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Address in Reply to Her Majesty's Most Gracious Speech

My Lords, I am happy to join my noble friends in congratulating my noble friend Lord McKenzie on the Front Bench and my noble friend Lord Sainsbury on his historic third ministerial manifestation. He represents a department which also needs congratulation on managing an extraordinary feat in Whitehall. It has resisted another forced marriage, having all its notepaper reprinted, to the benefit of the public funds, and remains the DTI, which we all love. It is about one measure—the last Bill to be announced in the gracious Speech—that I wish to speak. I remember being told, "You're last man in and although everybody wants to get to the bar, for goodness' sake don't give away your wicket cheaply". I intend to follow that advice by addressing one subject alone—the forthcoming company law reform Bill. The DTI notified us of it in March this year, after a three-year study by the company law review steering group finished in 2001. On 8 January last year, the noble Lord, Lord Patten, asked: "What do the Ministers in the DTI do all day long?"—[Official Report, 8/1/04; col. 273]. Well, now they have told us, because we have the draft company law reform Bill, with 239 clauses and several schedules. Given what your Lordships have said about the economy and the like, this measure, although the last in the gracious Speech, may well be the most important to come before you. In 2004, the DTI produced a small aperitif of an Act on companies and hurried forward a regulation on the operating and financial review. It should have been a Bill so that we could have amended it, but never mind. It carried on with the consultation, which, as usual, is largely confrontation with the City and should have been much wider. When the director of the steering group of the company law review was asked in 2001 what would be his assessment of the effect of the three-year review, he replied that it was like Mao Tse-Tung's assessment of the French Revolution—"it is too early to say". The time for that leisurely approach has now gone and the Bill will come before Parliament at last. I will address two or three aspects of it. The Government are right not to wait for some Enron or Parmalat, another Longbridge or some hedge fund disaster to force company law to the attention of the two Houses. In my 40 years of teaching and research in company law, I always found that students began with the notion long put forward that company law is not a sexy subject. After a few weeks of due instruction, they usually found that it was, because it is the area of law that takes the social pulse and tests the sinews of corporate entities small and big, some now so large that, like multinational mobile colossi, they bestride the world and have power equal to that of the state, if not more. Those who lust for a further era of privatisations have a special duty to make sure that the companies that are to receive the favours are governed by an appropriate body of law. It is therefore sad that the DTI document begins with the rather downbeat sentiment: "Company law can be very complex". It is sometimes complex, but that is no excuse for delay in getting this Bill on to the statute book. We have the good fortune of the technically admirable company law review and final report of 2001 on which to build. However, a lot has happened since 2001. Investment and finance in particular have now entered what may be called their era of nanotechnology in the mysterious and inadequately regulated planet of hedge funds, derivatives, contracts for differences and the like, leading to short-termism and great secrecy on the part of powerful private equity firms. Today, those firms control companies that employ one in five of the workforce and many, from the Takeover Panel to the chairman of Cadbury-Schweppes, have said in the last week that there is a need for further regulation of this area in the public interest. I take it to be a good precept in company and financial services law reform that when the likes of the chairman of Cadbury-Schweppes calls for action, all Sainsburys should pay instant attention. It is therefore surprising that the review—and, to some extent, the government draft Bill—makes a clear choice on the fundamental question posed for every system of modern company law in similar mixed societies. That is, for whose interest should the company be run? Is it to be a mix of interests of all the stakeholders, shareholders, creditors, employees or the community? Despite the scepticism of English lawyers, who have no comparative understanding, there are such systems. Or, must it be run directly in the interests of shareholders alone? The traditional English answer has always been that the company must be run in the interests of the shareholders on a long-term view—the members, as they are still called, for historical reasons—although indirect account can be taken of other interests if they affect the longer term interest of shareholders. As Lord Justice Bowen declared in 1883: "There are to be no cakes and ale except . . . for the benefit of the company". He meant the interests of the shareholders. The final report of the review effectively confirmed the same criteria, although it expressed the need to look at the subject broadly and called it "enlightened shareholder value"—the company must be run in the interests of a good-hearted shareholder. In truth, the new slogan was spin to hide the traditional test and the company must be run by the directors in the interests of shareholders. Even a badly drafted Conservative law of 1980, which put employees among the interests that directors must consider in law, should be repealed. The proposals of 2005 are profoundly encouraging in one respect and worrying in another because in the DTI's new version of a statutory statement of directors' duties, which is the most important part of the draft Bill, the new statutory provision continues to set out, in the words of the draft clause, that directors must consider, "in good faith, [what] would be most likely to promote the success of the company for the benefit of its members"— shareholders— "as a whole". In doing so, directors must take a long-term view and indirectly consider relationships with suppliers and customers and so forth. However, in the draft Bill—and this is encouraging—whereas the review merely told the directors to consider their relationships with employees, the draft Bill now states that directors must, "take account of any need of the company to have regard to the interests of its employees". That is not a drafting point, it is fundamental. The interests, not the relationship of employees, are on the agenda. This development in the Government's thinking is one from which they must not be shaken by any criticism from wherever it comes. Nor must the Government give way to criticism of the stringent statement in the draft Bill of fiduciary duties of directors and other officers and standards of negligence. We all know that current events before the courts are raising the question of directors' negligence, and therefore, one must not comment. But whatever the courts will say about the negligence of directors, the liability of any particular person in court, friend or foe, is not necessarily a good basis on which to change direction in company law reform. The most important development in company practice since 1990 has been one with which the company law review did not deal at all, and on which ministerial statements and policies have been totally inadequate—especially in the face of dozens of Questions, asked notably by my much-missed friend Lord Dormand of Easington, to whom I pay tribute. To quote from a publication of my own which is in the Library with 330 footnotes of evidence, your Lordships may like to consider the following proposition: "In the past decade there has been a massive rise in the benefits taken from the corporate enterprise by top executives and controllers"— or, as American colleagues researching in the field put it—a huge increase in "rent extraction" by top executives. This is not just a limited issue of rewards for failure as in the second Marconi scandal; this is a question that crosses the whole field of large corporate enterprise today. It takes the form of salaries, fees, bonuses in cash and kind, shares, share options, incentive schemes short and long-term, golden hellos, expenses, golden handshakes. As the late Lord Young put it, there are now all manner of new ways for people to feather their own nests in this area. We may not yet be in the position that Professor Galbraith described the United States as being in where he said that the compensation taken by chief executives of corporations were really a vote of warm self-confidence in themselves, however, we do have a situation whereby one fund manager said two years ago that directors are deciding their own pay; they sit on each others' boards, and they are pushing only one way. The Guardian on 4 May did a survey of 200 companies, every single one of which was aiming at massive increases next year in top executive reward. By itself that may not be important, but it is important to workers who see their pension funds disappearing and find that their jobs are cut. Noble Lords will find, in the publication I cited, examples of companies where those two things go together. This is not just a British phenomenon. The idea that this is some special Anglo-American problem is absurd. Workers is in France who were on strike for a further €50 a month were not pleased to find that their chief executive was in receipt of €9.9 million, and €25 million on a five-year pension plan. It is well known throughout Europe that this issue is a new one, which goes to the heart of the justifiability of the system that exists in society and about which one is not supposed to speak in polite circles. I cite for your Lordships what Anthony Sampson said in his publication last year, which was an admirable survey of, as he put it, Who Runs This Place? He said: "The centre of the Establishment has moved away from Parliament and cabinet and towards corporate boardrooms . . . Directors have become more self-contained and interlocked with other companies, inhabiting a narrow world of their own". He said that directors are often part of what used to be called an old boy net, with, "too narrow a gene pool", but added that the, "shareholders, employees and other stakeholders were conspicuously absent from the network"— in his research. The company law Bill to be set before us is not one simply to pacify the fans at the Stretford End in Manchester, or to deal with some particular problem. It has an obligation to the country to bring modern company law up to a modern standard in regard to the particular process of the increase of power in a particular area of top executive pay. Policy so far has totally failed in that area. Advisory shareholder resolutions, non-executive directors and various other schemes of that sort just have not worked. In particular companies there have been odd incidents where they have helped, but as a general recipe for an answer, the Government must add to its draft company law Bill something more satisfactory. Finally, today globalised capital has acquired a power that rivals and sometimes overrides that of the state. It is therefore very odd that the new ideological narrative of the company review, as published on the web, is to think about small companies, not large ones—to look at the small companies, draft for them and then add on something for the big ones. That is a totally new approach which needs to be rethought. There must be something in the Bill, not only about small companies—although I understand the reasoning for their inclusion—which indicates just what the add-on will be for mobile global capital, which includes vast areas of corporate networks; that is, unless the Government feel so powerless in the face of that power that they dare not legislate with the big international companies in mind. Of course, this is not a modern predicament alone, even if it is rather more difficult than ever before. From Hardie and Maxton to Attlee and Bevan, the dilemma of facing a corporate network which made legislation difficult has always been there for a Labour Government. The supporters and members of the Labour Party, of which I have been one for 60 years, know very well that for a Labour Government of principle, principle urges action but pragmatism urges restraint. The company law Bill is so far a framework which can match those two government objectives very well. The nettle of corporate law reform of a very ancient legal system is now within the Government's grasp—and from it I confidently predict that it will produce an admirable flower of new company law.