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Company Law Reform Bill [Lords]

I welcome the Bill. It has been a long time in its gestation, but that is its strength. It covers many aspects of company law, but I want to concentrate on just two clauses: clause 158 on the duties of directors and clause 399 on the business review, to which many hon. Members have alluded. The Bill addresses a fundamental premise. Should a company operate only in the interests of its members—its shareholders—or should it have a wider remit and operate in the interests of stakeholders? If we accept that wider remit, how should that be managed: by legislation, regulation or voluntary code? The old narrow view of the responsibilities of company directors has moved on now that we are in the 21st century. Historically, the legal responsibility of the directors of a company is to maximise shareholder value, usually either by a return in the form of a dividend or by capital growth, or by a combination of both. But should financial profit be the only motivating factor in doing business? In my view, there is a wider responsibility to consider the interests of employees, the impacts—both social and environmental—of doing business on the local environment, and the impacts of a company’s operations on the economy of the whole country and globally. That is the essence of what has been referred to before as corporate social responsibility. It makes good business sense for organisations not just to accept corporate social responsibility but to make it central to their strategic decision making. The Bill will encourage them to do that. The Labour Government are committed to promoting responsible business behaviour as a key part of their sustainable development strategy involving both the public and the private sectors. As a Labour and Co-operative MP, I represent the co-operative movement and corporate social responsibility is fundamental to co-operative principles. My aim as a Co-op parliamentarian is to encourage all organisations, not just co-operatives and social enterprises, to take on corporate social responsibility, in the interests of us all, to enable businesses to grow in a sustainable way. Corporate responsibility can encompass many things: community involvement in the form of charitable gifts, community investment, commercial initiatives in the community, or even just allowing employees time off to do community volunteering projects. It looks at the benefits to the wider community and environment from day-to-day business operations, job creation, investment in a region, taxes paid, goods and services provided and general wealth creation in our economy. Increasingly, it is about responsibilities to the whole value chain. For example, where are raw materials being sourced and to whom are goods and services being sold? Corporate responsibility is about business having a positive impact on society and the environment through its operations, products, or services. One might ask why businesses should sign up to that and what is in it for them. More and more, businesses are recognising that corporate social responsibility can bring them a competitive advantage, especially in the consumer retail sector. Corporate value is increasingly measured against non-tangible assets as well as tangible assets. What price is a company’s brand or reputation worth, and how quickly can that be lost if it is seen to be adversely damaging its local environment, or ruthlessly exploiting child labour overseas? In The Times last week, there was an article about the clothing chain Zara being dogged by child labour allegations following reports that Portuguese children as young as 11 were being paid just €20 a day to make shoes. Inditex, Zara’s parent company, has recognised the negative effect that that could have on its business. It has a code of conduct that bans the use of child labour by its subcontractors. It has pledged to investigate the allegations and, if they are true, cancel the contract. Child labour accusations can be seriously damaging to retailers as more shoppers become ethically aware. Both Nike and Gap have faced consumer backlashes following claims that they had used child labour. The argument is not about just consumers. In the past, investors have been either people with large amounts of disposable wealth, or pension funds in which individuals have had little control over how their money is invested. Now, however, we have a whole new population of potential investors. In the pensions White Paper that was published a couple of weeks ago, there were proposals for increased levels of personal savings and choices about personal pension plans. All new-born babies now have a child trust fund, and parents who had never before considered investment now have funds to invest and can exercise choices. If financial returns on products are broadly similar, people will consider other criteria when making choices, such as the ethical background of investment opportunities. People need a way to measure and compare the environmental and social performance of companies. Many leading businesses have recognised that and now produce an array of corporate responsibility reports. However, with no standard for reporting, how do the public differentiate between a business that reacts to problems or crises as they arise and one that puts corporate social responsibility at its core and involves that in all its business decisions? What about organisations that do not rely on a well-known brand? How do we ensure that they take on board wider interests? The sheer number of people who signed up to the Make Poverty History campaign last year demonstrates that there is a willingness to address exploitation in the developing world. However, do ordinary people in the street know which companies are continuing to exploit workers in the developing world with poverty wages and unsanitary and unsafe working conditions? Are we happy to let subsidiaries of UK companies to continue to do that safe in the knowledge they have no legal responsibility to tell their shareholders they are doing so? Like other hon. Members, I think that the matter is too important for a voluntary code—regulation is needed. Health and safety is considered too important to be left to a voluntary code, and corporate responsibility is also too important to be left to such a code. I do not want to diminish the huge step forward that the Bill makes. For the first time, it defines in legislation that a company director should have regard to other stakeholders, not just shareholders, when considering the likely consequences of any decision in the long term, the impact of the company’s operations on the community and the environment and the desirability of the company maintaining a reputation for high standards of business conduct. However, I am not sure how enforceable the measure will be, given the use of the phrase ““have regard to”” and the fact that the Bill represents a step back from a pluralist model that would require directors to have a positive duty to take reasonable steps to minimise significant negative impacts on wider stakeholders. We need to examine carefully how to prevent UK companies from taking advantage of weaker regulatory regimes overseas, especially in developing countries. I appreciate the arguments against that approach and that companies may choose to incorporate in other countries. Of course, we cannot act isolation in the UK and thus we need to bring other countries with us. However, there is scope for further strengthening the definition of directors’ duties, so I hope that that matter will be addressed in Committee. It is often said that we are powerless in the face of globalisation and the power of capital. However, if we do not do something about sustainable development, the power of capital will be worthless in the face of environmental and economic collapse. We need to consider the reporting regime, about which many hon. Members have spoken. Reporting should be a management tool for a business and the building blocks of an action plan, rather than just another bit of paper for shareholders. I, like many others, was disappointed when the operating and financial review was abandoned last year. However, I am pleased that many of the provisions have been incorporated into the business review, especially through clause 399, although, like other hon. Members, I would like the measure to go further. There are still no statutory reporting standards, and that to me is key. One would not expect a company to make up its own financial reporting standards, so why should there not be standards for social and environmental reporting? There are many examples of good practice in corporate social responsibility reporting. Let us use the companies that have been the trailblazers and show the rest of the business world how such reporting can and should be done. There should be standardised performance indicators that set out benchmarks and requirements for stakeholder dialogue and public reporting. Let us give consumers and investors the power to make informed choices by ensuring that companies present their reports in a standardised way so that people can make meaningful comparisons. I accept that the UK Government cannot act alone. There has to be a balance of incentive and regulation and, in our globalised economy, we have to take other countries with us, but we also have a duty to show leadership. We should start by agreeing the basic premise that a company does not exist in isolation and capital is only one of the building blocks that add value. From there, it is but a short step to acknowledging that directors should act in the interests of stakeholders as well as shareholders and with corporate social responsibility. I warmly welcome the Bill as a massive first step along the road of sustainable development and balancing economic growth and business success with responsibility to stakeholders and the wider environment. However, as I have said, there are aspects of the Bill that do not go far enough, so I look forward to further debate as the Bill progresses.