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Company Law Reform Bill [Lords]

Since the suggestions that have come from that corner of the House have been so utterly unreasonable and un-thought-through, I am not going to waste the time of the House by giving way to them, or at least not for some time. Whenever we look at a Bill, we should have regard to certain fundamental principles. I have already mentioned proportionality. Another obvious one is the issue of justice, in which we must consider whether a Bill is based on—or at least consistent with—certain fundamental principles on which we all agree, such as equality before the law and non-retrospectivity. As far as I can see, this Bill is fine in that regard. Another consideration is whether a proposed piece of legislation is rational—in other words, whether it will encourage virtuous behaviour and discourage behaviour that is damaging to the interests of society as a whole, or whether it will have a perverse impact. On the whole, the Bill is well conceived and passes that test pretty well. We must also consider whether a prospective law is clear and creates legal certainty, or whether it creates legal uncertainty. Legal uncertainty can be extremely damaging, especially in businesses that will be impacted by company law. We must have a society in which people can make investment decisions with market risks attached, and sign contracts with other parties—corporate or individual—with reasonable certainty that those contracts will be enforceable in law and that the regime under which the investment decisions involved in setting up or expanding a company are made will be sustained by subsequent decisions of a court if they are challenged. When Parliament adds legal risk, it does a very bad day’s work for the economy, because the total risk involved in investment and in other business transactions may be enhanced. That could result in less investment and fewer transactions for any given prospective rate of return, which could ultimately mean a lesser gross domestic product and therefore a lesser GDP per capita for all of us. It is very simple. So we need to consider any Bill that comes before the House, but particularly a company law Bill, against the criteria of whether it will increase or reduce legal certainty, and whether it will enhance or reduce legal risks. I am going to come back to that, which is highly relevant to the Bill. I shall now discuss some of the most problematic aspects of the Bill, which have received most attention. Clause 158, in particular, has already been the subject of considerable debate this afternoon. It deals with the duties of directors and I intend to comment on them. Frankly, all but one are statements of quite obvious obligations, which anyone becoming a director should—and, if half-sane and half-competent, would—accept without question. These definitions go to the heart of the duties of directors. The first in paragraph (a) states that directors should, in taking decisions, consider"““the likely consequences of any decision in the long term””." That is perfectly obvious. Any decision is likely to take into account the likely consequences in the short, the medium and the long term. In the case of financial decisions, a number of financial techniques are available for relating long-term to short-term decisions—discounted cash-flow analysis, for example. These decisions are part of the day-to-day and natural responsibilities of directors. Paragraph (b) refers to"““the interests of the company’s employees””." Well, anyone who is in business is in the business of management and in the business of recruiting, motivating and retaining employees and getting the best value for the company from them. Anyone who neglects employees cannot possibly be running a good business. A business is as good as the value of its employees and that applies whether it is a service company or a manufacturing company, a more or less labour-intensive or capital-intensive business. If employees are not doing the job properly, are unproductive, inefficient, poorly motivated and not conscientious, the business will not run properly. That seems to be absolutely fundamental and unexceptionable. I cannot imagine that anyone would be opposed to that statement as one of the fundamental obligations of directors. Paragraph (c) refers to"““the need to foster the company’s business relationships with suppliers, customers and others””." Again, anyone who—[Interruption.] Colleagues are laughing, precisely because that is a statement of the obvious. It is surely a legislative platitude. Anyone who wants to stay in business for more than five minutes obviously has to have regard to the interests of customers. If a company does not have any customers, it will not, by definition, be in business. Every day, the managers and directors of every well run business are thinking about the customers. They wonder whether their customers are satisfied, whether they could come up with a better solution for them, whether the reactions of customers to the latest contract have been taken into account and so forth. That is absolutely clear. Equally, it is not possible to run a business in most circumstances unless there are reliable suppliers. We want as many people as possible to compete for that business in order to secure the lowest possible prices and the best deal. That can be done only if a company has a reputation for being a good partner to deal with and a good customer to those suppliers. If companies become awkward and difficult to deal with, a price will be paid because fewer will quote so aggressively for the business. At best, a company will end up paying more for the supplies; at worst, those supplies may be interrupted. Once again, it is a statement of the obvious. Paragraph (e) mentions"““the desirability of the company maintaining a reputation for high standards of business conduct””." I cannot imagine anyone wanting to be on the board of a company unless he or she took some pride in the fact that it had the highest possible reputation. That translates, of course, into a good image with potential customers. The fact that someone is seen as being a reliable and good person to do business with is vital for success in the market and in dealings with other stakeholders, including suppliers. Finally, paragraph (f) refers to"““the need to act fairly as between members of the company.””" I am particularly pleased about that. Although it is platitudinous in the sense that it should be obvious to everybody, I can remember occasions when I have sat around the boardroom table and had to remind colleagues of that particular obligation. It arises when a director is associated with one—perhaps a large minority or a majority—shareholding and is inclined to be insufficiently aware of potential conflict. When a director is sitting around the boardroom table, his or her obligation should be to the totality of shareholders of the company. Under no circumstances must a director be influenced by the interests of one particular minority or majority shareholder. I am glad that that vital aspect is included. I have no problem with any of that. I think I heard my hon. Friend the Member for Rutland and Melton (Mr. Duncan) saying that he did not like the explicit statement of the obligations of directors because it pre-empted the possibilities for jurisprudence. I believe that he said something along those lines. He believes that somehow the courts would not be able to develop a substantial and continuing jurisprudence in respect of the definition of the duties of directors after the Bill’s passage. If my understanding of what my hon. Friend said is correct, I profoundly disagree with him. To me, the creation of legal certainty is, as I have just explained, a very positive gain. What one does not want is uncertainty about the duties of a director. One does not want to have to wait for the next judgment of a judge. One does not want to have 10 different lawyers giving 10 different views about what a particular judge may decide. One wants to be able to point to a piece of legislation that is clearly and lucidly drafted and to say that it is there, thus creating some legal certainty. I believe that that is a positive advantage and a good reason for including the clause in the Bill. I may well be told that I have completely misunderstood my hon. Friend the Member for Rutland and Melton. Perhaps my hon. Friend the Member for Huntingdon (Mr. Djanogly) will produce some exegesis or a correction to my impression.