the beachheads, dealing with the Americans in the difficult times that he had, back home his Government, without telling him—but then they did not tell the DTI or DEFRA either—were doing everything to undermine what he was saying elsewhere. They could tell the Foreign Secretary to tell the world that the Prime Minister was going to make climate change the key issue of his presidency of the European Union, while at the same time intending to ask the EU to increase the levels of emissions that we should be allowed and say that if it did not we would sue. How does one run a Government like that? Of course, people are now beginning to understand that that is how this Government are run. They are the same Government who promise that we will be safe on the streets but release on to the streets everyone who makes them unsafe. That was another job that the Leader of the House had.
You are absolutely right, Madam Deputy Speaker, but it was fun, was it not?
Before the Leader of the House goes, I should like to say that I hope that he will find plenty of time for the Bill to be discussed and will lean on the usual channels to make that possible. I also hope that he recognises that he will be pressed again and again to ensure that in the dying days of this Government we have the action that they promised on these issues. That needs to be started here. He is too intelligent and sensible to allow the Government to put the Bill through without the OFR element. If he can change that, he will have done something more important than anything else that he has done as a Minister. As this is so important, that is not insulting.
I am grateful to the right hon. Gentleman for his flattery, which was laid on so thick that even I could notice it, and therefore was all the less convincing. I am not fully up to speed on every detail of the Bill. However, I chaired the Cabinet Committee that had to make the decisions about increasing the allowances that he mentioned. Our decisions in Europe and our speeches to the Americans were entirely consistent on the issue of climate change, one way or another, and no Government have said or done more in respect of climate change than this one. With that, I hope that he will excuse me.
Of course the Leader of the House can leave. I shall not detain him longer, but I cannot understand how he believes that it was credible to tell the United States that it ought to join in on the issues to which the OFR and the Bill apply while asking the rest of Europe to allow us off the hook.
Different hon. Members will place a different emphasis on the Bill. Different people feel the issues more or less sharply. Conservative Members are right to insist that the Bill be clear and simple. My hon. Friend the Member for Rutland and Melton was right to say that the way in which the Government phrased the provisions that are supposed to replace the OFR are less than clear and may restrict rather than enable. Having said that, I hope that my hon. Friend will agree that we need to find an alternative that enshrines the simplicity and efficacy of the OFR and the effect that it would have produced. If we can get that back in the Bill, we may be able to make the changes that some of my noble Friends in the House of Lords tried to secure because of the inconsistency of the language, and also achieve the purpose that we share with the hon. Member for Kingston and Surbiton. That is more embarrassing for me than anything else.
As my hon. Friends know, agreeing with the Liberal Democrats presents a genuine difficulty for me because I have to ask myself whether my argument is right if they agree with me. On this occasion, by accident, they appear to have arrived in the same place as me and, therefore, for a brief moment, I shall accept their support.
Together, we must force the Government to act. They have shown themselves to be incompetent. They must show that they can do something right. The Bill is the chance to redeem themselves at least a little. Can we help the Government to do something that they should do and that, in their heart of hearts, they know that they must achieve?
I welcome the Bill, which is a major step towards establishing a fair, modern and effective framework for company law. However, I wonder whether it can go a little further than it does.
Last year, when steering the G8, my Government identified the two biggest challenges that face the world today: climate change and the increasing division between rich and poor. We all know from the public’s reaction that they agreed with us. Although the public agree that those issues are important and frequently appreciate the efforts of national Governments, not least ours, and international institutions to tackle the problems, that is simply not enough. A major player is missing. We need consistent and concerted effort from business.
Many believe—and I agree—that international capital is insufficiently controlled. That applies especially to democratic control. A recommendation on page 146 of the report of the Prime Minister’s Commission for Africa states:
“Developed country governments, company shareholders and consumers should put pressure on companies to be more transparent in their activities in developing countries, and to adhere to international codes and standards for behaviour.”
My constituents agree that more should be done and that companies have responsibility. They believe that companies do not do enough. We have a chance to ensure that companies take their social and environmental responsibilities more seriously.
I had received 255 letters, e-mails and postcards on the subject at the last count. [Interruption.] After a while, one begins to give up counting. More people have written to me on that subject than about anything else. People feel strongly that the major problems in the world cannot simply be addressed by national Governments and international institutions. International capital must work consistently and coherently with us to ensure that we address those major issues.
That is not to say that the Bill is not a step in the right direction. I especially welcome clause 158, which clarifies directors’ duties, although it might only enshrine in statute that which is already established in common law. I agree with many who would go further and I urge the Minister for Industry and the Regions to consider whether it is appropriate to take a more pluralist approach. If my right hon. Friend, having reconsidered the matter, believes that the only path is one of enlightened shareholder value—in other words, that directors should run the companies in the interests of shareholders while recognising that, in the long term, that means taking account of a wider range of factors that may affect the business, such as the impact on employees, the environment and communities—we can improve that approach.
I ask my right hon. Friend to consider two matters in particular. The first is ensuring that directors report properly to their shareholders and, secondly, that all shareholders—I mean all—can hold those directors to account.
Let me consider part 15 chapter 5. I greatly welcome the new duty for directors of our biggest companies to report on the environment, the welfare of employees, the social impact of their companies, their policies and how effective they have been. However, I am concerned that there is a get-out clause. As Mercutio said in “Romeo and Juliet”, it is
“not so deep as a well , nor so wide as a church door; but ’tis enough, ’twill serve”.
The report that directors make needs to include information only to
“the extent necessary for an understanding of the development performance or position of the company’s business”.
I do not understand what that means. I am worried that the get-out clause is so big that it makes the Bill ineffective in some ways.
Even if that problem were resolved, “Fine words butter no parsnips”, as my nan used to say. The best written report in the world is not enough in itself. I am sure that many fine equal opportunities policies are in place in City institutions, yet consider the way in which they treat their women employees. Directors need to be held to account so that it is not simply a matter of writing the right things in a report or getting some bright young thing to write something that sounds good and ticks the right boxes. Once the report is written, shareholders must hold directors to account. If my right hon. Friend is resolutely of the view that shareholders are the only people who can hold directors to account, we should allow all of them to do that.
Conservative Members repeat that we are all shareholders now. Let me present them with some inner-city common sense and reality: not all the people on my estates are shareholders. However, one fifth of the population—nearly 12 million people—hold shares. Of those, almost 4 million—one third—have no voting rights because they hold their shares in pension funds. Why is that? I do not follow the logic or the fairness of that and I am not alone.
Yesterday, I read something that appeared pretty sound. It stated about clause 136:
“The truth is, and the companies know it, that this simple clause has the power to force companies to treat all private shareholders with the respect they deserve. It might even enliven increasingly dull and predictable annual meetings. Overnight, the board would be far less certain of winning key votes like those on directors’ remuneration—very rarely voted down because of backroom deals with City institutions…
As private companies control increasingly large chunks of our daily lives through the march of the Government’s private finance initiative, the notion of a shareholder democracy has never been more important. History tells us democracy only flourishes when people look after it.
Our shareholder democracy is no different. For years, it has been ignored. This has got to change. The battle starts here.”
That call to the barricades is from the City section of The Daily Telegraph. If the City section of The Daily Telegraph is asking for all shareholders to have a voice and to be allowed to hold directors to account, I must urge my right hon. Friend to consider whether we can achieve that. Furthermore, I would ask that, at the very least, it be made mandatory that fundholders publicly declare how they vote. I was amazed to hear from the TUC that fundholders are allowed to vote as they wish and then decline to be accountable. I certainly hope that the Bill will be able to stop that happening.
I strongly want this country to be an excellent place in which to do business, and the Bill will ensure that it is. However, if it were to be beefed up a little, this would continue to be an excellent place for ethical and responsible business to thrive. I am confident that I speak on behalf of the majority of my constituents when I urge the Government to consider that point.
I should like to start by declaring my interests. I am a director of a small private underwriting company called Sumac, of which no one will ever have heard. I am also a member of the council of Lloyd’s, which is the governing body of one of the biggest insurance and reinsurance groups in the world. I am also a director of Vinci and of Vinci’s UK subsidiary, which used to be called Norwest Holst. I have in the past been a director, and an executive director, of other institutions before I joined the House.
The Secretary of State left us in some confusion about the programme motion. He said that he was prepared to entertain the suggestion that we should extend the time available for the consideration of the Bill in Committee, which was extremely welcome. It is particularly important that we should do so because the Government now intend to introduce the clauses of the Companies Act 1985, which is not to be disapplied by the Bill and will therefore remain part of the corpus of company law. The Government are absolutely right to do that, and I welcome and endorse their proposal. They intend to bring the clauses into the Bill for the convenience of the users of the legislation, so we now have a consolidation measure before us. That is thoroughly welcome, as is the fact that we might have more time to consider it.
However, the Secretary of State declined to say that he would withdraw the programme motion. Once it has been passed, we are stuck with it. Do the Government intend to waste the time of the House by bringing another programme motion back to the Chamber in a few weeks’ time? If the Secretary of State is serious in his undertaking to extend the time available to us, surely it would be sensible for him not to put the programme motion to the vote tonight. He should instead do what should be done in any sensibly organised legislature, which is to reserve programme motions for when there is a genuine problem of filibustering. In those circumstances, an ad hoc argument can be made to impose some kind of timetable.
This is a good Bill, and it reflects the fact that there have been seven years of consultation on it. Would that most legislation coming from this Government could have seven months or even seven weeks of consultation. Far too much legislation brought before the House has had no proper consultation at all. Far too much is simply dreamt up in Whitehall and determined through compromises among Whitehall committees or between Ministers, without the great unwashed public being allowed to know any of the arguments or on what basis those bureaucratic compromises are being reached. The Bill quite rightly imposes higher standards of transparency on business, and I hope that the Government will impose higher standards of transparency on themselves in future.
I should like politely to put the hon. Gentleman right on the consultation that the Labour party undertook in the run-up to the last election. The public consultation on the manifesto—which formed part of our national policy forum consultations with the general public as well as with Labour party members—was the biggest undertaken by any political party in the world.
I am not talking about consultations on a manifesto, and I do not want to get involved in that argument. I am talking about the role of this House as a legislature, as a body that conceives, drafts and eventually promulgates laws, subject to Her Majesty’s consent. We have received her consent—or that of her predecessors—pretty consistently for the past 300 years. We have an important job that must be taken seriously. It would be crazy to carry on a situation that we have had far too often in the recent past, in which Bills have been introduced that have not been properly thought through. We have then had much too little time to consider them, precisely because of the Government’s disgraceful habit of imposing automatic timetable motions. Whole rafts of legislation therefore go through without due consideration, and that is a disgrace to any Parliament. It is certainly a disgrace in this country, which is often said to have the mother of Parliaments.
On this occasion, however, I must give the Government their due for the fact that there has been proper consultation, and it has resulted in a sensible Bill. On the whole, it is also well drafted. That point has already been made today, but it bears repeating. On the whole, the Bill is written in sensible, lucid English. There are one or two exceptions, and if I am lucky enough to be appointed to the Committee, I might raise them there. Generally, however, the Bill sets good standards of drafting.
I was interested to hear the hon. Gentleman’s declaration of interest as a director of a private company. As he is in favour of the transparency in the Bill being applied to listed companies, would he also be in favour of extending that to private companies, thereby enabling a £25 billion market in ethical consumerism in this country to be added to the transparency measures that will be allowed to ethical investors?
No, I would not. This is a question of proportionality, which is one of the criteria that we should always have in mind when we are legislating to impose constraints or costs on the citizen. It would be ridiculous to impose the whole apparatus of corporate governance that is appropriate to a public company—especially a quoted public company—on a company that might be owned by a married couple and have a turnover of only a few thousand pounds a year. That would be absurd.
As the suggestions that have come from that corner of the House have been so utterly unreasonable and un-thought-through, I am not going to waste the time of the House by giving way to them, or at least not for some time.
Whenever we look at a Bill, we should have regard to certain fundamental principles. I have already mentioned proportionality. Another obvious one is the issue of justice, in which we must consider whether a Bill is based on—or at least consistent with—certain fundamental principles on which we all agree, such as equality before the law and non-retrospectivity. As far as I can see, this Bill is fine in that regard. Another consideration is whether a proposed piece of legislation is rational—in other words, whether it will encourage virtuous behaviour and discourage behaviour that is damaging to the interests of society as a whole, or whether it will have a perverse impact. On the whole, the Bill is well conceived and passes that test pretty well.
We must also consider whether a prospective law is clear and creates legal certainty, or whether it creates legal uncertainty. Legal uncertainty can be extremely damaging, especially in businesses that will be impacted by company law. We must have a society in which people can make investment decisions with market risks attached, and sign contracts with other parties—corporate or individual—with reasonable certainty that those contracts will be enforceable in law and that the regime under which the investment decisions involved in setting up or expanding a company are made will be sustained by subsequent decisions of a court if they are challenged.
When Parliament adds legal risk, it does a very bad day’s work for the economy, because the total risk involved in investment and in other business transactions may be enhanced. That could result in less investment and fewer transactions for any given prospective rate of return, which could ultimately mean a lesser gross domestic product and therefore a lesser GDP per capita for all of us. It is very simple. So we need to consider any Bill that comes before the House, but particularly a company law Bill, against the criteria of whether it will increase or reduce legal certainty, and whether it will enhance or reduce legal risks. I am going to come back to that, which is highly relevant to the Bill.
I shall now discuss some of the most problematic aspects of the Bill, which have received most attention. Clause 158, in particular, has already been the subject of considerable debate this afternoon. It deals with the duties of directors and I intend to comment on them. Frankly, all but one are statements of quite obvious obligations, which anyone becoming a director should—and if half-sane and half-competent would—accept without question. These definitions go to the heart of the duties of directors.
The first in paragraph (a) states that directors should, in taking decisions, consider
“the likely consequences of any decision in the long term”.
That is perfectly obvious. Any decision is likely to take into account the likely consequences in the short, the medium and the long term. In the case of financial decisions, a number of financial techniques are available for relating long-term to short-term decisions—discounted cash-flow analysis, for example. These decisions are part of the day-to-day and natural responsibilities of directors.
Paragraph (b) refers to
“the interests of the company’s employees”.
Well, anyone who is in business is in the business of management and in the business of recruiting, motivating and retaining employees and getting the best value for the company from them. Anyone who neglects employees cannot possibly be running a good business. A business is as good as the value of its employees and that applies whether it is a service company or a manufacturing company, a more or less labour-intensive or capital-intensive business. If employees are not doing the job properly, are unproductive, inefficient, poorly motivated and not conscientious, the business will not run properly. That seems to be absolutely fundamental and unexceptionable. I cannot imagine that anyone would be opposed to that statement as one of the fundamental obligations of directors.
Paragraph (c) refers to
“the need to foster the company’s business relationships with suppliers, customers and others”.
Again, anyone who—[Interruption.] Colleagues are laughing, precisely because that is a statement of the obvious. It is surely a legislative platitude. Anyone who wants to stay in business for more than five minutes obviously has to have regard to the interests of customers. If a company does not have any customers, it will not, by definition, be in business. Every day, the managers and directors of every well run business are thinking about the customers. They wonder whether their customers are satisfied, whether they could come up with a better solution for them, whether the reactions of customers to the latest contract have been taken into account and so forth. That is absolutely clear.
Equally, it is not possible to run a business in most circumstances unless there are reliable suppliers. We want as many people as possible to compete for that business in order to secure the lowest possible prices and the best deal. That can be done only if a company has a reputation for being a good partner to deal with and a good customer to those suppliers. If companies become awkward and difficult to deal with, a price will be paid because fewer will quote so aggressively for the business. At best, a company will end up paying more for the supplies; at worst, those supplies may be interrupted. Once again, it is a statement of the obvious.
Paragraph (e) mentions
“the desirability of the company maintaining a reputation for high standards of business conduct”.
I cannot imagine anyone wanting to be on the board of a company unless he or she took some pride in the fact that it had the highest possible reputation. That translates, of course, into a good image with potential customers. The fact that someone is seen as being a reliable and good person to do business with is vital for success in the market and in dealings with other stakeholders, including suppliers.
Finally, paragraph (f) refers to
“the need to act fairly as between members of the company.”
I am particularly pleased about that. Although it is platitudinous in the sense that it should be obvious to everybody, I can remember occasions when I have sat around the boardroom table and had to remind colleagues of that particular obligation. It arises when a director is associated with one—perhaps a large minority or a majority—shareholding and is inclined to be insufficiently aware of potential conflict. When a director is sitting around the boardroom table, his or her obligation should be to the totality of shareholders of the company. Under no circumstances must a director be influenced by the interests of one particular minority or majority shareholder. I am glad that that vital aspect is included. I have no problem with any of that.
I think that I heard my hon. Friend the Member for Rutland and Melton (Mr. Duncan) saying that he did not like the explicit statement of the obligations of directors because it pre-empted the possibilities for jurisprudence. I believe that he said something along those lines. He believes that somehow the courts would not be able to develop a substantial and continuing jurisprudence in respect of the definition of the duties of directors after the Bill’s passage. If my understanding of what my hon. Friend said is correct, I profoundly disagree with him. To me, the creation of legal certainty is, as I have just explained, a very positive gain. What one does not want is uncertainty about the duties of a director. One does not want to have to wait for the next judgment of a judge. One does not want to have 10 different lawyers giving 10 different views about what a particular judge may decide. One wants to be able to point to a piece of legislation that is clearly and lucidly drafted and to say that it is there, thus creating some legal certainty. I believe that that is a positive advantage and a good reason for including the clause in the Bill.
I may well be told that I have completely misunderstood my hon. Friend the Member for Rutland and Melton. Perhaps my hon. Friend the Member for Huntingdon (Mr. Djanogly) will produce some exegesis or a correction to my impression.
I have been enjoying my hon. Friend’s speech enormously and agree with most of it—until just then, when he did indeed misrepresent the position of my hon. Friend the Member for Rutland and Melton (Mr. Duncan), only in so far as he did not deny the merit of that the paragraphs that my hon. Friend the Member for Grantham and Stamford (Mr. Davies) has just explained and agreed with. No Conservative Member disagrees with those paragraphs; they are the established common law. What we are saying is that, by choosing a handful of existing common law obligations and putting them into a subsection over and above all the others, confusion could set in. Indeed, there could be a resultant reassessment of the established law. Of course, we shall discuss that issue at length in Committee, but I wanted to put him right now.
I am grateful to my hon. Friend for that but, unfortunately, I find that I did not misrepresent the remarks of my hon. Friend the Member for Rutland and Melton. Unfortunately, I find that there is a divergence in our views on this subject. It seems to me that the whole purpose of legislating in an area where only jurisprudence has existed since the Companies Act 1985 is precisely to create greater legal certainty, for all the reasons that I have just mentioned.
Of course I will give way to my hon. Friend, who is a distinguished company lawyer among other things, if he will let me complete my paragraph.
The whole purpose is to create greater legal certainty if that can be achieved. Therefore, I see the advantage of identifying the key directors’ obligations and placing them, as Parliament considers them, in the Bill. That would be a very desirable thing. It is always open to my hon. Friends the Members for Huntingdon or for Rutland and Melton to suggest that other things have been left out—indeed, I have left something out, which I will come back to in a moment—and that things in addition to those that the Government have included in the Bill ought to be added to the key obligations. I personally do not think that anything should be added to them. The five paragraphs that I have listed encapsulate the key obligations, and it is right for Parliament to say that those are the key obligations and that other things are secondary.
The question in my mind is whether paragraph (d)—the one that I deliberately left out when I read out the list—which refers to
“the impact of the company’s operations on the community and the environment”,
should remain in the Bill and continue to have the same status as treating all members of the company equally, being concerned with one’s customers and employees and considering
“the likely consequences of any decision in the long term”.
Of course, the paragraph on employees is the only one that has been taken from the Companies Act 1985.
I shall give way to my hon. Friend the Member for Eddisbury (Mr. O'Brien), and then say what I have in mind and what my concerns are in relation to the community and the environmental obligations.
There is a grave danger in this important discussion in not distinguishing between understanding the justiciability of the future grounds for considering what has been referred to in statute, given that the previous common law basis will be effectively enshrined partly in statute, and the Bill’s other objective, which will be one of the most difficult things to contemplate in Committee: how do we move from a tick-box mentality, whereby such a list simply aids those who have no understanding of business—they can simply tick the box to show that they have monitored the business—to actually influencing the directors’ behaviour in a way that gives them the judgment to do the right thing in the first place, thus giving the courts less of a reason to judge against them in the future? That is the nub of the problem.
With respect to my hon. Friend, I think that the Bill adopts precisely the opposite of a tick-box approach. It sets out general principles. I need not repeat the five that I have just read out, because I know that he is even more familiar with the Bill than I am. I think that we should have some general principles, and that Parliament should formulate them as clearly as possible, avoiding any ambiguity that can be avoided to reduce the scope for legal uncertainty—thereby, of course, reducing the scope for litigation and jurisprudence.
Whenever I suggest in the House of Commons any action that reduces the scope for litigation and jurisprudence, members of a certain profession—well represented here—turn against me immediately. I cannot think why that is, but it always happens. Nevertheless, I believe that, as legislators, we should be concerned with clarifying for the citizen the regime under which he can undertake contractual obligations with other parties, make investment decisions and incur liabilities, knowing precisely—or as far as possible precisely—what the liabilities will be and how they will be interpreted by a court.
My problem arises with paragraph (d), which refers to
“the impact of the company’s operations on the community and the environment”.
I cannot conceive that a director doing an honest job would not be aware of, make himself or herself aware of, or ask all the requisite questions about, the impact on the community and the environment of any major investment or major change in the company’s business. Nevertheless, I doubt that the requirement should be enshrined in law as a fundamental obligation. The problem is the drafting, which is very wide and imprecise. It would be extraordinarily easy to argue that a director had not taken account of some aspect of the impact of his company’s operations on the community or the environment.
I think that paragraph (d) fails my test. I say “I think” because I am speaking tentatively. I am keeping an open mind, and I am prepared to be persuaded by my hon. Friends the Members for Huntingdon or for Rutland and Melton, or any other Member—including those on the Standing Committee, if I am lucky enough to be on it. But I think that we should think about that paragraph very carefully.
Some of the same problems arise in clause 399, the business review clause. It has already been the subject of a good deal of comment of a different kind. Some of it is extremely good. Subsection (3), for example, states
“The business review must contain—
(a) a fair review of the company’s business, and
(b) a description of the principal risks and uncertainties facing the company”.
That means that anyone who becomes a company director has an absolute obligation first to make his or her assessment of the risks, and secondly, to communicate them to shareholders. The director must make absolutely clear what he or she believes to be the risks involved in the company’s activities. That requirement should be made explicit, and if directors are doing a fair job on behalf of shareholders, shareholders should expect the information to be provided.
If the risks change, it must be up to the board to ensure that the public know—that the market knows—that they are changing. The public and the market must be made aware of the potential impact on the company of, for instance, a rise in the oil price or a war in the middle east. Things can change in the world, and that means that the risks faced by a company can change. It is important for directors to feel obliged to assess the risks and to make their assessment available to shareholders and hence to the market; otherwise false markets will develop.
Most of this is very good stuff, and I am happy with it, but clause 399(5) refers to information about
“environmental matters (including the impact of the company’s business on the environment)”.
That is drafted extraordinarily widely. If the reference had been merely to the impact of the company’s business on the environment, that would have been relatively precise. It could well be said that it is the responsibility of directors to know about the impact of their company’s business on the environment, to assess it, and to communicate their assessment. Paragraph (5), however, does not say that. It says that the directors must provide information about
“environmental matters (including the impact of the company’s business on the environment)”.
What else does the obligation include? That is far from clear.
Similarly, subsection (5)(b)(iii) refers to “social and community issues”. It does not even refer to social and community issues arising from the company’s activities. What exactly does it mean? It is drafted dangerously widely, irresponsibly and imprecisely. I hope that it will be possible to tighten it in Committee or on Report.
I share my hon. Friend’s concerns. He may be interested to learn that in the other place subsection (5) was described as “a slightly gnomic formulation”. That was an eloquent way of saying that it was a catch-all provision, and it accorded with the views expressed by my hon. Friend today.
I am grateful for my hon. Friend’s support. She has put me to shame by making it clear, modestly and indirectly, that she has done something that I have not done, and read the Hansard report of the debate in the House of Lords. I am afraid that, having learned that the report ran to several thousand columns, I immediately decided that I would try to understand the Bill on the basis that I was simply a citizen who might have to observe the provisions of a new Companies Act. I therefore have not done the extensive homework that my hon. Friend has obviously done, and I am very grateful to her—especially because, having done that homework and having considered the matter carefully in the light of comments made in the other place of which I was entirely ignorant, she has been able to come to my aid.
Other aspects of the Bill strike me as potentially problematic. One was raised by my hon. Friend the Member for Rutland and Melton, and I agree with what he said. He mentioned the dangers of derivative actions. The Secretary of State said that there were two protections against, in particular, vexatious or frivolous actions of that kind, and I can all too easily understand how such actions could arise in the modern world. First, a court must be satisfied that there is a prima facie case. Secondly, it would be a defence for a director to say that he or she had acted reasonably in the circumstances of the time and, presumably, given the extent of his or her knowledge at the time. Nevertheless, I think that the issue of derivative actions should be probed very carefully before the Bill is allowed to become law. Otherwise, we may open the floodgates to cynical, vexatious litigation against company directors, especially in view of the imprecision relating to community, social and environmental affairs.
I want to raise two more points. One relates to whether institutional investors should be obliged to publish their votes at company meetings, either extraordinary or annual general meetings. I have some sympathy with the view that they should make their votes known. Why? Because all of them are, directly or indirectly, fiduciary institutions. All of them have ultimate beneficiaries who are private individuals. In some cases, such as hedge funds, all those who have provided the money are themselves institutions, but those institutions in turn will be pension funds or investment trusts whose beneficiaries are private individuals. In the interests of transparency, as the investors are ultimately fiduciary institutions, they should be obliged to say how they cast their votes on behalf of their ultimate beneficiaries.
I consider that a reasonable argument. I would need a great deal of persuasion to accept that the cost consequences, or other perverse consequences, of such a requirement at law were so great that it should not be supported. I also hope that such an obligation might do something even more valuable in practical terms, and induce those institutions to vote and to take an interest in the governance of the companies in which they invest. Far too often, still, fund managers say, “I do not have time for that. If we do not like the company’s performance, we should just sell the shares.” In many cases, if the block of shares is large in the context of the liquidity of the market, those shares cannot be sold, except at a discount. The institution may then be forced to take a more direct interest in what is going on and, if it does not like it, to do something about it.
I am a great believer in everyone, including Members of Parliament, trying to face up to their obligations. Directors certainly should. If they should, so should institutions. It would be good if there were greater pressure on them to vote and if there were a requirement to say how they have voted.
That is an important matter. It should be debated by the House and considered as part of the Bill. It should not be left to subsequent secondary legislation. I am offended by the suggestion that a matter as important as that should be left out of the Bill and dealt with through a statutory instrument. As we all know, the scrutiny of statutory instruments is a farce and a disgrace to the House. The matter should be dealt with now, explicitly, openly and honestly in the debates that we will have over the coming weeks, and possibly months, on the Bill. We should come to a conclusion and it should be in the Bill. There will also be great advantages in terms of the comprehensibility of the corpus of the Bill if all the provisions are clearly set out in one document.
On the enfranchisement of indirect shareholders, there are many reasons why people decide to hold shares through a nominee account. One may say that, if they decide to set up a nominee account, why should they have the benefits of holding the shares directly, but there are some special categories for which Parliament has responsibility.
Through our tax system, we have made it clear that small investors who want to take a share in the equity market—I am glad that we have provided these incentives and advantages for them—should do so through personal equity plans and individual savings accounts. If they invest through PEPs and ISAs, their names do not appear on the shareholder register. Therefore, they are being forced, if they wish to take advantage of the tax breaks on income tax and capital gains tax, to forgo their rights as shareholders.
Parliament made a terrible mistake when it linked those two things. It was right to provide fiscal inducements for small savers, or indeed for anyone, to invest small amounts of money in the equity market. That was a positive thing. It was done first under a Conservative Administration and subsequently in a slightly different form under a Labour Administration. That is fine. That is common ground. However, it was fundamentally wrong to do it in such a way that, whether intentionally or otherwise, de facto, those shareholders were deprived of the rights of shareholders—some were taking an interest in the equity market for the first time, no doubt—by virtue of being forced into those special vehicles, the ISAs and PEPs,. We have an opportunity in this Bill to rectify that wrong. It is both a moral and an economic wrong and I hope that we take this opportunity to right it.
We have had a good debate. It has been interesting to hear the points of agreement on the Bill and the points of disagreement. I, too, welcome the Bill because it will reduce the burden on small and medium-sized businesses in Swindon and help to expose irresponsible companies. In particular, it has given us the chance to raise the important issue of corporate social responsibility this afternoon. However, I want reassurances that what we get from the Bill is CSR rather than PR—public relations. I will outline the principles on which my concern is based.
Before I do that, I should say that the biggest factor in increasing social mobility in Swindon has been the increasing success of small businesses since the late 1990s. We have the best ever business environment under this Government. I come from a family who have run small businesses. My mother started a small business and my brother still has a small business, so my background is based on the success of small family businesses. I am delighted that the Bill will make it easier to set up and run a small business.
I work closely with the Federation of Small Businesses in Swindon. I have made it clear to the federation that I want to see the regulatory burden on smaller firms lightened and to work with them to identify new ways to simplify and to reduce the demands placed on them by Government. That is why I am pleased that the Bill could save small and medium-sized enterprises £100 million a year. It is right that the Bill changes the approach from looking at the needs of large businesses and large companies first to a “think small first” approach. I thoroughly welcome that.
I am pleased that there will be benefits from a range of measures for all businesses in my constituency, including greater clarity about directors' duties. The Bill makes it clear that they have not only to act in the interests of shareholders, but to pay regard to the longer term, the interests of employees, suppliers, consumers and the environment, as we have heard.
More than 30 international companies have their headquarters in Swindon. I heard and understood my right hon. Friend the Secretary of State's comments on the need to continue to attract such companies to incorporate in the United Kingdom but, as someone who has worked in corporate social responsibility for a large corporation, I know that CSR is essential to securing the future of British business, and I say respectfully to my right hon. Friend that strengthening it in the Bill would do us credit and would help companies.
My experience comes from three years working, in community relations in particular, for a large international company. That involved liaising with local stakeholders—I will use that term because it is understood by the industry. There is a difference between stakeholders and shareholders. I do not agree with the right hon. Member for Suffolk, Coastal (Mr. Gummer), who is no longer here, about that, because stakeholders means people in the local community who have a stake in a company. They do not necessarily have to have shares in it; they may not even be able to buy shares in it. That was my experience of working in industry: people could not buy shares in a company, but were still directly affected by its work in their community.
I had to create a programme to ensure that local stakeholders’ concerns and views in a somewhat controversial area were taken on board. Initially, there was much suspicion within both the company—people working for the company did not understand or see the need to talk to local people, to give their views or to explain why they were doing things—and the local community, which over a period of years had come to distrust the company because of the actions that it had taken in the past. Although I was employed and paid by the company I found myself, as a middle-woman, so to speak, liaising between one group and the other and ensuring that there was dialogue. That is an important aspect of corporate social responsibility, and of working in the local community and with local society.
I hope that that explanation goes some way to explaining to the hon. Member for Grantham and Stamford (Mr. Davies) why we should enshrine the idea in law. In the long run, doing that made the company's work at large easier because there was less confrontation with the local community, more joint working and more understanding. It saved the company time and money, particularly with planning applications, which, as any of us who have worked in industry know, are among the most difficult things to get through local communities. Therefore, I commend that to him as an important part of the Bill.
Corporate social responsibility reports are often handled by public relations departments. That is wrong and we should change the emphasis to community relations and corporate social responsibility. We need to do that in this country, to ensure that our companies are the best in the world. Our high skills and high level of company intelligence need to be kept up. We need to empower stakeholder engagement in companies, because of the benefits that I have described.
The public are demanding more transparency on issues. They have woken up to the fact that those issues are affecting their families. They include the environment and all sorts of other responsibilities that companies have taken on board. It is an issue for nongovernmental organisations, too. When they work with companies, rather than standing outside and throwing brickbats at them, they may find that their views have changed, and things are going differently from how they thought they were going when they stood outside the company and did not engage with it.
The CSR reporting framework that we could have had through the Bill would cut many hours of argument and debate in companies, simplify things and save them time and money. I remember discussing at great length what should be in and what should be left out of those reports, which took a huge amount of time. If the framework that we could have used was available in law, it would be much easier and simpler for companies, stakeholders and other people outside companies to understand, and to compare one company with another. It would also lead to a great deal more transparency.
We in this country should also recognise that, as MORI and many other polls have proved, NGOs are much more trusted by the public than are Governments, politicians and even businesses. If we can bring NGOs and companies closer together and get them to work together, that would be of mutual benefit to both. Even since the publication of the Bill, public opinion in this area has continued to shift. There has been growing evidence of the impact of irresponsible businesses on the environment, and growing public demand for the exposure of such businesses. The Opposition have been getting further and further out of step with public opinion, despite the comments of the right hon. Member for Suffolk, Coastal. Even though he said that he disagreed with the Trade Justice Movement, his arguments, which reflected many of the movement’s, led me to believe that he may have drafted some of its briefing notes.
I have been most disturbed to learn that while the Leader of the Opposition, the right hon. Member for Witney (Mr. Cameron), has been shopping for energy-efficient light bulbs at IKEA, his shadow Ministers in the House of Lords have tabled amendments that would have stripped away any green or ethical clauses in the Bill. While he was trying and failing to get planning permission for a windmill on his roof, Conservative peers in the Lords were trying to roll back company law to remove existing obligations for company directors that have been established in common law since 1862—presumably a century in which Conservative peers feel more at home.
In December 2005, the right hon. Member for Witney said that he did not
“go into politics to be the mouthpiece for big business”.
However, in March 2006 he said:
“I will always stand up for big business”.
That is an example of the confusion and contradiction that exists among Opposition Members, which I hope that they can overcome so that they can work with us to strengthen the Bill. If Opposition parties were serious about corporate accountability, they would join me to push for enforceable rules to ensure that companies act in the best interests of the community.
I am interested in what the hon. Lady is saying, and I wonder whether she agrees with me about a very real issue facing my constituency, which is close to Heathrow. The Government are looking at ways of expanding Heathrow. Does the hon. Lady agree that they should take a similarly socially responsible attitude towards the development of Heathrow and the regulatory framework that they give to BAA—or is that a different issue from the one that she is talking about?
Many of the hon. Lady’s constituents work at Heathrow, so there will be differences of opinion among her constituents. Corporate social responsibility—and the Bill, if it is toughened—will ensure that companies have to take note of the diverse views of her constituents. I hope that she will support the toughening of the Bill that I am suggesting.
Just before the recess I met two campaigners from Honduras—Rosa Giron and Pedro Landa—who were working with the Catholic aid agency known as the Catholic Fund for Overseas Development to reform mining laws in their country. As we heard in an earlier speech, mining multinationals, some of which are based in the UK, bring investment to developing countries, but we have to acknowledge that they also bring environmental destruction and slave wages. CAFOD wants to ensure that the people of Honduras and the Democratic Republic of the Congo benefit from their mineral wealth, rather then paying a heavy price for it. It is just one of several NGOs that are part of the Trade Justice Movement coalition, which is campaigning to support and to improve the Bill.
I was pleased to be able to sponsor a meeting of the Trade Justice Movement today, and in the light of it, I would like the Minister to clarify a couple of issues. The Bill makes it clear that the directors of a company must look at the long-term viability of the company and the future interests of shareholders, and that, in running the company for the long-term benefit of shareholders, they must have regard to factors such as the impact on employees and the environment, and report on the wider context in a business review. I would like some clarification of the nature of the business review, and to know what steps will be taken to ensure the quality of, and coverage of, the non-financial aspect of the reporting. The TUC and the Trade Justice Movement are asking for further amendments to ensure that there is a legal benchmark. All I would ask is that the Minister set out before us her benchmark for the acceptable quality and coverage of the business review.
The Secretary of State said that there would be too much litigation if we agreed to the Trade Justice Movement’s proposals. Arguably, that is wrong for two reasons. Section 309 of the Companies Act 1985 gave directors a duty to have regard to the interests of employees. Only about three cases were brought in 15 years. That definitely did not open the floodgates to litigation, and it is analogous to what is being proposed here. The prospect of a company or shareholders suing a director is unlikely to happen under the extended proposals from the Trade Justice Movement. A company would not ever take action against its own directors lightly.
There is all the difference in the world between creating an obligation for directors to have regard to the interests of their employees, which is a specific requirement, and their having to have regard to the community or the environment. The latter is a vast and more or less unending obligation. That is the difference between the obligation that we already have in the 1985 Act and that under clause 158(1)(d) in the Bill before us.
I understand the hon. Gentleman’s concern, but I do not agree with it, because such an obligation is not unending. There are companies in this country—I worked for one of them—that, although they did not necessarily find such an arrangement easy at first, have found it achievable, a good thing and of benefit to them in the long run. My argument is that that obligation will be of benefit to British business. It will ensure that we are competitive and moving ahead of many other countries.
Under the terms of the Bill, shareholders can take action against directors only if they have cost the company financially, which is almost like the company suing itself. There is unlikely to be much litigation in those circumstances.
Finally, I want the Minister to confirm that the intention is that the Bill will ensure that UK companies are more accountable for their impact on workers, communities and the environment, both in the UK and overseas. Will the directors’ duties and the duty to report on corporate social responsibility be strengthened and given teeth? I, too, believe that it is a great shame that the operating and financial review has been abolished, because it would have provided a good framework and greater transparency for shareholders and stakeholders. The proposed business review is much weaker. There is no requirement for information on social issues, and less stringent audit requirements. The OFR was not just a good thing in theory; in my experience, corporate social responsibility and the implications of the OFR are a good thing in practice not only for the good health and wealth of UK companies, and for their employees, local communities, the environment and stakeholders, but also for those living in developing countries.
In connection with what the hon. Lady was saying earlier about companies being sued, does she agree that where a UK company is operating overseas in a regime in which it is often very difficult for a local person to sue the company, provision should be made for taking action in the UK?
I thank the hon. Gentleman for his intervention. I am indeed interested in that idea, and I should like to pursue it further.
In conclusion, and as I was saying, the OFR is also good for those living in developing countries, for whom we in this House have a duty of care.
I am grateful to have the opportunity to take part in this debate. At the outset, I must declare my interest, as recorded in the Register of Members’ Interests, not only as a non-practising solicitor—I have in the past practised in the City of London—but as a fellow of the Institute of Chartered Secretaries and Administrators and as its parliamentary adviser.
I was the group company secretary for a FTSE-100 company before entering Parliament, and it may help if I start with a small story from my by-election in 1999 that helps to describe the mental map with which the Government approach these complex issues. Anyone who has been trained in the law knows of the enormous amount of statute and common law that provides the certainty and the competitive base from which our country can compete, fairly, honestly and transparently. During the by-election, the Labour party made desperate attempts, with many investigators looking into my background and chasing my family and friends, to discover whether there was anything that it could give to The Guardian. At one point, as my campaign vehicle arrived at a country pub for a lunchtime rendezvous, I was greeted by two of my team, who were ashen-faced. They said, “There’s a real problem, Stephen. The Labour party has just fed The Guardian with a piece of news that will completely derail the campaign. It claims that you have 273 directorships.” I said, “Let them print.” Because I was so relaxed about it, The Guardian got cold feet and did not print, so we could not embarrass the Government on that issue.
It was obvious that a FTSE-100 company group secretary should be a director of all the subsidiary companies registered in the UK, because it would be grossly bad business and inefficient for different people to be employed as company secretary for each individual company, as the 1947 Act and other legislation stated. Indeed, as the group secretary, I was the chairman and director of the 100 per cent. owned Redland Secretaries Ltd, which was the corporate company secretary to each of the group companies. That was good business and good risk management, and it was what most FTSE-100 companies did. Clearly, Labour did not understand that, and we see the result today.
The Bill is a generally good reform of company law, which has undergone a tremendous amount of review and consultation, with experts being able to give their advice freely in a long process. However, at certain points the Government have decided that they want some totemic change and displayed their ignorance of the business world. We must be able to manage risk confidently so that everybody who treats with private enterprise—which creates all our wealth, underpins our democracy and gives Members of Parliament the chance to represent our constituents—makes the choice about how that wealth is raised, spent and, through the public purse, deployed.
I congratulate everybody involved in the process of company law reform. The Bill has been a long time in the making—we have been calling for it for many years—but after eight years, which more or less coincides with my time as a Member of Parliament, we have it. It is a large Bill that will get larger, as the Government have—rightly—decided to interleave it with the remaining parts of the 1985 Act, so that we have one statute as the corpus of corporate law.
It is sensible to seek to update the law. As every lawyer knows—indeed, most make their living from it—the danger is that tinkering with legal drafting creates uncertainty and inconsistency, because precedents are not necessarily included. However, my colleagues in the other place did an outstanding job in scrutinising this wide-ranging and technical Bill. Many other noble Lords made worthwhile and important contributions to the debate, which has given us a much better Bill.
Most of the issues will require clarification and detailed discussion, and that is best left to the Committee stage. It would not be right to take up the time of the House going through many technical issues. However, I have a keen interest in one point of principle, which will be obvious from my declaration of interest. The principle has not been much discussed today, although it was raised in the other place, but it is the proposal to scrap the requirement for private companies to have a company secretary, as set out in clause 253.
In appraising whether the Government have made the right judgment call on that issue—whether it will deliver the totemic, deregulatory effort that they wish to be able to claim for this Bill—we have to go back to first principles. Will it bring company law up to date, and make it more flexible and accessible to all companies? We have to think small first, because that is where new wealth is created. It is also where most of the employment is generated. As legislators, we are now increasingly aware that we should seek to simplify the way in which the law is drafted and operates. As anybody who has had the foolish notion of listening to any of my utterances in the House over the past few years will know, I am obsessive about the need to deregulate, because the burden of regulation on companies, individuals, families and communities in this country is bearing down on our ability to enjoy life and be competitive, and it is anathema to the ways in which humans best behave and operate. It takes away their judgment and replaces it with a tick-box exercise, which means, as long as it is satisfied, that they need no longer think about how to do the right thing in the right way.
We must also at all times aid competitiveness. Above all, we must not lose sight of the fact that this country has a well deserved reputation for establishing so many of the principles that govern corporate competitiveness and the ability to trade across the world. Let us not forget that part of what we trade is our system for organising business—our corporate law and the way in which we administer our corporate affairs. Among our greatest exports are the various schemes for trading and methods of ensuring that companies have good administrators who act as internal civil servants.
On those principles, the Government have, understandably and logically, decided to retain the current law on public quoted companies. Clauses 254 to 263 enshrine the compulsory requirement for all publicly quoted companies to have a secretary. That is right and it is consistent with first principles. However, the requirement is to be scrapped for private companies, reversing section 283 of the 1985Act that
“every company shall have a secretary”.
The reason behind that provision is that it gives every company, whatever its size, a second pair of eyes. Even in what we lazily call mom and pop companies, a second pair of eyes is needed—although we can consider the degree of the requirement. The principle applies to all areas of governance. The House has learned, from bitter experience, that problems have arisen in primary care clinical governance with single GP practices. I need not mention the name Shipman as an extreme example.
Many professional bodies, such as the one to which I belong and the Association of Chartered Certified Accountants, have argued that it is wrong in logic to remove the requirement for private companies to have a company secretary. What have the Government got against the poor old company secretary in private companies?
A company secretary is good at advising chairmen and directors about new developments, compliance requirements, codes of practice, regulations and points of law. The company secretary is often regarded as a company’s civil servant, or its conscience. He or she provides information and advice, records meetings and ensures that the proper processes are observed and recorded. He or she also monitors and records the implications of decisions, and ensures that papers for members of the board are properly prepared so that decisions are made and followed up correctly.
All of that can happen without a company secretary, but a company that has one knows that that person is required to carry out all those functions.
I agree with much of what the hon. Gentleman says, but he referred to what many call mom and pop companies. Does he accept that the post of company secretary in those companies was largely a titular position? I do not want to be sexist, but in many cases the role was carried out by the wife. Is not the real issue a company’s size, rather than whether it is public or private? Does that not offer a proper way to deal with this matter?
The hon. Gentleman is entirely correct. The whole House agrees with the principles on which this Bill is based. Public companies clearly have outside shareholders who need to know that there is a properly qualified person in a position to support the governance of the company, but why should the approach to private companies be so different?
The Government have identified mom and pop companies as the problem, but they are not. We must take account of a company’s size, and not be distracted by the distinction between private and public. That is where the Government have got this matter wrong. The problem goes all the way back to what the company law review group recommended, but the Government’s experience and mental map mean that they cannot counter that judgment. That is why we are in this muddle, and I am always worried that the Government are reluctant to lose face by admitting that an adjustment needs to be made.
However, we have come to the moment when that must happen. I know that my hon. Friend the Member for Grantham and Stamford (Mr. Davies) hopes to be a member of the Standing Committee, and he will want to take that opportunity to make the necessary changes to the Bill. We need to arrive at sensible and logical proposals that will accord with best practice in corporate governance.
Those who followed the Bill’s passage through the other place will know that concern was expressed about the consequences of removing company secretaries from private companies. Who will be authorised to sign documents on behalf of a company and give the outward authority on which third parties can rely? How can that be checked? Currently, we can find out by inspecting one form filed with Companies House—we can even do it online, if necessary—that a person has been registered as a company’s official secretary. We can then be sure that the liabilities that a limited company should be expected to undertake will be observed.
The proposal about authorised signatories has, however, given rise to many questions. I hope that the Minister will say that she is prepared for the detail of the proposal to be considered at length in Committee. A number of real problems have arisen, and need deep discussion.
The proposal to remove the requirement for private companies to have a company secretary raises an important matter of principle. Those of us who are in tune with the notion that the private sector is the wealth creator believe that it gives people an opportunity to engage in the fulfilling activity that is business. That means that they can contribute to corporate wealth and therefore to the wealth of our country, and that they help to ensure a high quality of life for us all. We care deeply about good corporate governance, and want to make sure that the good reputation of business is not undermined by negligence, fraud or risk that is not accounted for properly.
I am worried that the Bill sends out precisely the wrong message. The one person in any company who is likely to be the most knowledgeable, capable and accountable when it comes to questions of governance is the one who services the ability of directors to take responsibility for those matters. That person is, of course, the company secretary.
Earlier, I intervened on the Secretary of State to emphasise that the company secretary is an office holder in a company. He or she is not merely an employee, nor another director. A chairman is simply the person whom the board of directors chooses to chair board meetings, but the company secretary is an office holder, with various responsibilities—directly to his or her employer and, in a non-executive capacity, to the chairman through the supply of free and impartial professional advice. The Government have been determined to ensure that the principles of good corporate governance should be enshrined in law, but they must not undermine that approach by removing the very person identified as having the responsibility of ensuring that those principles are put into practice.
How do address the problem identified a moment ago by the hon. Member for Angus (Mr. Weir)? The Government rejected the obvious answer offered in the other place—that there is no deregulatory attack if the cut-off points for small companies are allied to their audit threshold, which currently stands at £5.6 million. Other options are to determine a company’s status according to the number of people that it employs, or in accordance with its value added tax returns. That is rather complicated, however, and the audit threshold option is much more suitable.
The Minister in the other place dismissed that proposal, without giving it the consideration that it deserves. I hope that it receives serious consideration in Committee, as it will resolve the difficulty presented by a proposal—which is based on the difficulties encountered with smaller companies—to get rid of the one person likely to enhance corporate governance in private companies.
We must not forget that some of our biggest companies are privately owned. For instance, John Swire and Sons has a turnover in excess of £2 billion, and the shoe manufacturer C. and J. Clark International is another massive enterprise. The Government propose that such companies should get rid of their company secretaries. Of course, such companies will still have the option to retain the post, but it was made clear in the other place that exercising such an option has consequences. The Government were somewhat edgy about the argument, but a company secretary who is put in place because a company has exercised its option in that regard is not enshrined in law and so cannot carry the same authority as a postholder under the old regime. The relevant authority will go to the authorised signatory.
I do not want to go into too much detail, but the new system will weaken the stature of the company secretary. Those of us who have lived through the experience know how great the responsibility can be: one has to be ready to engage in major arguments with board directors who might want to do something a bit close to the wind, and that can be a tough old road to hoe. Importantly, the person who is prepared to have such arguments must be sure that he or she has the authority that comes with being appointed through statute. That is what gives a company secretary the necessary command in the boardroom, and without that there is the danger that directors will not respond with the respect that the company secretary’s office deserves. The company secretary is not merely an employee, who can be hired and fired and who is controlled by the board through the pay and conditions on offer.
The Bill quite properly repeats and expands the current law on the qualifications needed by company secretaries. It makes it clear that the postholder should be a qualified lawyer or accountant, or someone who has been a company secretary in the past.
We have an opportunity to do the right thing. I hope that the Minister will listen to the arguments in Committee and think about what can be done. The provision in the Bill that gives companies the option to have a company secretary does not confer on the postholder the authority that is needed if the valuable benefits of good corporate governance are to be delivered.
If the Government go ahead with their proposals, I hope that they will remember the arguments made against them when, as will inevitably happen, something goes wrong. There are never any thanks in politics for people who say, “I told you so,” but the Government would do well to recall that people become company secretaries because there is a need for them. They do not appear out of thin air, and there is still a need for them in public companies. We should keep the post in private companies whose size exceeds a certain threshold. Although the company secretary’s role is no longer so relevant in smaller firms, it is absolutely crucial in larger ones. If the Government are allowed to go ahead and remove the one person who can keep a company’s affairs on the straight and narrow when things go wrong, we will all have to come back here and hang our heads in shame, saying, “I told you so.”
Notwithstanding what has been said from the Front Benches so far, I should like briefly to urge the Government to think again and respond more positively to the calls from the Trade Justice Movement and the Corporate Responsibility Coalition to use the Bill to ensure that companies can be held responsible for how their practices and policies affect people and the environment.
It has been suggested that that could be done, first, by requiring corporations to report on their social and environmental impacts in the same way as they have to make financial reports. I heard what the Secretary of State said about clause 399, but I share the scepticism of others about the robustness of business reviews. It would be much more sanguine if operating and financial reviews were still on the agenda.
Secondly, companies could be held responsible by obliging directors to minimise damage to communities and the environment rather than just to have regard to them. The obligation is the clearest way of going forward. I do not believe that it would cut across the accountability of directors to shareholders. Thirdly, we should allow people from overseas who are harmed by the activities of a UK company to take action against them in UK courts if they cannot secure justice at home. I understand the Government’s reluctance, but if we do not make this sort of change, we shall effectively condemn victims in the poorest parts of the world to no or at best inadequate redress. We have only to think back to Bhopal and the years after it and the fact that the victims of that tragedy have still not been compensated properly to realise what such a change would mean.
I appreciate the fact that in some ways the calls go against the grain of the Bill, which is essentially deregulatory. Much of the simplification and clarification of the Bill is good and welcome. However, unlike the hon. Member for Eddisbury (Mr. O'Brien), I do not subscribe to the view that regulation is always bad and deregulation is always good. Sometimes we need regulation in order to move forward and in particular to provide a level playing field so that those who want to do the right thing do not find themselves unable to compete with those who are prepared to sacrifice planet and people in the scramble for profits.
My right hon. Friend the Member for Cardiff, South and Penarth (Alun Michael) and the right hon. Member for Suffolk, Coastal (Mr. Gummer) mentioned the delegation of prominent business leaders who went to see the Prime Minister earlier today to talk about the threat of climate change. From the news coverage that I heard, it seems that they told him that companies needed more than encouragement and fine words; they need a stronger steer and in some areas of policy stronger and tighter regulation. That argument transfers over to the subject of this legislation. I do not believe that we will get the level of transparency, responsibility and accountability that is needed across the board on the basis of the neo-voluntary approach that the Government appear to advocate. While the concept of enlightened shareholder value, including social and environmental values alongside financial ones, is admirable in its way, I am not convinced that without regulation it will make a significant change in current practice. Current practice, of course, is what has led the coalition of environmental groups, charities, unions and Churches to mount the campaign that they have over the past months to seek to improve the Bill in the way that I have described.
One of the business leaders who met the Prime Minister today to discuss climate change was apparently the UK chair of Shell. Shell is lauded by some as a company that willingly embraces corporate social responsibility. In particular, it is claimed that Shell adheres to the Organisation for Economic Co-operation and Development guidelines for multinational enterprises—a set of international voluntary guidelines. Yet Friends of the Earth, local groups and others have provided example after example of where Shell has behaved anything but responsibly and has cheerfully ignored those very OECD guidelines.
I cite, for instance, the impact of its underwater liquefied gas terminal on the local fishing industry in Louisiana; the damage to wild salmon spawning areas and the last western pacific grey whales that will be caused by work on the Sakhalin II project in Russia; oil spills and air pollution from illegal flaming in the Niger delta in Nigeria; and emissions of massive quantities of toxins damaging to the human cardiovascular and respiratory systems from Shell’s joint venture Motiva refinery in Port Arthur in South Africa. Shell workers are subject to toxic pesticides and oil waste at São Paulo in Brazil. The company still does not guarantee medical treatment for affected employees. There are many, many more examples from around the world. There is strong evidence that this acclaimed corporate leader in the international community is not delivering what it promises using the voluntary approach.
Shell is not alone, of course. Our supermarkets, in their rush to push down prices, are trampling on the rights of workers in the developing world. Women workers picking fruit in South Africa exclusively supplying Tesco report dangerous exposure to pesticide, lack of protective equipment, poverty wages, long hours and increased insecurity. Similarly, research in south-east Asia shows that palm oil plantations are replacing natural forests at a horrifying rate, destroying orang-utan habitats and leading to violent conflict and human rights abuse. Palm oil is used in one in 10 supermarket products, but few of our very profitable supermarket chains have responded positively to the call for them to ensure that palm oil comes from sustainable, non-destructive sources.
Tobacco farmers in Brazil and Kenya have suffered health problems linked to the use of harmful pesticides sold to them by British American Tobacco. Those are the sorts of abuses that the changes for which we are calling could help deal with by introducing a legal right to information, legal responsibility and legal redress. Other countries such as Sweden, Finland and Denmark have higher levels of business regulation and are still ranked in the top five in the national competitive index.
One fact supplied by members of the World Development Movement who lobbied me on this issue recently really convinced me that the voluntary road would not take us very far at all. Out of 61,000 multinational corporations, fewer than 2,000 produce annual reports on their social and environmental impacts. When we remember that two thirds of global trade is carried out by multinationals and that some of those who produce social and environmental impact reports do so as a cynical public relations exercise, we have to conclude that we need, and more importantly, the most vulnerable people and places on this planet need, good robust regulation. I hope that Ministers will think on that as the Bill proceeds through the House.
I wish to say at the outset that we in Plaid Cymru subscribe to the principles promoted by the Trade Justice Movement and the Corporate Responsibility Coalition. To echo the hon. Member for Gower (Mr. Caton), we also believe that companies should adopt ethical and responsible corporate behaviour and that they should adhere to the three principles reported in the newspapers today. They should report on the social and environmental impacts of their activities. People overseas harmed by a UK company who are denied justice in their own country should have the right to take legal action in the UK. I was disappointed with the response that my hon. Friend the Member for Angus (Mr. Weir) received on that point from the Secretary of State earlier. My hon. Friend talked about globalisation and the Secretary of State responded that somehow as a Scottish nationalist my hon. Friend was not entitled to make internationalist points. My hon. Friend and I believe that the need for responsible behaviour by British companies overseas is a fundamental principle and would provide a clear signal to companies everywhere that globalisation does not give us the right to dump our problems overseas.
We hear all about how people are working for low wages in the third world, but the flip side of globalisation is that we can export best practice. In this Bill we can make UK companies responsible and ensure that rights that cannot be exercised in other countries can be exercised in UK courts.
I agree with my hon. Friend, and, indeed, that will be the burden of some of my later remarks.
Looking at the third principle, that directors should be obliged to take steps to minimise the harm that companies may cause in local communities and environments, we can see that good practice established in the UK is an example for companies working overseas as well.
The point, of course, is that those principles apply to companies working in the UK as well as to companies working in the developing world. Much of the debate has been focused on companies working in that context, but today I would like to address that last point with particular reference to a company working in my constituency: Friction Dynamex. The company has been in dispute with its workers since before I was elected in 2001. It is the longest running dispute in Welsh industrial history.
I want to refer briefly to the review of company law instituted by the Government and to points made in the research paper provided by the House of Commons Library. The paper notes that there is a view that the interests of a company are to be equated exclusively with the interests of its members and that that can lead to a focus on the short-term financial bottom line rather than to enlightened shareholders building a long-term relationship based on trust. There are those two contrasting views. The steering group states that:
“directors should adopt the broader and longer-term (‘inclusive’) view of their role”
and that directors are currently obliged by law
“honestly to take account of the considerations which contribute to the success of the enterprise.”
As the law stands, directors should not be looking to focus solely on the ruthless pursuit of short-term gains. That is what the steering group says, but as the House of Commons Library notes
“the DTI acknowledges that this interpretation is not deep rooted in the mainstream of company life.”
That is to say that the attitude that we want to promote is not deep rooted in the mainstream of company life.
I would argue that that is perfectly illustrated by the case of Friction Dynamex in my constituency. I do not intend to go into any detailed history, given that time is short. I will say only that what began as short strike—as a last resort taken by workers in the face of an unreasonable management and intransigent employer—became a lockout and, more, an assault on the whole community and an offence to the community. The Friction Dynamex workers were reluctant to strike. Many of them had been employed since the ’60s. They did not strike to improve their wages or conditions, but to defend those wages and conditions in the face of an employer who wanted to reduce their wages. Initially, he wanted to freeze their wages and for four years they put up with that. Then he wanted to cut their pay. They would not relent on that point. He wanted a change in working practices and to divide and rule the work force. He wanted to choose whom he could dismiss. He dismissed people very carefully to his own advantage. That was a determined attempt on his part to squeeze whatever value he could get out of the plant and its workers. The workers wanted to negotiate, but he did not want to negotiate with them. As I said, he eventually locked them out.
After two years of waiting, the workers won an industrial tribunal. The employer was proved to have acted unfairly. He appealed, but withdrew his appeal. In the meantime, he reorganised his business and suddenly found that Friction Dynamex had to be put in the hands of the administrator because, apparently, it suddenly had £8 million of debts. The employer has subsequently—let me use the term “reorganised” again—reorganised his business a number of times. He has shed the name and adopted new names, but has not succeeded in shedding his liabilities. He remains, in effect, in charge of the business and, a couple of months ago, he sacked his current work force and recruited a new lot. When the strike started 130 people worked at the company; he is now down to 24. It is interesting that, under clause 364, that company would be defined as a small company and that it would not be subject to the provisions in clause 399 about doing a business review in the first place.
The point about the unpleasant and, in terms of the employer’s behaviour, quite squalid case of Friction Dynamex is that the broader view of the responsibilities of directors has not prevailed as the law stands now. As a consequence, a number of things have happened. The taxpayer has lost the £1 million of public investment that went into the company initially. The local community has seen the loss of about 100 good jobs—jobs that are not usually available locally. A site uniquely placed on the banks of the Menai straits, which could be redeveloped into a site for new businesses, is tied up in an enterprise that, to be kind, has now run its course.
There are, of course, consequences for the workers in the case. They have been locked out and they have lost their jobs. They won their case at the tribunal, but they still have not been compensated after five years of disputes. They have seen their employer take on other workers from the jobcentre to take the jobs that they wanted to do and were perfectly willing to do until they were locked out. Hon. Members should remember that this was not a dispute about higher pay. They have had their morale stretched to the extreme limits. Unsurprisingly, many of them who supported Labour in the election in 1997 no longer do so.
I have gone into the case in some detail because it is a case that calls out eloquently for justice for this group of workers, who have conducted themselves with dignity in what we can rightly call a heroic struggle. They have been supported by people locally in Caernarfon and Bangor in Wales and in the UK, and by people throughout the world who understand the meaning of justice for workers. However, that is not all. Most UK companies take a serious and responsible view of their environmental and social responsibilities, but the case of Friction Dynamex shows us clearly why company law must be changed so that Mr. Smith, the owner, and his like can no longer put their own narrow short-term interests first, middle and last. That is the intention of clause 158, but I fear that Mr. Smith would laugh at clause 158. He would laugh at the voluntary approach. He would agree with it in its entirety and he would tick the boxes. Would he be caught by clause 158? I have my doubts and, for that reason, I think that the Bill needs to be amended.
I welcome the Bill. It has been a long time in its gestation, but that is its strength. It covers many aspects of company law, but I want to concentrate on just two clauses: clause 158 on the duties of directors and clause 399 on the business review, to which many hon. Members have alluded. The Bill addresses a fundamental premise. Should a company operate only in the interests of its members—its shareholders—or should it have a wider remit and operate in the interests of stakeholders? If we accept that wider remit, how should that be managed: by legislation, regulation or voluntary code?
The old narrow view of the responsibilities of company directors has moved on now that we are in the 21st century. Historically, the legal responsibility of the directors of a company is to maximise shareholder value, usually either by a return in the form of a dividend or by capital growth, or by a combination of both. But should financial profit be the only motivating factor in doing business? In my view, there is a wider responsibility to consider the interests of employees, the impacts—both social and environmental—of doing business on the local environment, and the impacts of a company’s operations on the economy of the whole country and globally. That is the essence of what has been referred to before as corporate social responsibility.
It makes good business sense for organisations not just to accept corporate social responsibility but to make it central to their strategic decision making. The Bill will encourage them to do that. The Labour Government are committed to promoting responsible business behaviour as a key part of their sustainable development strategy involving both the public and the private sectors. As a Labour and Co-operative MP, I represent the co-operative movement and corporate social responsibility is fundamental to co-operative principles. My aim as a Co-op parliamentarian is to encourage all organisations, not just co-operatives and social enterprises, to take on corporate social responsibility, in the interests of us all, to enable businesses to grow in a sustainable way.
Corporate responsibility can encompass many things: community involvement in the form of charitable gifts, community investment, commercial initiatives in the community, or even just allowing employees time off to do community volunteering projects. It looks at the benefits to the wider community and environment from day-to-day business operations, job creation, investment in a region, taxes paid, goods and services provided and general wealth creation in our economy. Increasingly, it is about responsibilities to the whole value chain. For example, where are raw materials being sourced and to whom are goods and services being sold?
Corporate responsibility is about business having a positive impact on society and the environment through its operations, products, or services. One might ask why businesses should sign up to that and what is in it for them. More and more, businesses are recognising that corporate social responsibility can bring them a competitive advantage, especially in the consumer retail sector.
Corporate value is increasingly measured against non-tangible assets as well as tangible assets. What price is a company’s brand or reputation worth, and how quickly can that be lost if it is seen to be adversely damaging its local environment, or ruthlessly exploiting child labour overseas? In The Times last week, there was an article about the clothing chain Zara being dogged by child labour allegations following reports that Portuguese children as young as 11 were being paid just €20 a day to make shoes. Inditex, Zara’s parent company, has recognised the negative effect that that could have on its business. It has a code of conduct that bans the use of child labour by its subcontractors. It has pledged to investigate the allegations and, if they are true, cancel the contract. Child labour accusations can be seriously damaging to retailers as more shoppers become ethically aware. Both Nike and Gap have faced consumer backlashes following claims that they had used child labour.
The argument is not about just consumers. In the past, investors have been either people with large amounts of disposable wealth, or pension funds in which individuals have had little control over how their money is invested. Now, however, we have a whole new population of potential investors. In the pensions White Paper that was published a couple of weeks ago, there were proposals for increased levels of personal savings and choices about personal pension plans. All new-born babies now have a child trust fund, and parents who had never before considered investment now have funds to invest and can exercise choices. If financial returns on products are broadly similar, people will consider other criteria when making choices, such as the ethical background of investment opportunities.
People need a way to measure and compare the environmental and social performance of companies. Many leading businesses have recognised that and now produce an array of corporate responsibility reports. However, with no standard for reporting, how do the public differentiate between a business that reacts to problems or crises as they arise and one that puts corporate social responsibility at its core and involves that in all its business decisions? What about organisations that do not rely on a well-known brand? How do we ensure that they take on board wider interests?
The sheer number of people who signed up to the Make Poverty History campaign last year demonstrates that there is a willingness to address exploitation in the developing world. However, do ordinary people in the street know which companies are continuing to exploit workers in the developing world with poverty wages and unsanitary and unsafe working conditions? Are we happy to let subsidiaries of UK companies continue to do that safe in the knowledge they have no legal responsibility to tell their shareholders they are doing so? Like other hon. Members, I think that the matter is too important for a voluntary code—regulation is needed. Health and safety is considered too important to be left to a voluntary code, and corporate responsibility is also too important to be left to such a code.
I do not want to diminish the huge step forward that the Bill makes. For the first time, it defines in legislation that a company director should have regard to other stakeholders, not just shareholders, when considering the likely consequences of any decision in the long term, the impact of the company’s operations on the community and the environment and the desirability of the company maintaining a reputation for high standards of business conduct. However, I am not sure how enforceable the measure will be, given the use of the phrase “have regard to” and the fact that the Bill represents a step back from a pluralist model that would require directors to have a positive duty to take reasonable steps to minimise significant negative impacts on wider stakeholders.
We need to examine carefully how to prevent UK companies from taking advantage of weaker regulatory regimes overseas, especially in developing countries. I appreciate the arguments against that approach and that companies may choose to incorporate in other countries. Of course, we cannot act isolation in the UK and thus we need to bring other countries with us. However, there is scope for further strengthening the definition of directors’ duties, so I hope that that matter will be addressed in Committee. It is often said that we are powerless in the face of globalisation and the power of capital. However, if we do not do something about sustainable development, the power of capital will be worthless in the face of environmental and economic collapse.
We need to consider the reporting regime, about which many hon. Members have spoken. Reporting should be a management tool for a business and the building blocks of an action plan, rather than just another bit of paper for shareholders. I, like many others, was disappointed when the operating and financial review was abandoned last year. However, I am pleased that many of the provisions have been incorporated into the business review, especially through clause 399, although, like other hon. Members, I would like the measure to go further. There are still no statutory reporting standards, and that to me is key. One would not expect a company to make up its own financial reporting standards, so why should there not be standards for social and environmental reporting? There are many examples of good practice in corporate social responsibility reporting. Let us use the companies that have been the trailblazers and show the rest of the business world how such reporting can and should be done.
There should be standardised performance indicators that set out benchmarks and requirements for stakeholder dialogue and public reporting. Let us give consumers and investors the power to make informed choices by ensuring that companies present their reports in a standardised way so that people can make meaningful comparisons. I accept that the UK Government cannot act alone. There has to be a balance of incentive and regulation and, in our globalised economy, we have to take other countries with us, but we also have a duty to show leadership. We should start by agreeing the basic premise that a company does not exist in isolation and capital is only one of the building blocks that add value. From there, it is but a short step to acknowledging that directors should act in the interests of stakeholders as well as shareholders and with corporate social responsibility.
I warmly welcome the Bill as a massive first step along the road of sustainable development and balancing economic growth and business success with responsibility to stakeholders and the wider environment. However, as I have said, there are aspects of the Bill that do not go far enough, so I look forward to further debate as the Bill progresses.
I will try to be brief because it is getting late and several other hon. Members wish to speak. I declare an interest as a director of a very small private company, Infrastructure Capital Partners, and a very small public company, Specialty Scanners plc. I do not think that that greatly influences what I will say.
Liberal Democrats are concerned that businesses should be held to account by their shareholders for not only their financial performance, but their impact on the community and the environment. There is also a broader—although perhaps lesser—public interest in transparency. We have thus welcomed any moves towards new forms of corporate reporting that would achieve those goals, so we were excited by, and supportive of, the whole concept of the operating and financial review that the Department of Trade and Industry promulgated in detail in 2004. We were as stunned as everyone else when the consultation was withdrawn by the Chancellor in November 2005. It is important that we use every opportunity during the passage of the Bill to press the Government to look again at the measures on business reviews in clause 399 and consider whether there would be only gain and no loss by strengthening the provisions, in effect to pick up the various abandoned parts of the OFR.
At the beginning of the debate, the Secretary of State most graciously let me intervene. I picked up on the issue of prospective investors and their interest in access to information on the environment, the community and social impacts that the operation and finance review offered. I think that the hon. Member for Eddisbury (Mr. O'Brien) quoted from a DTI press release issued back in 2004 by the hon. Member for Leicester, East (Keith Vaz). It talked about the OFR improving the quality of reporting and “completing the corporate jigsaw”—that was the phrase that he repeated—to give investors a clearer picture. A paragraph continues—I shall not bore the House with it—that essentially repeats that sentiment, constantly stressing the importance of the OFR to investors in understanding the picture of the companies in which they might choose to invest and support, and the importance of the dialogue that ensures between investors and business with these disclosures.
I was able to quote back to the Secretary of State the words of Lord Sainsbury of Turville, who was speaking for the Government in the other place. He essentially dismissed those principles of providing information to potential investors on a much wider range of issues.
We constantly hear the Government call for people to invest more and to save more. It is a call that is directed especially to younger people. When I spend time with younger people and with people of my generation—I am thinking of my own grown children—they are deterred from investing because they do not understand the efficacy of the corporations in which they might invest, in their daily practices and operations. If we want to bring the younger generation in, we must respond to what they are asking us to do, which is to ensure that there is full and reasonable disclosure. That is not too high a standard to set before the Government.
At the beginning of the debate, the Secretary of State seemed to give the impression that the business review was almost everything that the OFR was, bar a few technicalities and costs—a little extra on the reporting requirement and a little more auditing—and so not really very different. I read in the Bill something that is fundamentally different. There is no basic accounting standard. How can anyone compare one company with another without a common language and a common standard around which to work? I do not think that it is reasonable to ask someone to do that. There is the light touch of audit on statements. Under the business review, any requirement has now been removed for auditors to check for inconsistencies between the business review and the reality. To me, that matters. The best companies will continue to provide full and accurate information, but if anyone wishes to be slack or inconsistent, there seems to be a door through which they can charge. I am sad to say that the business review will have attached to it the words “caveat emptor”. That is exactly what we do not seek. Instead, we want certainty, clarity and absence of ambiguity.
There are a few other issues that I want to raise on the business review. There is no reference to the supply chain. Two years ago, I was in New Zealand at a conference on sustainable development. One of the main speakers was from B&Q, I think from strategic planning. He talked of an experience that the company had had. It had been challenged by NGOs on the ground that—I do not want to swear by this—the company had been supplying furniture that had been made from wood from endangered forests. I think that it was teak from inappropriate sources.
That caused the company to look at its supply chain. It was horrified with what it found. The company committed itself to examine every aspect of the supply chain, including its contractors. It found that it did not know who its contractors were when it started the examination. It examined where it was sourcing from and how workers were treated. It examined what standards were used in the workshops. At first, it thought that there would be a huge cost on the company, to be offset by a gain in reputation. We were told at the conference that the benefit was found in better suppliers and better sources. The company had workers employed by their various contractors. They were being properly employed and properly treated in much healthier conditions. The company’s financial bottom line improved because of that chain in practice.
What struck me more than anything else was that the company did not know what its situation was until it was forced by an outside event to go and explore. I am worried by the absence of the supply chain within the business review. Without that forcing element, companies will not go back, do the homework, discover what the situation is, confront it and finally deal with it. The opportunity is provided by the Bill to achieve that.
Is there not a danger that some companies might operate from abroad, reporting that they are meeting the highest standards of corporate social responsibility while subcontracting to suppliers and other businesses in their supply chain that have poor standards so that we have the worst of all possible worlds?
My hon. Friend is right.
The hon. Members for Gower (Mr. Caton) and for Portsmouth, North (Sarah McCarthy-Fry) both cited companies whose public declarations in the UK showed that they sincerely believed—this is not an issue of malfeasance—that they met high standards of corporate responsibility. However, non-governmental organisations and other bodies that looked at what happened in developing countries, particularly the role of contractors, found unacceptable standards and major environmental, social and community impacts. In 2005, Friends of the Earth conducted a case study on palm oil in which it asked 96 UK companies to trace the sources of their palm oil and provide an assurance that it came from sustainable non-destructive sources. Only 18 companies replied, but, according to Friends of the Earth, none of them could
“trace their palm oil to non-destructive plantation sources, and the majority did not even know where their palm oil came from.”
That is a small example, but that lack of knowledge and focus by companies lies at the heart of the problem. If we can strengthen the business review so that it is much closer to the OFR, we can tackle that challenge.
In the other place, there was an extensive discussion of British business operations in the Democratic Republic of the Congo. In 2000, a UN panel of experts met to look at the illegal exploitation of natural resources and other forms of wealth in the DRC. Among the companies that it cited as being in violation of Organisation for Economic Co-operation and Development guidelines for multinational enterprises were a number of British companies. We should not have to wait for a UN panel of experts to apply pressure and expose the problem. We should be able to look at our own company law structure in the business review to bring that information into the open and provide transparency.
The hon. Lady is making a powerful case on both named and unnamed companies. Asda Wal-Mart deploys marketing strategies using the tag line, “A better life for all”. In reality, it makes widespread use of sweatshop labour in south-east Asia and central America and, in the UK, it was recently fined nearly £1 million for anti-trade union activities. Is that not shocking, and is that not the reason why the Bill should proceed and be strengthened in the process?
The hon. Gentleman has read the same report by War on Want as me. We have a great deal of evidence of the inconsistency between what companies say and the reality on the ground. If clause 399 strengthened the business review so that it became an OFR it would achieve a climate of transparency.
It is inconsistent to exclude from most of clause 399 unquoted companies. In the Democratic Republic of the Congo, many companies reported by the UN were unquoted, so we cannot work on the assumption that transparency is required only for listed companies. I accept that we cannot include small companies, but it would be appropriate for some medium-sized companies to report on such issues. Recently, The Times reported that companies that follow good practices often believe that they are isolated and unsupported by Government. I shall not try to quote from that lengthy article but, companies frequently express frustration that there is not a level playing field on ethical practice. A company may decide to pursue good environmental, social and community practice, but it is frustrated that its competitors do not do so. Here we are discussing a tool which creates that level playing field. If there is anything that is ultimately good business, it is the creation of a level playing field so that competition exists on fair terms, not on unacceptable terms.
There has been a general assumption that the reason why the OFR was abandoned in favour of the much lighter touch––the much paler business review––is that widespread objections were raised by the corporate UK. I find that contradicted by the experiences and conversations that I have had. I was a member of the Treasury Committee last December when we took evidence from a number of people on the impact of OFRs and their views on the abandonment of OFRs. I shall quote some of those.
F&C, one of Britain’s biggest fund managers, said that it was disappointed that the OFR had been swept away. Anita Skipper, head of governance at Morley, which invests £148 billion on behalf of Norwich Union policyholders, said:
“We were surprised and disappointed. The OFR would have given companies the opportunity to educate, explain and persuade.”
The head of the Chartered Institute of Management Accountants said:
“We think this is fundamentally a bad decision.”
There is quote after quote from relevant bodies.
I had the opportunity to take evidence from Mr. John Whiting of PricewaterhouseCoopers. One might say that, as an accountant, he has an interest in a reporting standard or OFR, but he is a gentleman to whom hon. Members in all parts of the House have turned for good advice over the years. When I asked him what he thought of OFRs, he said:
“I think in general we saw the Operating and Financial Review as a good way forward. It promoted more openness, there were more general statements about what was going on and we supported it. It seemed to be a way forward in terms of just generally encouraging more openness and more transparency.”
When I asked him:
“Much benefit from scrapping it?”,
his answer was:
“I do not immediately see it. I think one could think of other things that people would rather see scrapped.”
Was it not simply a case of sod’s law? The Chancellor wanted to do something to improve his credentials as a pro-business, anti-regulation Chancellor, and he snatched the one piece of regulation which, on the whole, business supported and the non-business community supported, for which the costs had already been sunk because of the work done by the accounting community and most major companies to put in place reporting mechanisms and procedures, and for which the additional cost would not be high because it was moving companies in the direction in which they already felt they ought to be going.
In conclusion, there is an old adage in which I strongly believe: what you measure, you manage. The operating and financial review gave an assured, properly audited standard-based mechanism for displaying environmental, social and community impacts in narrative form rather than in financial ratio terms, but accurate, recognisable and measurable in its narrative. It would have led to management of those aspects. By adopting a light touch in the form of business review, we have abandoned it. I hope the Government will take the opportunity of the remaining stages of the Bill to go back to their initial sound concept.
I am grateful for the opportunity to take part in the debate. I should say at the outset that I have a particular interest in proceedings in the Chamber today, inasmuch as I am a non-practising solicitor. Before entering the House, I practised in the area of company law for 14 years as a company solicitor, so I retain an interest in the development of corporate law, even though I am no longer practising in that field.
I welcome the Bill and the opportunity for us to overhaul, take stock of and examine current company law and the way it can be improved. There has been a lot of change since 1985 in how businesses conduct themselves, and how regulation and technology has moved on. It is therefore right for us to look at the operation of current practice and the manner in which businesses are conducting themselves, as well as how we can try to regulate them and make life easier in some respects, while using the opportunity to review the parts of the legislative framework that require it.
We have heard about the Bill’s long gestation period. It is astonishing that all this kicked off eight years ago. I welcome the opportunity to have a full consultation period so that stakeholders can express their views on how company law should be updated and revised. However, it is remarkable that we should be discussing at this late stage, when the Bill has already passed through another place, the introduction of several hundred new clauses, albeit by way of restatement of the Companies Act 1985—although we will need to look at the detail to see whether there are any further modifications.
It is surprising that the concept of codification did not arise at a much earlier stage. As a practitioner, I could have told the Minister that it is important to try to keep the law in one place—for the ease not only of practitioners but, most importantly, of companies. Directors and officers should be able to point to one particular Act and know with a degree of assurance that most companies legislation will be in that place. I welcome the news that there will be greater codification so that the parts of the 1985 Act that were not in the Bill will be pushed across into the new legislation. I hope that we will have a full and proper opportunity to review the impact of those changes and to ensure that there are no fundamental implications in making such a substantial change to the Bill at this late stage.
It has been difficult to keep track of the Bill’s progress through the other place, where it has changed dramatically and radically. I would like to put on record my tribute to their lordships for the work that they have done to improve it through their 1,600 amendments tabled in Committee and on Report. It is recognised that a fair amount of work remains to be done. That is no criticism of their lordships, who have done a tremendous job in trying to knock the Bill into shape. However, as this lively debate has shown, various issues require greater scrutiny and amendment to ensure that we end up with a Bill that, in the words of the Secretary of State, is clear and understandable and has no great scope for litigation. I could not agree more, but we are not quite there yet. There will be detailed scrutiny in Committee, and rightly so.
However, the Bill has many positive aspects. I will not mourn the loss of companies having an authorised share capital. We can happily consign to legal history the arcane debate about how much of a company’s authorised share capital should exceed its issued share capital and what its various authorities for allotment should be. There is a new mechanism in place that will be fit for purpose. Similarly, scrapping specific rules such as the financial assistance regime for private companies, which was increasingly questioned, and the convoluted whitewash approval process that sat alongside it, will be no loss to the statute book.
Various other provisions, such as online filing, companies’ ability to provide information electronically through websites and streamlining private company administration, are welcome. Most companies are small, so it is crucial that the burdens of bureaucracy be light but effective when necessary. The Bill takes important steps towards achieving that result through, for example, providing that annual general meetings may no longer be required, and provisions on written resolutions and the execution of documents.
However, my hon. Friend the Member for Eddisbury (Mr. O'Brien) made a valid point about company secretaries. A company secretary is an effective corporate governance tool in ensuring that a company fulfils its responsibilities to its employees, creditors and shareholders in private companies that are not subject to the overarching wider scrutiny to which a public company is subject, especially when it is listed on a regulated market. I hope that we will have the opportunity in Committee to re-examine the role of and need for company secretaries in a private company environment, and to reflect on my hon. Friend’s comments.
Other issues deserve further scrutiny, including the new provisions to counter corporate terrorism. I welcome the amendments that were made in another place to tackle serious attacks on companies that operate in a legitimate and legal framework so that their operations are not undermined and their shareholders and staff are not intimidated and threatened. The issue needs further consideration to ascertain whether the provisions require strengthening and developing to ensure that they provide the proper protection that hon. Members of all parties rightly acknowledge is necessary so that companies can conduct their affairs properly and are not held to ransom by small groups of individuals intent on acting aggressively and sometimes violently.
We should note that several provisions have been consigned to the draftsmen’s scrap heap, notably chapter 31. I am pleased that that has been removed, because it was a fundamental constitutional change that had no place in the Bill.
One improvement is giving those who hold shares through a nominee the ability to have specific rights, such as voting rights and the right to receive information. It is interesting that the Secretary of State acknowledged that that was a “valid and understandable concern” for shareholders or quasi-shareholders who hold their interest through personal equity plans, individual savings accounts and the nominee approach. Although some stakeholders and interest groups have expressed concern about the implications of that, I would be disappointed if the Government responded simply by restating the previous position. I hope that we have the opportunity in Committee to examine the matter further.
It is valid to acknowledge a position whereby people are essentially prima facie and de facto shareholders. There are some parallels with the uncertificated securities regulations. Increasing numbers of shareholders hold their shares in uncertificated form, which means surrendering a certificate and creating an interest in shares, although it is not termed in that way. Shareholders in those circumstances gain the same right as registered shareholders, who clutch share certificates in their hands. It is therefore right to empower and enfranchise individuals who hold their shares through PEPs, ISAs and other nominee holdings. I hope that we will have the opportunity to review that matter in detail, and to ensure that that basic right is entrenched.
We have spent some time on part 10, which deals with directors’ fiduciary duties and with codification. The problem is that this part of the Bill is neither fish nor fowl. It is right and proper, and entirely understandable, that Members have expressed concern about the need to strengthen corporate social responsibility. The present drafting, however, is intended only to codify existing directors’ duties, although I would argue that the Bill does not even do that. It is a mish-mash of a number of different provisions. It neither codifies nor seeks to extend the provisions to address issues of corporate social responsibility.
The Bill also fails officially to list certain other groups of people. For example, creditors of companies are noticeable by their absence from clause 158. There is also the question of the relationship between these provisions and other statute law. This will result in uncertainty, from which disputes could arise. I note that the Law Society maintains its view—notwithstanding the amendments that have been made in another place—that the clause will make a material change to the existing law. It states:
“In our view, the introduction of a list of factors which the directors are obliged to consider makes it significantly more likely that the courts will intervene in matters previously left to the directors’ judgement. We believe that this is likely to lead to wasted management time, and unnecessary expense, on the company’s part.”
That gives the lie to the Government’s apparent contention that this measure involves only codification.
We have heard reference today to section 309 of the Companies Act 1985, and to a director’s duty to have regard to the interests of employees. It is interesting that clause 158 of the Bill states that the primary responsibility of a director is to
“promote the success of the company for the benefit of its members as a whole, and in doing so have regard”
to the various factors listed. Section 309 of the 1985 Act states:
“The matters to which the directors of a company are to have regard in the performance of their functions include the interests of the company’s employees in general, as well as the interests of its members.”
The new provision therefore seems to water down the rights of employees, which were on an almost equal footing in the existing legislation, in so far as they have now been downgraded to a position behind the interests of the members. I am sure that we will have an interesting debate in Committee on the effectiveness of clause 158, and on its implications for directors and the costs that it is likely to expose. It certainly does not achieve its overarching aim of promoting greater corporate social responsibility. There are other ways of doing that, as has been said today.
Other provisions in the Bill also require further scrutiny. A valid concern has been expressed about companies seeking to protect their business name, and a new procedure has been proposed whereby if someone had misappropriated a name to which good will has been attached, a mechanism would exist to challenge that, rather than the injured party having to rely on intellectual property rights relief. That is a laudable aim, but the provisions in the Bill will not achieve the right result. They will not work speedily enough, and they could even have the opposite effect of allowing bigger companies to bully smaller companies in relation to the use of names. That is a real risk, and we need to reconsider the mechanism by which company names adjudication will work.
There is also the issue of approvals for political donations. That aspect has been strengthened, but we need to examine the issue of piercing the corporate veil and reflect on the fact that if a director is a director of a holding company, which passes a resolution effectively sanctioning its subsidiary’s approval of political donations, the director is deemed to have knowledge of all the actions of that subsidiary. That may be appropriate, as we have already heard this afternoon, where there are common directorships, but that is not often the case, particularly in large groups. We should reflect carefully on the impact of such provisions.
In conclusion, I welcome the opportunity that the Bill provides to update, modernise and streamline company law in this country for the best interests of the corporate sector, to promote good corporate governance and to promote this country as a place where companies can conduct business in an effective regulatory environment. We should continue to receive significant investment, jobs and opportunities as a key international financial centre. It is just a pity that it has taken us so long to get here, and that there is still such an awful lot of work to be done. I hope that we will be given the time and opportunity to carry out that work, so we should reflect on the programme motion and the time available for us to do properly the job that business, shareholders and employees rightly require to ensure that we have a companies Act that ultimately stands the test of time, and implements the aims that the whole House rightly wants achieved.
I am grateful for the opportunity to participate in the debate on such an important measure. The Bill is a huge piece of legislation, amounting to a wholesale reform of company law. Indeed, such is the extent of the reform that it is surprising, as my hon. Friend the Member for Hornchurch (James Brokenshire) pointed out, that it was not originally framed as a consolidating measure. It is good to see that it now is.
I shall confine my remarks to part 10, which deals with the duties of company directors, and particularly to the provisions in clause 158, which was described by the CBI as perhaps the most important clause in the whole Bill. The duties of directors are currently defined by common law and equity through developed case law precedent. Part 10’s aim is to introduce a new statutory codification of the general duties owed by directors to their companies and shareholders.
It would appear from the explanatory notes and from the remarks of the Attorney-General in the other place that the aim of the codification is to make the law clearer and more accessible for the lay user, but it remains to be seen whether that aim will be realised. It is the job of the courts, of course, to carry out the function of interpreting the code set out in part 10 and no doubt they will do so. Over time, as interpretation succeeds interpretation, the code will become less clear to the lay reader, who will then need a lawyer to interpret it.
The Law Society, of which I am a member, takes the view that creating greater clarity for the lay reader would be better achieved by the publication of a non-statutory guide to directors’ duties. I understand that the Government have already made it clear that they intend to publish non-statutory guidance on the statutory statement of directors’ duties. That rather questions the value of statutory codification, if it is incapable of standing alone without such guidance.
The Law Society has also pointed out, quite properly, that the new code contained in part 10 will have an uncertain relationship with the existing common law in that it is unclear how far concepts that have been developed under the common law will continue to be relevant under a statutory regime that uses different terminology and introduces wholly new concepts. Common lawyers well understand what is meant by the expression “acting in the interests of the company”. It is uncertain how acting to promote the success of the company for the benefit of its members as a whole will differ from acting in the interests of the company.
The explanatory notes to the Bill make it clear that the Government are seeking to promote the principle of enlightened shareholder value, or corporate social responsibility—an aim that is, no doubt, shared by hon. Members on both sides of the House. However, given that clause 158 sets out what is effectively a checklist—albeit non-exhaustive—of matters that are to be taken into account in establishing whether that principle has been achieved, one can only sympathise with the comments of the Association of British Insurers that codification is more likely to lead to a compliance-based approach to the exercise of directors’ duties, rather than one based on the making of good faith judgments, which is more likely truly to promote the principle of enlightened shareholder value.
The ABI further points out that directors could feel obliged to take expensive and time-consuming legal advice, which may impair efficient decision making and add an extra layer of bureaucracy to the practice of company boards. The codification of directors’ duties, therefore, may not achieve the Government’s goal of greater transparency and accountability, but instead create new uncertainties, greater administrative burdens and a tick-box approach to the discharge of directors’ duties.
The Attorney-General reiterated in the debate in Grand Committee in another place that the Government’s aim is to make the general duties of directors clearer and to make the law more accessible. He commented that the traditional formulation of directors’ duties as being the obligation to act in the interests of the company did not achieve that aim, but it is hard to understand how greater clarity will be introduced by the Bill’s formulation.
A major concern must be that part 10 will apply, of course, not only to the directors of large multinational companies but to small family undertakings. The duties set out in clause 158 are in no sense reduced in the case of a corner-shop company. It might be said that that is as it should be, but in truth, smaller companies simply cannot afford the compliance-based approach that appears to be envisaged in clause 158.
Clause 158 will require a company director to act subjectively in good faith, but whether he has done so will be judged objectively against the test set out in clause 158(1). The additional pressures that that will place on directors, particularly those of small companies, is predictable. There will be longer board meetings and audit trails of compliance. The CBI points out:
“The list of stakeholder interests to have regard to in Clause 158 is much more diverse than the current requirement to have regard to the interests of employees. And, being more diverse, it is more difficult to demonstrate compliance, even though the interests of shareholders remain paramount. We therefore argue it should be more clearly stated on the face of the Bill that it is for the directors and the board to determine the manner and extent they have regard to stakeholder interests, according to their good faith business judgement.”
I agree with the CBI’s criticism of clause 158.
In conclusion, I have no doubt that the Government mean well, but if it is not amended, clause 158 may turn out to be a fertile source of future litigation. It will certainly impose greater pressure on often already hard-pressed directors, particularly those of smaller companies, without leading to the promotion of the principle of enlightened shareholder value. I believe that clause 158 is in dire need of amendment, and I look forward to its discussion in Committee.
I want to concentrate on parts 15 and 16.
Clause 399 deals with the business review. I think that the Government should be careful with subsection (2), which concerns the purpose of the review. We should bear in mind earlier attempts to legislate on directors’ activities. In the Corporate Manslaughter Bill, for instance, directors’ duties were very much part of the Government’s original proposals, but that measure was ultimately not as successful as the Government, or indeed the House, would have wished. Revision of the Bill focused on corporate duties and corporate management. I suggest that at some point the Government should think carefully about the risk posed by clause 399(2); a similar situation could arise.
Anyone who has worked in business for any length of time will confirm that there is a distinction between directors’ actions and the success of a business. There may be an indirect link. In the other place the link was described as fundamental, and of course that is true, but there is a temporal issue relating to when directors make decisions and when those decisions affect the success or otherwise of the company. I fear that some of the wording of clause 399 is so vague that directors will not be clear about how much detail they should give in the review, or about the time scale within which they should be prepared to give that detail.
I hope that the Minister will clarify another aspect of the review. Perhaps we shall be able to return to it in Committee. The performance of directors must be assessed very clearly. It could be said that a director had performed badly because he or she had not made decisions quickly enough to take advantage of certain business opportunities. That might not be flagged up in a business review, but it could arguably represent a bad case of poor director performance. We should consider whether the business review will focus on optimising directors’ behaviour in terms of optimising the success of companies, or whether it will focus merely on whether the directors have performed adequately.
Members will know of many examples that have arisen over a number of years. Minimal investment in a well-known brand may lead to a catastrophic decline in sales, but that may not have been clear at the time when the directors in question were in charge of the company. There is an indirect link between directors’ duties and actions and the success of their companies, and I am not sure that the business review will make that link clear enough. We must ensure that if there is a review, it delivers what we all want: a clear understanding of not just the directors’ assessment of their own and the company’s performance to date, but how they intend to build on that performance.
The clause is very judgmental. In an increasingly changing business environment, companies and directors face difficult decisions. They may have to choose, for instance, between an expansion strategy involving buying other companies and going on an acquisitive spending spree and a period of consolidation in which they can concentrate on core business activities. It may be very difficult for shareholders and company members to assess whether proposed decisions will prove to have been right in the long term. There will, of course, always be some uncertainty around the business review, but that is an example of where the intention of the measure as it is currently worded may not necessarily be fulfilled. I am sure that we will come back to that in Committee.
Often, the performance of directors is seen as clearly in how well the internal processes of the company are functioning as in the company's performance itself. If the company is in a market that is rapidly expanding and it was for various historical reasons an early entrant, it can apparently be incredibly successful, despite the directors. The directors may be taking decisions that add bureaucracy to the company. They may be imposing reporting requirements that are unnecessary and that subsequently hold the company back. However, at a time of an expanding market, those matters may not be focused on by either the shareholders or any potential investors who may be interested. It comes back to the temporal aspect.
Linking clause 399 to clause 158 could, because of the arguable weaknesses in clause 158, present some problems in law in assessing whether the business review delivered what was intended. There is the other adequacy test regarding clause 158. I presume that that would need to be considered before an assessment could be made of whether a business review had been adequate. I am sure that we shall discuss in Committee whether the Government intend to have that dual conditionality. I look forward to probing the matter in more detail.
I should have said at the beginning of my contribution that I am a member of the Institute of Chartered Accountants and spent some time auditing during my training, as many people who become members of that institute do as part of their qualification. I welcome the fact that the concept of the true and fair statement is now enshrined in clause 375 and the related clauses 378, 386 and 485. That is a step forward. As for the further major change to the audit profession in clause 525, we need to be careful that the way in which the Bill is phrased regarding liability limitation agreements will enable the Government to deliver the benefits that they seek to achieve. I am sure that many in business have concerns regarding that agreement and the potential for confusion that it may cause. Therefore, it is important that, as we refine the Bill, those risks and the need for balance are thoroughly addressed, particularly in Committee.
Obviously, any concept of proportionate liability would be new in the audit profession. We need to be careful to ensure not only that the audit profession receives the comfort that it is seeking to achieve through the clauses that the Government have now put into the Bill, but that, in doing so, small shareholders and other shareholders in the company being audited feel that the audit opinion expressed on the accounts following an audit that was underpinned by a liability limitation agreement is still valid. Therefore, we need to be careful that we do not undermine the purpose of an audit by having that agreement. I am sure that that is not the Government's intention and that the audit profession is seeking to have those agreements in place, so that it can perform high-quality audits that assure shareholders about the true and fair nature of accounts. However, we need to be very careful to ensure that the Bill delivers what is intended; otherwise, the unintended consequences could be profound. For example, shareholders might feel unable to have confidence in a report produced by an audit company that signed a limited liability agreement to accept a certain proportion of liability, without knowing in advance the circumstances in which that agreement might be called upon in deciding whether liability had been expressed in relation to potential problems with that company.
In Committee, I want the Government to think long and hard about clause 497—formerly clause 498—and the offence of “knowingly or recklessly” mis-auditing accounts. We need to couch this offence very carefully. In the other place, it was argued that a far better phrase would be “dishonestly or fraudulently”. As someone who has worked in the accounting and auditing profession, I know that, in looking at the risk-based approach to auditing, it is often very difficult to draw a line between when to accept and not accept management explanations of anomalies in an audit and changes in the figures from one accounting period to the next. At times, such a task confers a significant judgment requirement on all levels of an audit company. Any audit that is signed off is the product of the judgment of a number of people who participated in the audit on behalf of the auditing company.
On reading through the relevant debates in the other place, my initial reaction was that the phrase “dishonestly or fraudulently” might better capture what the Government are seeking to achieve. That said, I look forward to debating this issue further, and doubtless we will return to it in Committee. It is important that we do so, because if we do not get it right, there is a danger that we will put off some of our brightest, most initiative-driven business people from entering the audit profession. We need to make sure that the law is structured in such a way as to encourage those who encounter an issue in an audit to raise it, rather than to sweep it under the carpet. I am sure that that is the intention behind clause 497, but we need to ensure that it delivers on that intention, and that it does not put off our best and brightest graduates from entering the audit profession in the long term. They may worry that if they make a judgment during an audit that subsequently proves wrong, they will be liable on behalf of their company. Nobody wants to be in that situation unnecessarily.
The Bill has gone through a number of iterations in reaching this stage, and all Members will agree that it has been improved immensely since the first draft. We Conservatives look forward to playing our role in ensuring that any remaining concerns that we may have on behalf of the business community, stakeholders and those worried about corporate social responsibility will be thoroughly debated and ironed out in Committee. I certainly look forward to playing my role in Committee in the coming weeks—if I am lucky enough to be selected, which I very much hope will happen.
It was also nice to hear the former Minister make a fine contribution to our debate. I also declare my interests as they appear in the Register of Members’ Interests.
We have had an interesting debate, although it has focused on only some 20 of the 950 clauses in the Bill. I start by recognising that it is more than 20 years since the last major change to the company law framework. We are pleased, therefore, that after eight years of wide consultation, we now have the Bill. Consideration started in the other place, and I recognise that the 1,600 amendments considered to date have changed and improved the Bill dramatically. I join my hon. Friend the Member for Rutland and Melton (Mr. Duncan) in recognising the heroic efforts made in the other place by Lord Hodgson, Baroness Noakes, Lord Freeman and many others.
My hon. Friend the Member for Grantham and Stamford (Mr. Davies) gave a good summary of the criteria against which the Bill should be judged, focusing on the need to create a steady framework for companies. I agree with him that, for most of the Bill’s 950 clauses, it nearly reaches that objective. We also agree that the language of the Bill has been significantly improved, compared with the Companies Act 1985, which it replaces. Furthermore, we welcome the fact that the focus of the Bill is now on the private company with any further requirements being subsequently set out for public companies, rather than the other way round as it is done at present. It is right to think small first, considering the relatively few public companies.
As my hon. Friend the Member for Hornchurch (James Brokenshire) pointed out in his wide-ranging and interesting speech, in which he demonstrated his technical expertise on the issue, we welcome the fact that the Government have listened to us and now propose to include in the Bill most of the existing Companies Act 1985, thus producing one single consolidated Act. I have no doubt that that will be warmly received by business and advisers alike, but with some caution by Committee members who will have a Bill of some 1,300 clauses to consider—possibly the largest ever.
Given the huge expansion of the Bill, the Government’s insistence on a programme motion is not welcome. The single day for Report, instead of the four provided in the Lords, seems unwise, considering the likely consultations that will need to be finalised over the summer.
The protection of directors and shareholders from violence and intimidation arising out of their involvement with companies is a key issue that the Conservative party has been asking the Government to address for several years. The disgusting behaviour shown towards my constituents at Huntingdon Life Sciences and the intimidation of the company’s shareholders have long given me the belief that the Government have to do more, including changing the law. Through amendments in the other place, the Government have gone some way towards heeding our calls. However, it is an example of the knee-jerk nature of much of what the Government do that it took the intimidation of GlaxoSmithKline shareholders to kick them into action. Reactive law can often be the worst law, as we all know. As my hon. Friend explained, we shall use the Committee stage to probe the Government’s proposals, to compare them with alternative suggestions and to tighten up their effectiveness where necessary.
Let no one be in any doubt that for the Conservative party this issue extends beyond animal testing to the need to protect the secure environment that is so vital for all our companies in all sectors of operation. In any age in which more than half of shares are owned by nominees, we have given much thought to the rights of owners of shares, as well as the obligations owed by institutions to their investors—all in the context of our support for extending shareholder democracy and encouraging active involvement in general meetings. Our aspiration and ideal is active membership from the bottom up, rather than Government regulation from the top down. In that context, we welcome the changes to the Bill made by our noble Friends in the other place to enable beneficial owners to opt into receiving company documents and votes. The hon. Member for Islington, South and Finsbury (Emily Thornberry) made a strong case for that, as did the hon. Member for Kingston and Surbiton (Mr. Davey).
That is a new concept, at least in this country. We have listened carefully to business representatives in recent days, and we accept that the details of the proposals made by our noble Friends will need some refining. We look forward to working with the Government on this matter, given that Ministers today seem at least to have accepted the concept. We also strongly support the proposal that institutions should publish how they have voted on their share investments, and we commend the half dozen or so institutions that now do so on a voluntary basis.
My hon. Friend the Member for Grantham and Stamford called for institutions to become active and to vote, and he was spot on. We found the Government’s threat of compulsion to be cack-handed and over regulatory. That is why, in the other place, we removed the relevant clause from in the Bill. However, we agree that this is an important area, and one in which we would like to find a compromise with the Government. Accordingly, we intend to table amendments that would require institutions to publish whether, rather than how, they voted. We feel that that could be a good starting point for discussions aimed at encouraging shareholder activism in a way that is not heavy handed. We agree with the Liberal Democrats that we need to look very carefully at the mechanics of the issue.
With a Bill of this size, we must take account of the context. For the most part, its clauses are conceptually sound, and our work in Committee will be of a technical nature. However, significant elements of the Bill will complicate company law further, rather than make it more flexible. The review of accounting provisions is certainly timely, although I am not sure that I totally agree with the hon. Member for Great Grimsby (Mr. Mitchell), who asserted that lower audit standards necessarily lead to looser business ethics.
The Minister will correct me if I am wrong, but as far as I am aware the Bill contains no provisions to reduce audit standards. My hon. Friend the Member for Putney (Justine Greening) gave us some expert and welcome input in that regard. She used her expertise to give us some very pertinent observations about the business review, and made some excellent remarks on the vital importance of companies’ internal processes. She also spoke about auditors’ liability limitation, and we look forward to further contributions from her in Committee.
Government new clause 22 is interesting. The Government like to talk about shareholder democracy, but the clause will allow company members to entrench provisions in their company’s articles. As drafted, the Bill therefore runs contrary to the concept of shareholder democracy. For instance, company directors with enough shares will be able to entrench their right to have a—possibly large—salary.
It is interesting and somewhat bizarre to note that the Labour party in opposition liked to attack what it called “corporate fat cats”. In government, it seems to want to introduce laws that will allow those people to entrench their right to get fatter. In Committee, we hope to address that matter and redress the balance in favour of shareholder votes.
We will also wish to reassess the role of the company secretary. My hon. Friend the Member for Eddisbury (Mr. O'Brien) made a very convincing case that proper recognition should be given to what is a very important officer role in a company. Company secretaries are especially important in larger companies, whether public or private. We also intend to look carefully in Committee at the proposed use of criminal sanctions by the takeover panel.
The question of directors’ duties featured strongly in the debate. Clause 158 in part 10 of the Bill is intended to codify a limited number of existing common-law principles relating to the responsibilities of directors. That has led to vociferous and growing complaints from across the legal and business communities. As my hon. Friend the Member for Clwyd, West (Mr. Jones) skilfully demonstrated in an excellent contribution, historically judges have had the discretion to deal with complicated issues relating to directors’ duties on a case-by-case basis. That system has been adaptable and effective in dealing with cases that are often complicated and highly technical. A flexible system is at risk of being replaced by Labour with an inflexible tick-box one.
The Government’s position has been inconsistent. They have said that there will be no change in the common law position yet they talk about introducing the concept of enlightened shareholder value. If nothing is to change, the Government need to explain what they mean by enlightened shareholder value. That will be a theme in Committee.
The Law Society doubts the level of anticipated savings for business from the Bill. On the contrary, it believes that the new provisions on directors’ duties will result in new uncertainty, increased legal costs and additional bureaucracy. It seems clear to us that, while the Government protest that they are holding some kind of middle ground, as the Secretary of State suggested, and are not changing the common law position, in fact they are doing exactly that. Such a course can only lead to confusion where there should be clarity. We shall support the position of our noble Friends and the Law Society that a non-statutory guide to directors’ duties is the way forward, not wishy-washy confusing platitudes that seek to show concern but will probably do little other than confuse.
A May Financial Times lead article entitled “A Missed Opportunity” said:
“The stated aim was to make directors’ duties clearer and more up-to-date. The reality is a confused list that mixes platitudes with necessary duties…the government’s approach betrays an underlying mistrust of business.”
We say that company law exists to provide a stable framework in which companies can operate. Part 10 of the Bill does not do that. It bases law on fashion, not reason. That is an issue that we will address in Committee.
A major concern of hon. Members in today’s debate has been that the Bill should enable company law to become the arena for a number of interest groups to further their causes. Corporate social responsibility is now taken more or less seriously by all larger companies based in this country. There is general agreement, which we certainly share, that it is only good business for companies to do so. The Conservative party places high value on the issue. We strongly support action taken towards social responsibility by companies and we believe that companies, sometimes more than Government, can be a positive driver of environmental and social change.
The hon. Member for Richmond Park (Susan Kramer) made an important point when she said that the Government spent too little time recognising and encouraging good corporate social responsibility practice when they found it. That is not a lesson lost on the Conservative party. The question is whether the Bill is the place to advance CSR. That will be an important theme for the Committee.
I have been listening to the hon. Gentleman’s case with great care. If he thinks that the Bill is not the place to enhance corporate social responsibility, where is the place?
I have just explained that I see the primary way of advancing CSR as being through companies voluntarily putting measures in place. However, there are other ways in which it should be encouraged. The hon. Member for Gower (Mr. Caton) mentioned the OECD. That is certainly an international context in which CSR should be advanced.
Yes. If the hon. Member for North Swindon (Mr. Wills) had heard some of the debate, he might have been a bit wiser.
One of the problems that we have is that the amendments mean that burdens will be placed on company directors of all UK companies—the corner shop as much as the multinational. We shall argue that that will not just lead to uncertainty and the fear of litigation, but will set back the agenda of engagement in corporate social responsibility that our party supports. That point was made elegantly by the right hon. Member for Cardiff, South and Penarth (Alun Michael). The hon. Members for Richmond Park, for Kingston and Surbiton, for Portsmouth, North (Sarah McCarthy-Fry), for Caernarfon (Hywel Williams), for Gower, for Great Grimsby, and for Islington, South and Finsbury, and my right hon. Friend the Member for Suffolk, Coastal (Mr. Gummer), in their own ways and often elegantly, made their cases for more regulation on business and mandatory reporting in the name of corporate social responsibility—many different forms of corporate social responsibility, I hasten to add.
Although some of the causes that were mentioned were certainly appealing, the recipe for dealing with those issues was much less so. I appreciate that this is a significant and important area and I foresee that we will spend some time on it in Committee. Let me just give hon. Members one example now. Most of the campaigns involving international development or environmental issues will probably involve large multinational companies and most of those companies will probably be foreign. Some hon. Members may have overlooked the fact that the Bill applies only to UK companies. Quite apart from the merits of the campaigns involved, is this the place to deal with those issues? We will suggest that it is not.
I have great sympathy with what my hon. Friend is saying, but surely the situation is rather different. It would be possible for us to produce a mix of sensible legislation that would not be overburdening, but which would show quite clearly that we were taking the lead. This country ought to take the lead. The idea that we are not doing that because other countries will not do it is surely not suitable. Climate change and its environmental results are too urgent for us not to take the lead. I hope that he will find ways in which we can do that.
I totally agree with my right hon. Friend. This country should take the lead. He explained earlier how the Government are not taking the lead in the way that they should be. I thought that he made an excellent contribution. It is important to point out that companies in this country are leading the world on corporate social responsibility. As we discussed earlier, the Government are not paying enough attention to the good that exists. Encouraging that good has not been a priority in the way that it should be or that it would be under a Conservative Government.
I will—[Interruption.] The question is quite simple. Essentially, we feel that, following the huge mess and the total shambles of what the Government created in relation to the OFR—as the hon. Gentleman explained in his speech and as my right hon. Friend the Member for Suffolk, Coastal also explained very well in his speech—when it comes to the question of the business review, although the Government stumbled into it blindly, we would say that what is now in the Bill is roughly in the right position, subject to review in Committee.
The hon. Gentleman starts from the wrong point—[Laughter.] He does. As my hon. Friend the Member for Eddisbury pointed out, the stance of the Conservative party was against the OFR from day one. The premise of the comments of the hon. Member for Kingston and Surbiton is thus wrong.
I thought it was important that the hon. Gentleman allowed me to intervene one more time, because on 16 March, in the Eleventh Standing Committee on Delegated Legislation, which considered the Government’s measure to repeal the OFR, he voted with the Liberal Democrats to try to oppose the repeal. Has his position shifted since 16 March?
The hon. Gentleman totally misconstrues what Conservative Members did in that Committee. As the record will show, we were voting against the total mess of a process produced by the Government on the OFR—and he knows it. He got it wrong from the start and in the middle, and now he has got it wrong again at the end. We will proceed from the position of what is right for British business.
When the proposed directors’ duties provisions are added to the provisions on derivative claims and the new business review reporting arrangements, all of which, admittedly, were improved in the Lords Committee, we must still listen to those who say that the Bill could increase the possible liabilities for company directors. We will wish to review the matter in Committee.
There is a growing fear in the business community and among Conservative Members that if the regulatory environment is made too harsh and the fear of litigation becomes too great, the best people will not wish to be company directors in the UK and many of our companies will repatriate or re-list overseas. The stakes are high, and we will keep that in mind throughout the passage of the Bill.
As other hon. Members have done, I remind the House that I have a registrable shareholding that is set out in the Register of Members’ Interests.
We have had a good-hearted debate, even in the past few minutes. The Bill is highly significant and I am grateful to all who spoke. We all recognise that company law is an important building block that helps us to sustain and strengthen our growth and prosperity. The world is an increasingly open place in which to do business and the business world itself is changing with the advent of new technologies and working practices. In that context, a flexible and modern system of company law that is accessible to all sizes of business is crucial to the UK’s success. Many hon. Members on both sides of the House have recognised that that is what the Bill provides.
Historically, company law has been a UK strength. We were one of the first countries to put in place a legal framework to regulate the organisation and management of companies. That framework has generally stood the test of time well and has been recognised as a model for other countries throughout the world. However, over time, law with such historical roots can become out of date.
In the 1990s, a consensus emerged that our system of company law needed improvement. The Government thus established the company law review to provide an expert and independent analysis of the areas in which the law needed updating and to come up with recommendations for change. In very large part, the Bill follows the route map that the review provided.
The company law review established the principle that policy in this area is best determined through as inclusive a process as possible. Again, many hon. Members have acknowledged the inclusive nature of the policy. We have attempted to follow that principle when possible, and the final provisions of the Bill reflect a thorough process of consultation. As others have said, the process has been a model of the sort of way in which we should legislate. That is one reason why, whatever differences remain on specific proposals, the Bill has such large support, not only in the House but from business organisations and other stakeholders with an interest in company law. The Bill is rightly seen as a landmark that will bring real improvements to the way in which companies operate in the UK.
I shall say a few “thank-yous”. I pay tribute to the members of the company law review steering group and to all its working parties, and to all those who contributed to the review’s work. I am grateful to the many businesses and other organisations and individuals who contributed through formal or informal consultation. I pay particular tribute to my predecessor, my right hon. Friend the Member for Cardiff, South and Penarth (Alun Michael), for all his efforts, which I am picking up quickly in bringing this major piece of legislation to this stage in its consideration.
I mention also the extensive scrutiny that the Bill has received in another place. Unlike Opposition Members, I acknowledge Members on both sides of the House of Lords who participated in consideration of this measure in that place. As for Government peers, Lord Sainsbury of Turville did an excellent job, supported by Lord Goldsmith and Lord MacKenzie of Luton. Conservative Members failed to mention the contribution of Labour peers, but I acknowledge the contributions of Lord Hodgson of Astley Abbotts, Lord Freeman and Baroness Noakes, and for the Liberal Democrats, Lord Razzall and Lord Sharman. I think we all agree that there have been contributions that have improved the Bill.
In developing the Bill, we have followed a consistent set of principles. We want to ensure that the new law is as clear as possible, that it is as simple as possible, that it is modern and fit for today’s business purposes and that it does the maximum possible to get rid of any unnecessary burdens of regulation. I think that the Bill achieves those aims. The comments from stakeholders suggest that the Bill is already set out in ways that will make it much more simple for its users than previous legislation—particularly businesses—to understand the provisions that apply to them. I expect the measure to be further enhanced after we have had many hours of consideration in Committee of this very large Bill.
Some specific areas of the Bill have been raised during the debate. I shall go through as many of those as time allows. The principal area, on which most of the debate has concentrated, has been directors’ duties and clause 158, associated with clause 399. Those matters were raised by Opposition spokespersons and in an excellent exposé of the concept of enlightened shareholder value by my right hon. Friend the Member for Cardiff, South and Penarth. They were mentioned in a good contribution by my hon. Friend the Member for Islington, South and Finsbury (Emily Thornberry), who, together with my hon. Friends the Members for Gower (Mr. Caton) and for South Swindon (Anne Snelgrove) asked us to beef up the provisions. The issue was raised in an interesting way by Opposition Members, who appeared to disagree with one another.
The hon. Member for Grantham and Stamford (Mr. Davies) fundamentally disagreed with the hon. Member for Rutland and Melton (Mr. Duncan), who was not in his place to hear the contribution of his hon. Friend. The hon. Member for Grantham and Stamford wanted the certainty that his hon. Friend does not want. The hon. Member for Clwyd, West (Mr. Jones) disagreed with the right hon. Member for Suffolk, Coastal (Mr. Gummer), who thought that the approach was too timid. The hon. Member for Richmond Park (Susan Kramer) asked that we strengthen the business review.
Enlightened shareholder value is a radical aspect of the Bill. In the past, we always believed that community aspirations and business success were seen as competing objectives. At the heart of the Bill—it is what it is all about—is our belief that that is wrong. Business success in the interests of its members and community aspirations, whether they be aspirations for employees, suppliers, the community, the environment or sustainable development, are interlinked ambitions, not competing objectives. We want business to prosper, and business will do that best when it acts in an enlightened way, recognising the part that it plays in strengthening and sustaining our communities. That is why we have developed the proposed legislation, which is based on the concept of enlightened shareholder value.
Long-term prosperity for a business is about recognising the role that business plays at the centre of a community, rather than in conflict with community objectives. The legislation allows us to bring the behaviour of all businesses up to the best standard. Good businesses recognise the importance of good regulation and they want a clear, well-defined level playing field so that they are not at a commercial disadvantage if they do the right thing.
The hon. Member for Rutland and Melton discussed inflexibility and confusion. He has got it wrong: a clear set of directors’ duties is incorporated in clause 158, but we have also provided the necessary flexibility so that companies can respond to a fast-changing environment. The list is not exhaustive, and we do not pretend that it is. He said that he wished to add 165 criteria—I hope that that is right—to the list. The hon. Member for Huntingdon (Mr. Djanogly), on the other hand, was worried about our having any criteria, although he was happy to reinstate section 309 from the Companies Act 1985. Our discussion of clause 158 and associated clauses showed that Opposition spokesmen are reluctant to change as the Leader of the Opposition wishes. Anyone can talk the talk, as the Leader of the Opposition does, but government is about walking the walk. That is the toughest lesson that the Notting Hill set must learn if it is ever to consider a role in government.
Does the right hon. Lady accept that a Government who ditched the OFR, who produced a Bill without the OFR, who make cheap remarks about the Opposition while failing to introduce a policy that they said was at the heart of their programme, cannot possibly pretend that they are on the side of the environment?
I hope that the right hon. Gentleman whose party, as we have seen in tonight’s debate, voted against the OFR, will help us to consider the components of the business review so that we can meet the objectives of enhanced shareholder value.
Some people, including the right hon. Gentleman, believe that we should have adopted a more pluralist approach instead of one based on enlightened shareholder value. We all share the goals of marrying commercial prosperity with long-term sustainability. The real debate on the Bill concerns how we can best achieve those goals. The provisions on directors’ duties, together with the provisions on narrative reporting, will give a huge boost to our corporate social responsibility agenda. If we went further, we would damage our success in attracting companies to incorporate in Britain, along with the economic growth and jobs that that brings. In a global economic environment with global markets, companies can choose where they wish to incorporate their business, so company law must focus on its core purpose to create the right environment for business success.
Company directors require clarity about their duties. While we accept that long-term business success partly depends on employee interests, communities and the environment, we must accept, too, that company law is not the best vehicle to address wider social and environmental objectives. We can address those objectives, as some Government Members have said, through domestic legislation, health and safety measures and environmental protection, on which we have made progress. We can drive our agenda forward through the EU. Organisation for Economic Co-operation and Development guidelines for multinational companies, the extractive industry transparency initiative, which the Prime Minister launched in 2002, the partnerships that have developed on natural habitat loss, and the round table on sustainable palm oil are all examples of initiatives that ensure sustainable best practice in the global environment. Finally, we should remember that, as consumers, we all have power to change cultures. Laws are not always the best way for us to achieve cultural change.
My hon. Friend the Member for South Swindon asked whether we would strengthen our commitment to corporate social responsibility. Guidance will be developed on the quality and coverage of the business review and all UK companies will be accountable in that they will have to fulfil their duties under both clauses. They will therefore have to report clearly on how the action that they have taken impacts on issues such as the environment. If they fail to include that in their report, they will have to explain why.
If the round table on sustainable palm oil does not succeed in its objectives—I hope that it does—should they not be put on a statutory footing so that sanctions will be available to the Government to ensure that standards are maintained?
I reiterate what I said a little earlier: I do not think that that is an issue for the Bill.
I shall deal quickly with other issues that were raised. The hon. Member for Eddisbury (Mr. O'Brien) made an impassioned defence of the role of the company secretary. I think that he recognises that we are not scrapping that role for small and medium-sized businesses. We are making it a voluntary facility, rather than an essential requirement. If he remembers that 96 per cent. of SMEs have five or fewer members of staff, I hope that he will accept that, in that context, this is a sensible deregulatory measure. The issues that he raises in relation to authorised signatories are valid, and I hope we can discuss them further in Committee.
When the right hon. Lady considers the matter again, I hope that she will not skate over it. If a company secretary is an optional appointment, there must be an empowerment of that role, which comes from statutory enshrinement, not by making it another job title.
That is one of the aspects that we will consider when we examine the Bill clause by clause in Committee.
I look forward to the participation of the hon. Member for Caernarfon (Hywel Williams) in Committee so that he may develop a better understanding of the provisions of the Bill with respect to the business review and other topics. The hon. Member for Grantham and Stamford raised the issue of derivative claims and the possibility that pressure groups will bring actions and open the floodgates to vexatious litigation. My right hon. Friend the Secretary of State dealt with that, and I shall add two comments. Even if the action is successful, the damages will be paid not to the individual, but to the company. The Bill also provides that the court may make any consequential order that it considers appropriate, so that pressure groups that make claims that are not intended to promote the success of the company, which is the core function, could find that they have to pay heavy costs.
We had an extensive discussion of animal rights, which I know is of particular concern to the hon. Member for Huntingdon. The measure is not a knee-jerk reaction to a particular instance. Perhaps he missed the Serious Organised Crime and Police Act 2005, which was entirely—
If the hon. Gentleman served on the Committee, he did not understand the Bill. It would deal with the cases exemplified by the attempted harassment of GlaxoSmithKline shareholders. We believe that we have got the balance right.
The hon. Member for Kingston and Surbiton (Mr. Davey) suggested that there might be occasions where no names need to be revealed. There is a clause that enables companies to go to court and seek exemption from including the names of shareholders, but that is a matter that we can discuss further.
I want to deal briefly with consolidation, which was mentioned by several hon. Members. Clearly, we want to move forward in a consensual manner. We have said that we will not bring into the consolidation provisions anything that goes wider than companies, such as investigations, regulation of auditors, or self-contained provisions on community interest companies. We have also said that we will take power in relation to capital maintenance and charges. The purpose of the consolidation is simply to make the Bill, when enacted, more comprehensive—it is not in any way about substantive change. I understand that hon. Members will want to debate these issues, and we will consider further how we can ensure proper consideration.
The only other issue that I wanted to deal with was that of auditors’ offences, which was raised by the hon. Member for Putney (Justine Greening) from her own experience. She will accept that the introduction of the new offence is balanced with the introduction of new clauses that will limit liabilities for auditors. No doubt we will have an interesting discussion about recklessness and carelessness in Committee, but we believe that recklessness is a high hurdle that would have to be overcome were a prosecution to be successful.
This is a large Bill—
Indeed. It is also an important Bill that comes to us after a long process of thought and reflection on how to achieve a modern framework for company law that is clear, accessible and flexible. It has benefited from the inclusive process, drawing on input from all stakeholders and interested parties. After tonight’s Second Reading, we will have ample opportunity in Committee to consider its clauses in detail.
The Bill has the broad objective of ensuring better regulation. That means appropriate regulation with a focus on the needs of small businesses as well as large quoted companies, appropriate deregulation with savings to businesses both large and small, the encouragement of a long-term investment culture, and stronger shareholder engagement and involvement where shareholders seek such engagement. All those objectives feature in the Bill, which we believe will strengthen and promote Britain’s position as the best country in which to establish and to run a business. For that reason, I commend the Bill to the House.
Question put and agreed to.
Bill accordingly read a Second time.
COMPANY LAW REFORM BILL [LORDS] (PROGRAMME)
Motion made, and Question put forthwith, pursuant to Standing Order No. 83A(6),
That the following provisions shall apply to the Company Law Reform Bill [Lords]:
1. The Bill shall be committed to a Standing Committee.
Proceedings in Standing Committee
2. Proceedings in the Standing Committee shall (so far as not previously concluded) be brought to a conclusion on Thursday 13th July 2006.
3. The Standing Committee shall have leave to sit twice on the first day on which it meets.
Consideration and Third Reading
4. Proceedings on consideration shall (so far as not previously concluded) be brought to a conclusion one hour before the moment of interruption on the day on which those proceedings are commenced.
5. Proceedings on Third Reading shall (so far as not previously concluded) be brought to a conclusion at the moment of interruption on that day.
6. Standing Order No. 83B (Programming committees) shall not apply to proceedings on consideration and Third Reading.
7. Any other proceedings on the Bill (including any proceedings on consideration of any message from the Lords) may be programmed.—[Mr. Cawsey.]
COMPANY LAW REFORM BILL [LORDS] [MONEY]
Queen’s recommendation having been signified—
Motion made, and Question put forthwith, pursuant to Standing Order No. 52(1)(a) (Money resolutions and ways and means resolutions in connection with bills),
That, for the purposes of any Act resulting from the Company Law Reform Bill [Lords], it is expedient to authorise—
(1) the payment out of money provided by Parliament of any sums required by a Government department for defraying expenses incurred under or in consequence of the Act, and
(2) the payment out of the Consolidated Fund of any increase attributable to the Act in the sums so payable under any other enactment.—[Huw Irranca-Davies.]
Question agreed to.
COMPANY LAW REFORM BILL [LORDS] [WAYS AND MEANS]
Motion made, and Question put forthwith, pursuant to Standing Order No. 52(1)(a) (Money resolutions and ways and means resolutions in connection with bills),
That, for the purposes of any Act resulting from the Company Law Reform Bill [Lords], it is expedient to authorise—
(1) fees or charges,
(2) a levy for meeting expenses of the Panel on Takeovers and Mergers,
(3) the amendment of section 17 of the Companies (Audit, Investigations and
Community Enterprise) Act 2004, and
(4) the payment of sums into the Consolidated Fund.— [Huw Irranca-Davies.]
Question agreed to.