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Company Law Reform Bill [HL]

My Lords, company law is central to our prosperity. It is important, therefore, that it is up to date and able to meet the needs of a modern, dynamic economy. As the noble Lord, Lord Wedderburn, has pointed out, our company law is based on principles largely established in the 19th century; namely, that the right to limited liability brought with it certain responsibilities, and that the advantages should be matched by arrangements for accountability. A thorough overhaul was long overdue to make the law clearer and more accessible. I join with other noble Lords in broadly giving a warm welcome to the Bill. I recognise that the choice of the word minimalist to describe a Bill with 885 clauses may seem somewhat bizarre, but the Government have, by and large, followed the principle of preferring codes to over-prescriptive legislation. There are a couple of exceptions, which I hope will be addressed in Committee—for example, directors’ responsibilities, which might be handled in another way. By and large, they have not over-legislated here. It is a big Bill because, frankly, company law is a very big subject. As a small side issue, I suggest that the DTI allocates a small promotional budget to export our legislative system on company law abroad and counter the regulatory imperialism of the SEC, which is exporting American methods into Asia, in particular. We start with the huge advantage that Commonwealth countries by and large have company law based on ours. Without being chauvinistic about it, I believe that our system is better than that of the United States, where over-legislation has produced corporate scandals which, by and large, we have avoided. We are more than pulling our weight in Europe in these matters. I attended the European Corporate Governance Conference in London in November, where Commissioner McCreevy said that it was quite clear that Europe has got the message that we need to have a proper balance in the tension between accountability and entrepreneurship. He made the point that:"““Despite having an Internal Market of over 450 million, we still make it difficult for companies to exploit this. We need more entrepreneurs and we need to make it easier to set up, and to wind up, businesses. Let’s face the facts. How easy is it to do business in the EU? Comparatively, not very””." He instances only two countries in the top 10—one of which, I am glad to say, is the UK. I congratulate the Government as this Bill is a model of how legislation should be introduced. I recognise the, perhaps, legitimate complaint from the Opposition that it took rather too long to produce the Bill; but I should much rather spend more time in preparation than have bad legislation rushed through and then repent it for five years before having another legislative window. The consultation has been extensive; consultation becomes real only when people see draft clauses and realise the effect of them and how they will impact on their businesses. At that point, you get a genuine response, rather than over-general submissions to the government department. The one exception that I must make is with the OFR clauses. At best, I may say that the Government have handled that matter in a messy way. We in the All-Party Parliamentary Corporate Governance Group commissioned some research into the OFR, and the broad conclusion is that while all the companies thought that the Government had done extremely well in consulting on how the OFR should be implemented, they had not done very well in deciding whether the OFR was necessary. My present feeling is that the Government have got it about right with the business review proposal, but I must admit that they have gone a very long, round-about way in getting there. At the start, the proposals frightened a lot of people because they meant that expressions of opinions about futures would have to be audited. Frankly, auditors are not equipped to second guess the future; they are equipped to measure the past. The Government got away from that and I, along with the noble Lord, Lord Freeman, and others, in this House in March, broadly welcomed the OFR as meeting the needs of business as it then was. We then got a shock when the Chancellor said that they were not going to proceed with it; then we heard that it was not really killed off because the business review was coming in its place. I believe that we have ended up in the right place, but we could have got there a bit more efficiently. Thirty years ago we had regional stock markets in this country—we had one in the city of Glasgow. Individuals now own a quarter of the percentage of shares that they owned then. Insurance companies, by contrast, own twice as high a percentage, pension funds three times as much, and foreign investors nearly five times as much. So the relationship between shareholders and companies is radically different from what it was even 15 or 20 years ago. The difficulty is how we mediate trust between essentially remote investors and companies. Even active investors are not as close to companies as owners used to be. I am not for a moment suggesting that the relationship between owners and companies was always healthy; sometimes they were too close to the company and interfered far too much. But it is undoubtedly very difficult to get a relationship with investors. It is a simple question of time; it is all right for the BPs of this world, but for the vast number of companies it is more difficult. I was chairman of a company with just under £400 million market cap; expecting shareholders to spend time seeing me even on a once-a-year basis is frankly over-optimistic in such a circumstance. You cannot get an effective dialogue going. I shall concentrate on the issue of shareholders and directors, leaving others who are more expert to concentrate on the important provisions on audit. ““Shareholders”” is a term that covers a multitude of sins, as it includes owners, directors, officers and staff, all of whom may be thought to have an interest greater than simply financial in the company. It also involves real investors, such as institutions, which think, at least at the beginning, that they will be in for the long term. But it includes, too, straightforward gamblers, who are gambling on an increase in the share price. There is nothing wrong with that; it is a perfectly proper use of the stock market. People frequently gamble on a company being taken over, which is hardly always in the best interests of the company, but it is a straight punt—instead of backing horses, you back shares. Almost instinctively, you ask yourself whether those people have exactly the same rights as someone who has held shares for 30 years. Regrettably, the answer must be yes, as I see no other way of dealing with it—and the rewards of holding shares for a long time should come through mitigating capital gains tax on them, as in fairness the Chancellor has by and large done, so that there are distinct benefits to encourage long-term shareholding, which is preferable to short-term shareholding. There is also a difficulty with shareholders who are remote that they always want verification of things, because they are dealing with people whom they do not really know. That creates a kind of ““audit society””, when people look for every statement to be vouched for by an independent observer. Life does not work that way. I accept that rules are necessary—and, to some extent, cars with good brakes can drive faster, so rules are helpful. They help entrepreneurism. But there comes a point when the scaffolding of regulation can obscure the structure of the building. I hope that we do not ever reach that stage in corporate governance, or it will become a joke. The problem is that if you over-rely on rules, you get a false sense of security. I remind the House that Enron was given an A-rating by CalPERS—and if that rating was translated into an investment decision, a lot of public service employees in California must be slightly worried about their pensions. As for directors, I rather like the concept of enlightened shareholder value, although whether you should put it in a statutory code or deal with it in another way I am not quite sure. I shall consider that in Committee. But I rather like the idea, as it is common sense that directors’ enlightened self-interest should lead them to do all the things that various noble Lords would like to see done. The only difficulty is trying to do that by legislating for it; the idea that by legislating for something you achieve it is a delusion that politicians constantly suffer from; it does not work that way. Frequently what happens is that if you over-legislate, people simply avoid the legislation. That is why the legal profession is quite as well remunerated as it is at the moment. As good example of this, I bumped into a contemporary of mine at Glasgow University, Sir Menzies Campbell—and in the light of current circumstances I should say that he is much younger than I am—who reminded me that there is an international athletics regulation that at the Olympics or the Commonwealth Games, there should be a 14-foot fence between the male and the female quarters. When there were games in Brazil, that regulation was observed by putting a single strand of wire 14 feet off the ground—and a lot of legislation is very much like that. In conclusion, I urge noble Lords to look at ways in which to promote the restoration of trust, because unless you have trust between shareholder and director, no codes are going to work. The crooks will still get away with it, and the good guys will avoid going into business. You have to restore trust—and I believe that the Bill could go a long way to doing that. I believe that it is capable of amendment, I hope beneficial, in Committee.