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Company Law Reform Bill [HL]

My Lords, I join in the welcome and the congratulations to the noble Baroness, Lady Bottomley, on her maiden speech. If my congratulation is brief I am sure that she will understand that it is no less sincerely said. I am also able to exercise the principle that I always like to welcome any measure that my noble friend on the Front Bench brings before the House. In his first dance through this vast legislative operation he did much to rebut the maxim with which my illustrious predecessor and the great company law scholar, Professor Jim Gower, used to open the academic year. He always said, ““Unhappily, I have to tell you company law is not a very sexy subject””. It becomes more sexy if one follows the Herculean efforts undertaken by the Company Law Review Group, which was to look at it not only as a dry commercial subject, but as one that governs relationships of many stakeholders and as part of social law. That is why it proposed the OFR—the Operating and Financial Review—to which noble Lords have so rightly referred. I leave aside what I was going to say about it, except to comment that its sudden death through a veto from other parts of the Government astonished me. I want to hear more from my noble friend about it. In the words of the Company Law Review, it caused large companies to report on their stewardship of a wide range of social relationships. Whatever noble Lords think, that stewardship is already recognised in company law and in the Bill. I leave aside consolidation in the hope that someone—I hope a young man—in the vast labyrinth of Whitehall is already writing the first clause of a consolidation measure for 2012, in which he will put together a single thread—that is important—of company law, takeover law and financial services. Of course, as its great novelty, the Bill takes up the maxim of the Company Law Review, ““Think small first””. The trouble is—if I can put in a phrase and leave out a page—that the Bill does not ““think small first”” in its deregulation of formalities, AGMs and so on, but it ““thinks private company first”” and the two are not the same, as every practitioner in company law will understand. ““Think private company”” is a very different proposition from ““think small””. It is also important to notice what the Bill would do with the basis of our company law. Every company law system imposes a price for two necessary privileges, which are incorporation by registration of the company as a separate legal person and, secondly, as we have had since 1855, the privilege of limited liability for the members. The Bill actually adds a new area of immunity for the Takeover Panel as regards its address of the rule of law, but that is a footnote. The price that we have always insisted on at the core of our system is, first, adequate, appropriate disclosure of a company’s affairs and, secondly, protection of investors and the public against fraud. In company law, ““fraud”” does not mean merely crude misrepresentation or deceit; it means a sustenance of those fiduciary duties and principles of which the great American Chief Justice Cardozo once said that the important thing was that they were ““somewhat higher than those of the marketplace””. The claims that the fiduciary duties have recently been tightened in the courts are, in my submission, erroneous. They were a kind of allergy brought on by severe attacks of what has been called City-equitable-itis. There is no tightening of the fiduciary duties and it is important that the passage of the Bill is not an occasion on which they are developed. I say that about only Part 10, which has been much discussed. The clauses in Part 10 of the Bill are a brave effort clearly to set out the basic fiduciary duties in statute. The fact that people do not realise that they were already there in cases, in slightly different language on occasion, does not alter my view. Nor do I think that the clauses on the derivative action are other than a brave and clear effort to set out something that is in our law already. I may be too influenced by having spent many years with the rule in Foss v Harbottle, but my studies in this area lead me to believe that these two parts of the Bill are an excellent effort, albeit they will be examined closely in Committee. Unhappily, Committee will be in that quiet legislative graveyard of the Grand Committee from which one can play truant only if the pressures of important matters in the Chamber force one to leave it. It is a pity that the Committee is not taking place in the Chamber. The most important clauses—as has been pointed out—are those that centre on the basic duty of directors to act in the interests of the company. To summarise my view, there are not the difficulties that people have been putting forward on Clauses 154 and 156 and that part of the Bill. There is a requirement that directors act in what the Company Law Review called,"““an enlightened attitude to shareholders’ interests””." Curiously, that is similar to what the CBI said in 1973 when it reported that a company, particularly a public company should act as,"““a good corporate citizen in business””." However, the clauses on corporate governance are important for another reason and I make two final points on that. First, simply analytically, executive directors have come to occupy a new social stratum—a new position—not just in Britain but around the world. Recent research has disclosed very clearly that that has little or nothing to do with the so-called global competition for good executives. Of course, the development is at its most objectionable when it takes the form of very high rewards for business failure. Marconi was only one example—there are many others—about which noble Lords can read in the Library where I have deposited a publication dealing with these matters. Quite apart from failure, the House must understand that, in the past two decades, the takings—or what American colleagues call rent extraction—from corporations by executive directors have risen exponentially. They have risen, are rising and should be restrained. The Government must also understand that the three orthodox remedies for that—greater disclosure, supervision by institutional directors or supervision and monitoring by an expanded pool of post-Higgs non-executives—have all shown signs of failure. At the very least, my noble friend will surely amend the Bill to make the shareholders’ resolution on directors’ remuneration, in which we include salaries, share options, incentive plans and what one professor in the 1980s called an exceptionally diverse and expensive perquisite of large scope and ingenuity. Surely the shareholders’ view on that coming from the remuneration committee should be made final. There is a further reason to believe that the Bill should at least include some procedural measures to deal with this social question. Brendan Barber of the TUC recently said that directors,"““have continued to build up enormous VIP pensions, while they tighten everyone’s belts except their own . . . [They] already get huge salaries and they should be in the same pension scheme as their staff””." He said:"““It’s time to end pension double standards””." Well, I do not know about that, but certainly riches overflow in corporate pension pots while ordinary folk fear, after a lifetime of toil, for their old age in their company pension schemes. I have various examples of that, but time does not allow me to describe them although it would astonish some of your Lordships who I find are not quite ““with it”” in knowing how far this has gone. Similarly, I must leave aside Part 31, although I accept that we should take a close look at it because it seems, as has been said by your Lordships’ committees, to go beyond the normal rules of legislation. Subject to all that, I welcome the Bill, which has a vast number of sensible and practical proposals.