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Company Law Reform Bill [Lords]

I want to concentrate on parts 15 and 16. Clause 399 deals with the business review. I think that the Government should be careful with subsection (2), which concerns the purpose of the review. We should bear in mind earlier attempts to legislate on directors’ activities. In the Corporate Manslaughter Bill, for instance, directors’ duties were very much part of the Government’s original proposals, but that measure was ultimately not as successful as the Government, or indeed the House, would have wished. Revision of the Bill focused on corporate duties and corporate management. I suggest that at some point the Government should think carefully about the risk posed by clause 399(2); a similar situation could arise. Anyone who has worked in business for any length of time will confirm that there is a distinction between directors’ actions and the success of a business. There may be an indirect link. In the other place the link was described as fundamental, and of course that is true, but there is a temporal issue relating to when directors make decisions and when those decisions affect the success or otherwise of the company. I fear that some of the wording of clause 399 is so vague that directors will not be clear about how much detail they should give in the review, or about the time scale within which they should be prepared to give that detail. I hope that the Minister will clarify another aspect of the review. Perhaps we shall be able to return to it in Committee. The performance of directors must be assessed very clearly. It could be said that a director had performed badly because he or she had not made decisions quickly enough to take advantage of certain business opportunities. That might not be flagged up in a business review, but it could arguably represent a bad case of poor director performance. We should consider whether the business review will focus on optimising directors’ behaviour in terms of optimising the success of companies, or whether it will focus merely on whether the directors have performed adequately. Members will know of many examples that have arisen over a number of years. Minimal investment in a well-known brand may lead to a catastrophic decline in sales, but that may not have been clear at the time when the directors in question were in charge of the company. There is an indirect link between directors’ duties and actions and the success of their companies, and I am not sure that the business review will make that link clear enough. We must ensure that if there is a review, it delivers what we all want: a clear understanding of not just the directors’ assessment of their own and the company’s performance to date, but how they intend to build on that performance. The clause is very judgmental. In an increasingly changing business environment, companies and directors face difficult decisions. They may have to choose, for instance, between an expansion strategy involving buying other companies and going on an acquisitive spending spree and a period of consolidation in which they can concentrate on core business activities. It may be very difficult for shareholders and company members to assess whether proposed decisions will prove to have been right in the long term. There will, of course, always be some uncertainty around the business review, but that is an example of where the intention of the measure as it is currently worded may not necessarily be fulfilled. I am sure that we will come back to that in Committee. Often, the performance of directors is seen as clearly in how well the internal processes of the company are functioning as in the company's performance itself. If the company is in a market that is rapidly expanding and it was for various historical reasons an early entrant, it can apparently be incredibly successful, despite the directors. The directors may be taking decisions that add bureaucracy to the company. They may be imposing reporting requirements that are unnecessary and that subsequently hold the company back. However, at a time of an expanding market, those matters may not be focused on by either the shareholders or any potential investors who may be interested. It comes back to the temporal aspect. Linking clause 399 to clause 158 could, because of the arguable weaknesses in clause 158, present some problems in law in assessing whether the business review delivered what was intended. There is the other adequacy test regarding clause 158. I presume that that would need to be considered before an assessment could be made of whether a business review had been adequate. I am sure that we shall discuss in Committee whether the Government intend to have that dual conditionality. I look forward to probing the matter in more detail. I should have said at the beginning of my contribution that I am a member of the Institute of Chartered Accountants in England and Wales and spent some time auditing during my training, as many people who become members of that institute do as part of their qualification. I welcome the fact that the concept of the true and fair statement is now enshrined in clause 375 and the related clauses 378, 386 and 485. That is a step forward. As for the further major change to the audit profession in clause 525, we need to be careful that the way in which the Bill is phrased regarding liability limitation agreements will enable the Government to deliver the benefits that they seek to achieve. I am sure that many in business have concerns regarding that agreement and the potential for confusion that it may cause. Therefore, it is important that, as we refine the Bill, those risks and the need for balance are thoroughly addressed, particularly in Committee. Obviously, any concept of proportionate liability would be new in the audit profession. We need to be careful to ensure not only that the audit profession receives the comfort that it is seeking to achieve through the clauses that the Government have now put into the Bill, but that, in doing so, small shareholders and other shareholders in the company being audited feel that the audit opinion expressed on the accounts following an audit that was underpinned by a liability limitation agreement is still valid. Therefore, we need to be careful that we do not undermine the purpose of an audit by having that agreement. I am sure that that is not the Government's intention and that the audit profession is seeking to have those agreements in place, so that it can perform high-quality audits that assure shareholders about the true and fair nature of accounts. However, we need to be very careful to ensure that the Bill delivers what is intended; otherwise, the unintended consequences could be profound. For example, shareholders might feel unable to have confidence in a report produced by an audit company that signed a limited liability agreement to accept a certain proportion of liability, without knowing in advance the circumstances in which that agreement might be called upon in deciding whether liability had been expressed in relation to potential problems with that company. In Committee, I want the Government to think long and hard about clause 497—formerly clause 498—and the offence of ““knowingly or recklessly”” mis-auditing accounts. We need to couch this offence very carefully. In the other place, it was argued that a far better phrase would be ““dishonestly or fraudulently””. As someone who has worked in the accounting and auditing profession, I know that, in looking at the risk-based approach to auditing, it is often very difficult to draw a line between when to accept and not accept management explanations of anomalies in an audit and changes in the figures from one accounting period to the next. At times, such a task confers a significant judgment requirement on all levels of an audit company. Any audit that is signed off is the product of the judgment of a number of people who participated in the audit on behalf of the auditing company. On reading through the relevant debates in the other place, my initial reaction was that the phrase ““dishonestly or fraudulently”” might better capture what the Government are seeking to achieve. That said, I look forward to debating this issue further, and doubtless we will return to it in Committee. It is important that we do so, because if we do not get it right, there is a danger that we will put off some of our brightest, most initiative-driven business people from entering the audit profession. We need to make sure that the law is structured in such a way as to encourage those who encounter an issue in an audit to raise it, rather than to sweep it under the carpet. I am sure that that is the intention behind clause 497, but we need to ensure that it delivers on that intention, and that it does not put off our best and brightest graduates from entering the audit profession in the long term. They may worry that if they make a judgment during an audit that subsequently proves wrong, they will be liable on behalf of their company. Nobody wants to be in that situation unnecessarily. The Bill has gone through a number of iterations in reaching this stage, and all Members will agree that it has been improved immensely since the first draft. We Conservatives look forward to playing our role in ensuring that any remaining concerns that we may have on behalf of the business community, stakeholders and those worried about corporate social responsibility will be thoroughly debated and ironed out in Committee. I certainly look forward to playing my role in Committee in the coming weeks—if I am lucky enough to be selected, which I very much hope will happen.