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Company Law Reform Bill [Lords]

I am grateful for the opportunity to participate in the debate on such an important measure. The Bill is a huge piece of legislation, amounting to a wholesale reform of company law. Indeed, such is the extent of the reform that it is surprising, as my hon. Friend the Member for Hornchurch (James Brokenshire) pointed out, that it was not originally framed as a consolidating measure. It is good to see that it now is. I shall confine my remarks to part 10, which deals with the duties of company directors, and particularly to the provisions in clause 158, which was described by the CBI as perhaps the most important clause in the whole Bill. The duties of directors are currently defined by common law and equity through developed case law precedent. Part 10’s aim is to introduce a new statutory codification of the general duties owed by directors to their companies and shareholders. It would appear from the explanatory notes and from the remarks of the Attorney-General in the other place that the aim of the codification is to make the law clearer and more accessible for the lay user, but it remains to be seen whether that aim will be realised. It is the job of the courts, of course, to carry out the function of interpreting the code set out in part 10 and no doubt they will do so. Over time, as interpretation succeeds interpretation, the code will become less clear to the lay reader, who will then need a lawyer to interpret it. The Law Society, of which I am a member, takes the view that creating greater clarity for the lay reader would be better achieved by the publication of a non-statutory guide to directors’ duties. I understand that the Government have already made it clear that they intend to publish non-statutory guidance on the statutory statement of directors’ duties. That rather questions the value of statutory codification, if it is incapable of standing alone without such guidance. The Law Society has also pointed out, quite properly, that the new code contained in part 10 will have an uncertain relationship with the existing common law in that it is unclear how far concepts that have been developed under the common law will continue to be relevant under a statutory regime that uses different terminology and introduces wholly new concepts. Common lawyers well understand what is meant by the expression ““acting in the interests of the company””. It is uncertain how acting to promote the success of the company for the benefit of its members as a whole will differ from acting in the interests of the company. The explanatory notes to the Bill make it clear that the Government are seeking to promote the principle of enlightened shareholder value, or corporate social responsibility—an aim that is, no doubt, shared by hon. Members on both sides of the House. However, given that clause 158 sets out what is effectively a checklist—albeit non-exhaustive—of matters that are to be taken into account in establishing whether that principle has been achieved, one can only sympathise with the comments of the Association of British Insurers that codification is more likely to lead to a compliance-based approach to the exercise of directors’ duties, rather than one based on the making of good faith judgments, which is more likely truly to promote the principle of enlightened shareholder value. The ABI further points out that directors could feel obliged to take expensive and time-consuming legal advice, which may impair efficient decision making and add an extra layer of bureaucracy to the practice of company boards. The codification of directors’ duties, therefore, may not achieve the Government’s goal of greater transparency and accountability, but instead create new uncertainties, greater administrative burdens and a tick-box approach to the discharge of directors’ duties. The Attorney-General reiterated in the debate in Grand Committee in another place that the Government’s aim is to make the general duties of directors clearer and to make the law more accessible. He commented that the traditional formulation of directors’ duties as being the obligation to act in the interests of the company did not achieve that aim, but it is hard to understand how greater clarity will be introduced by the Bill’s formulation. A major concern must be that part 10 will apply, of course, not only to the directors of large multinational companies but to small family undertakings. The duties set out in clause 158 are in no sense reduced in the case of a corner-shop company. It might be said that that is as it should be, but in truth, smaller companies simply cannot afford the compliance-based approach that appears to be envisaged in clause 158. Clause 158 will require a company director to act subjectively in good faith, but whether he has done so will be judged objectively against the test set out in clause 158(1). The additional pressures that that will place on directors, particularly those of small companies, is predictable. There will be longer board meetings and audit trails of compliance. The CBI points out:"““The list of stakeholder interests to have regard to in Clause 158 is much more diverse than the current requirement to have regard to the interests of employees. And, being more diverse, it is more difficult to demonstrate compliance, even ""though the interests of shareholders remain paramount. We therefore argue it should be more clearly stated on the face of the Bill that it is for the directors and the board to determine the manner and extent they have regard to stakeholder interests, according to their good faith business judgement.””" I agree with the CBI’s criticism of clause 158. In conclusion, I have no doubt that the Government mean well, but if it is not amended, clause 158 may turn out to be a fertile source of future litigation. It will certainly impose greater pressure on often already hard-pressed directors, particularly those of smaller companies, without leading to the promotion of the principle of enlightened shareholder value. I believe that clause 158 is in dire need of amendment, and I look forward to its discussion in Committee.