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Company Law Reform Bill [HL]

My Lords, I come from the generation of business people who admire Peter Drucker as a business guru. He was one of the very first to say that free enterprise cannot be justified because it is good for business. It can be justified only because it is good for society. I think many of us who have spoken this evening would agree with that. This Bill helps to achieve that, and generally has my support. Another thing I would like to say about the Bill is that it has not been prompted by scandal. My noble friend Lord Gordon referred to this. Corporate scandal in America prompted the Sarbanes-Oxley Act in 2002 as an immediate response. Most now agree that it was clumsy and unnecessarily onerous and placed American companies at a disadvantage, so, like my noble friend, I think the Government were right to take their time over this Bill. Some noble Lords have wondered if the Bill is deregulatory. Of course it is. Two-thirds of the old Companies Act has gone in order to delete the outdated Victorian ideas that we should have got rid of years ago. Certainly there are additions, but they too are long overdue. The most important of these is a clear statement of the duties of directors. Because of the absence of this statement of duties, lawyers usually told directors that their sole duty was to look after the interests of the shareholders. In my view, that has been the major cause of short-termism and malicious harassment of directors. Unlike the noble Lord, Lord Patten, and the noble Viscount, Lord Trenchard, I welcome the Bill identifying the various interests and stakeholders to which directors should have regard in fulfilling their duties. I agree with my noble friend Lord Clinton-Davis that perhaps this could be established rather more firmly. At the same time there are measures to strengthen the directors’ accountability to shareholders, and the ability of shareholders to hold directors to account. An important change incorporated in Part 11 of the Bill is that if the shareholders sue directors, any damages accrue to the company and not the claimant shareholders. Some—including the noble Viscount, Lord Trenchard, and my noble friend Lady Goudie—argued that this may lead to American-type class actions. I do not think so. It is contrary to the business culture we have here. I agree with the Minister that removing a lot of the old Victorian rules effectively deregulates and simplifies the formation and running of small private companies. Providing a model set of rules, simplifying reporting, and abolishing the need for meetings, for company secretaries and for maintaining certain registers all eases the administrative burden, and it is to be welcomed. Many of these things have become meaningless. They are simply routine, and serve no purpose at all in most small companies. However, removing these regulations does not mean that directors of private companies can become sloppy. They still have a duty of care to the shareholders and stakeholders that has to be taken seriously, and that is only right. In my 30 years’ experience in business, many companies got into difficulties because the directors failed in these duties. I hope the Minister will reassure me that the removal of the administrative and regulatory burdens for small companies in no way diminishes the duties of care that directors have to ensure the success of the business, because that is especially important in private companies. The Minister told us that one of the objectives of this legislation is to ““enhance shareholder engagement””. No one could argue with this objective; indeed, the combined code encourages active shareholding. However, as the Minister told us, the nature of shareholding has changed in recent years. Some of us own shares in our own name, but, as the noble Lord, Lord Hodgson, and the noble Baroness, Lady Murphy, pointed out, many of us own shares through collective savings like PEPs, ISAs, pension funds or unique trusts. These are all held in a pooled nominee account, so there is just one name on the share register. The Share Centre, which is a share-dealing organisation in the City, agrees with the noble Baroness that over 40 per cent of personal shareholdings have no shareholder rights because their shares are held in nominee accounts. The Share Centre is concerned about this, and I think it has a point. The Bill identifies the problem in Clauses 136-37. These clauses allow companies and shareholders to amend the company’s articles to enable the shareholders to enjoy their rights voluntarily, or, as in Clause 137, the Secretary of State can compel companies to do so. The noble Lord, Lord Sharman, spoke about a voluntary system, but even so the Bill could go further. The reason for nominee accounts is the expense of companies keeping detailed shareholder records. That may have been true 20 years ago, but today information processing and storing electronic data have become so cheap that anything you ever communicate again in your life can be stored for ever. The Bill recognises this by allowing electronic share records and transfers. If companies are going to take advantage of this, they should also commit to providing governance rights for their individual shareholders grouped in nominee accounts. Instead of the Secretary of State having to make regulations to compel companies to do this, it should happen automatically when companies take advantage of the electronic communication rules under Schedules 6 and 7. This would enfranchise all nominee shareholders, and would be in keeping with the Government’s objective of enhancing shareholder engagement. Perhaps the Minister would be kind enough to say something about this. Like other noble Lords, I have noticed in recent years that there has been a rise in different kinds of shareholders. There is a shareholder who views a share as a financial instrument, quite separate from the company. He does not actually need to own shares: they could be hedged, borrowed or derived, and traded as an asset, entirely separate from the company or its governance. He may not hold any financial asset, instead using derivatives to mimic these assets. I am told these derivatives are a good thing, and are used mostly for hedging and for spreading risk. But forecasters say that the derivatives market will grow this year to more than 10 times the world’s domestic product, and I am forced to wonder why you need to hedge more than once. The Bill is strangely quiet about this kind of shareholding. Does this mean the Government are not concerned, or do they hope that the European transparency directive relating to the disclosure of shareholding will clarify this? Or do they think the FSA is the competent authority to deal with it? Perhaps the Minister can tell us. I have the feeling that the enormous growth of that kind of activity has taken all of us, and the Government, by surprise. There are probably more surprises in store, because new instruments are being invented all the time. To deal with this rapid change in types of shareholding and financial instruments, company law has to be frequently updated, so we need the facility to respond quickly. That is why I welcome the power to reform company law by secondary legislation in Part 31 of the Bill. Clauses 776 to 782 impose a lot of restrictions on government action, but even so, in the report published last month, your Lordships’ Delegated Powers and Regulatory Reform Committee concluded that Part 31 should be removed from the Bill. I would regret that. In spite of the concerns of the noble Viscount, Lord Bledisloe, and the noble Lord, Lord Freeman, I think a way has to be found to maintain this right. The Financial Reporting Council has been given the task of keeping these matters under review, but surely the Government must be in a position to react should the council convince Ministers that it is necessary to update the law. Perhaps the Minister could tell us what the Government will do about this. This is a huge and complicated Bill. Like other noble Lords, I do not think there are a lot of votes in it, so there must have been a temptation to put it to one side. But it is important for the economy. It helps to maintain Britain’s being a fair, reasonable, well regulated and secure place to do business. That is why I welcome the Bill.