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Company Law Reform Bill [HL]

My Lords, company law concerns the creation and regulation of corporations. Too frequently debate focuses on the second of these objectives. The first is even more important. Few could quarrel with the stated objectives of the Bill. My noble friend Lord Hodgson eloquently made the points about the growing gap between the exciting rhetoric and the possible reality that might be developing. Nevertheless, I am well aware of the obligation to avoid controversy when first addressing your Lordships’ House. The Government made a wise choice in introducing this lengthy and complex Bill in this House in the light of the detailed knowledge and distinguished experience of so many in this place. The immediate comments of the noble Lord, Lord Clinton-Davis, make the point all too clearly. I feel privileged to join your Lordships and I am deeply appreciative of the welcome I have received. As a Member for 21 years in the other place, I have long had great respect for the proceedings of your Lordships’ Chamber in terms of the care and attention to detail and the generally constructive and non-partisan approach to legislation. If ever there was a really difficult and complex Bill to be introduced when in Government, I did all I could to ensure that it went to the Lords first. The growth of business is the driving force behind economic development and reform over recent centuries. As the Minister himself said, the creation of joint stock companies and the limitation of individual liability, together with the competence of many Scottish engineers, helped the accumulation and the use of capital. All this led to increasing prosperity in Britain and around the world. Only last week a Heritage Foundation report suggested that in economic terms the UK is the fifth most free country in the world, higher than the US. A major indicator of economic freedom, as the Minister said, is how easy it is to set up and administer companies. Overall, we have done well, and we do not want to go backwards. Starting and running a business is a component in providing opportunity for those coming to this country, including black and ethnic minorities. They can become successful, contributing economically and socially to society. Analysis of the recent riots in France suggests that excessive obstacles in setting up small businesses there prevent enterprising migrants developing a similar stake in the community. I have long been aware of the need to create wealth if we are to fund welfare. Thirty-five years ago, as an idealistic young social scientist working for Frank Field—now a Member in another place—on low-income families, I produced my first report for the Guardian, and published a CPAG pamphlet. It was sent by my father, John Garnett, then leading the Industrial Society, to Sir Keith Joseph, a distinguished former Member of this House. I was summoned to see him, in a state of anxiety similar to that in which I am addressing your Lordships today, and he firmly reminded me that it is so much easier to divide the cake up than to bake it in the first place. There are many socially-reforming measures on which I hope to make a contribution in this House. The only way to realise these ambitions is to pay equal attention to the wealth and employment-creating capacity of our nation. So let me speak more about the Bill. We have some of the best corporate governance in the world and we must not let a rigid legislative approach compromise the pragmatism and flexibility that has helped us prosper. Ours is a principle rather than a rules-based system. Excessive regulation leads to additional administration. Directors become policemen and box-tickers, rather than strategists contributing to successful wealth-creating companies. As the Minister in his own maiden speech said, the success of business depends on,"““enterprise, vision and skills . . . Government cannot provide a substitute for that””.—[Official Report, 12/1/98; col. 863.]" Legislation and regulation cannot stop company fraud. We should develop mechanisms to ensure that alarm bells ring earlier. We must train people to recognise the signs. We must empower people to be independent and courageous in their views. We must encourage critical friends. Independent non-executive directors can play a key role. I was pleased that the Minister highlighted the work of Sir Derek Higgs in his recent report. Before going any further let me declare my own interests as set out in the Register. I am an executive director of Odgers Ray & Berndtson, heading the board practice and so involved on a day-to-day basis with the identification and selection of directors to serve on all manner of bodies. I also sit on a number of both commercial and charitable boards, nationally and internationally. Corporate Britain needs talented directors, both executive and non-executive. But there are already ominous warning signs that the liabilities and constraints involved are preventing some of the most talented from taking up the challenge. The danger of this legislation is that non-executive directors, contrary, I am sure, to the intentions of the Government, will be further deterred or will act defensively rather than independently and, where necessary, courageously. Patience Wheatcroft, the Times business and city editor, predicted that,"““2006 could be the year when quoted companies find that there are simply not enough directors to go round. The rewards do not compensate for the risks involved and people of the right calibre will not volunteer””." She is not alone. There are indications that sought-after individuals are reluctant to join a board, preferring to serve in an advisory or consultative fashion. FTSE 100 companies will be fine with their strong brands, but it is often the smaller businesses, which may need the NED contribution more, that will be vulnerable. It is welcome that the Government are calling for greater diversity in the board room, but these measures may deter precisely those potential NEDs they most wish to attract. Extending the provisions for the indemnification of directors is obviously a welcome step, and those who know, as I know well, Jennie Page, who has been so scarred by recent episodes with Equitable Life, will appreciate that this may take a step forward. She is a public servant of great ability and integrity. Recently she said:"““It’s very difficult to think the circumstances of non-executives are well-defined or well-protected in this day and age . . . If a climate of litigation by boards against their predecessors becomes a generality, you can see how being a non-executive could be a very dangerous thing to be””." The noble Lords, Lord Sharman and Lord Hodgson, have already spoken about the dangers envisaged in the analysis of directors’ duties contained in the Bill. There is a real concern that the statutory code could be unworkable and counterproductive. It may make more work for those from the previous profession of the noble Lord, Lord Clinton-Davis, but directors may feel that they will not be able to move without consulting lawyers as to whether they have complied with the legislation. The strength of the present flexible arrangements is that they are adaptable, flexible and allow for exception—comply or explain. The point about the measures being ““so far as reasonably practical”” has been well-covered. The previous wording of ““where relevant”” seems a much stronger argument. Much may be practical, but not relevant. To have to do something that is practical but not relevant on risk-based proportionality principles would be a significant burden and a diversion of energy. Similarly, the provisions relating to the avoidance of conflict of interest are complex to navigate. It will frequently be far from clear to directors whether a conflict exists. In helping directors to resolve all these matters, the first port of call in most circumstances is the company secretary. I am with those who argue most strongly that we should hold on to company secretaries wherever possible. Very often they are the guardians of the corporate governance structure. They are pivotal in influencing and monitoring the governance of a company, advising on new developments and compliance with codes of practice, regulation and corporate law. They ensure the follow-up of board decisions. They are a primary source of information for executive directors and shareholders alike, and I very much hope that the Minister will look again at this matter. In recent months, Sir Bryan Nicholson has handled the revised, combined code with great skill and effectiveness. I welcome the Minister’s reassurances about the FRC, but I am concerned about the moves in Clause 861 to make the FSA, rather than the FRC, the competent authority to make rules about corporate governance. It may be that that is connected with complying with European legislation, but I hope the Minister will agree that the strength of the UK’s corporate governance regime, for which the FRC is responsible, is its flexibility and the degree to which it commands support in the business and investor communities, and that is precisely because it operates on a non-statutory basis. Can he give undertakings that powers will be taken under this clause only if there is full consultation in advance? The rules of the FSA should be used only as a last resort. Perhaps I may turn briefly to the subject of charitable enterprises. Like many others in this House, I serve on a number of charitable bodies: the Prince of Wales International Business Leaders Forum, the Ditchley Foundation and, closer to home, the Industry and Parliament Trust. These are charitable companies limited by guarantee. Something like 20,000 charities on the register have the same structure and, although there is some mention of them in the Bill, particularly in regard to the exemption from audit clauses, there are a number of contradictions elsewhere. In particular, the rules on conflicts of interest and duty may possibly have a damaging effect on charities. The impression is given that those rules have been influenced by the assumption that directors are paid, whereas of course with charities that is the exception rather than the norm. After the care and deliberation that this House has given to the Charities Bill, I suggest to the Minister that there needs to be further consideration of the way in which this latest legislation will impact if it is not to create a two-tier system of trustees on charities and possibly open charities to some unfortunate developments. After 22 years in another place, although only a few months in your Lordships’ House, I am well aware that the best legislative intentions can easily result in unintended and damaging consequences in practice. I recognise the formidable degree of consultation that has been invested in the preparation of this Bill. I have every confidence that the Minister, in his characteristic manner, will give detailed consideration to the serious concerns raised by myself and many others in this debate.