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The Minister should consider the reasonable arguments that have been put by right hon. and hon. Members from both sides of the House when he replies to this debate.

Mr. Redwood : I share the interests of right hon. and hon. Members on both sides of the House who have argued so eloquently in favour of more non-executive directors, particularly in companies that have not yet taken any steps towards having a reasonable number or which do not have any at all. I welcome the trend towards an increasing number of non-executive directors. As hon. Members on both sides of the House have said, that is happening. There is a healthy growth in their number on the boards of major British companies.

Before I was elected to the House, I was a non-executive director of an industrial public company, and I hope that some of the issues I raised made a contribution to the progress of the company. I do not need persuading that non-executive directors have an important role and are desirable. Many right hon. and hon. Members have quite rightly asked me how their number will increase if there is no statutory requirement to place such people on boards. I think they will spread for the same reasons and by the same mechanisms which have caused them to spread in recent years.

First, the excellent work by Promotion of Non-Executive Directors, which has been praised in this debate, will continue. The service that it provides by advising companies and making available lists of suitable candidates is invaluable and is encouraging many companies to increase the number or to take the step towards having some. Secondly, the role of the Bank of England is important, and that has been mentioned. Thirdly, the fact that it is good practice for companies to take on such people is becoming widely accepted in the City, in the financial markets and among shareholder groups, and that will lead to more pressures for non-executive appointments. Finally, there will be shareholder and banker pressure in particular cases, and perhaps more generally, if companies do not have boards that meet the requirements of shareholders and bankers when discussing company matters at the AGM or putting forward loan proposals and other financial arrangements.

The new clause is similar to proposals voted down after extensive discussion in Committee. I have three fears about moving to a statutory system. First, I am advised that the basis of British company law depends on the creation of the category of director and the law does not recognise whether people work full time, part time or very little at all. If I accept the new clause, I cannot be sure that the rest of company law would work, because we would be intruding the concept of independent directors on existing company law based on a single category of director with general responsibilities. That could be dangerous and could have consequences not foreseen by the supporters of the new clause.

The second matter relates to my understanding and view of how company boards work. One of my hon. Friends said that he thought that Ministers were concerned about the tradition of collective decision taking on company boards. Such a proposal, cast in the way that it is and with the modest pressures suggested in the new clause, could disrupt that tradition of collective decision

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taking and could make personal relationships within boards more difficult. That might not be in the interests of shareholders or the company.

In the end, a company depends on good debate in the board, mutual trust between all its members, and a belief by the non-executives that the chief executive or the chairman--or both if they are executive jointly--are broadly taking the company in the right direction and making the right decisions. The non-executives can apply pressures and skills to individual policies. It is rare for non-executives to have to take more decisive action about the structure of the executive board. If they were there as a separate group clearly marked by law it could create more tensions and hostilities which could create suspicions within the board. That might not be desirable.

My final reason for not accepting the new clause is that while the House could pass the measure and each company designated under the proposal would have to appoint independent directors who would be so named by the clauses, we could not guarantee that they would be genuinely independent people. It depends on the dynamics of the company and the politics of the board, but it is possible to imagine that in companies with chief executives or chairmen who were powerful in the way that has been described devices could be formulated by which people could be appointed to the boards on the tacit understanding that they did not exercise full independence of the kind that hon. Members wish to see.

The House should know that in their reports listed companies already have to reveal which directors are non-executive and must furnish short biographies of them. Therefore, some of the requirements for information are already met by existing arrangements for listed companies.

I shall now deal with audit committees which I think are a good idea. When I was a non-executive director we moved to establish an audit committee and it worked out an agenda of quite useful work. At the beginning, I was a member of a board that in many respects did not operate through audit committees, and that meant that the business came to the board itself. That can be a perfectly satisfactory way to proceed. Some companies prefer to work through many committees and will have strong views on the disposition of non-executive and executive directors of those committees. Others wish to do that through the board.

We cannot get away from the central point that if the main issue is controlling fraud or malpractice, the main defence for the shareholder in the presentation of the figures and accounts is the appointment of a good independent auditor. It is for good reason that that is a shareholder power in all companies. The auditor has a close relationship with a company, but he must be genuinely independent and must answer to shareholders. Modern audit is time consuming. The hon. Member for Workington (Mr. Campbell- Savours) asked if there could be delay. The answer is no, because if the audit is of systems the auditor is trying to satisfy himself that the company has systems that usually work well and guarantee honesty and accuracy of reporting. Much modern audit is systems audit and not counting the figures in each of the books.

For those reasons, but with some reluctance, I urge the House to vote against the new clause. I am a strong believer in spreading the gospel of non-executive directors, but these proposals are not constructive in the right way

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and there are good signs that shareholders, bankers and other financial market people are moving companies in that direction. I welcome that.

Mr. Campbell-Savours : I understand the hon. Gentleman when he talks about systems in so far as he is putting to the House that the auditors he talks about are ensuring that the systems are in place when they come in perhaps once a year. Things can happen fast. A large shareholder who is a director of a company and whose holding might be worth hundreds of millions --we know that there are such directors--may well in a matter of months be able to manipulate the accounts in order to misappropriate large sums or engage in fraud. How would he be caught? Perhaps systems could be modified before the auditors about which the Minister spoke examined the accounts. Surely to some extent there is a case for having this more permanent role.

Mr. Redwood : That is not a strong argument. Someone who tries to mislead or carry out fraud and is in a powerful position could surely hoodwink the auditors and would most surely be able to hoodwink the non- executive directors who might meet in audit committee three or four times a year. Those non-executive directors depend primarily for their information and for the agenda of their committee on matters brought to their attention by the auditor. Anyone who looks at the structure of an audit committee will conclude that the main line of protection against fraud or malfeasance or twisting of the figures lies in accurate and clear auditing by a good independent auditor.

Mr. John Garrett : This has been a sensible and reasonable debate. The arguments in favour of our new clause were put as well by the hon. Members for Chichester (Mr. Nelson) and for Beaconsfield (Mr. Smith) as by any Opposition Member. The arguments are becoming unanswerable. The middle of the Minister's speech was an endorsement of the concept of independent directors and could well have ended with an acceptance of the new clause-- until we reached his objections to independent directors being enshrined in statute.

The Minister had three objections. He spoke of the unforeseen consequences of the clause, having foreseen the same consequences happening naturally. He had already said that if--

Mr. Redwood rose --

Mr. Garrett : Let me explain before the Minister jumps up. He said that the consequences of the clause are unforeseen yet it encourages the development of independent directors. He then advocated the spreading of independent directors as they have spread in the past. In other words, he accepted the principle but denied the means.

Mr. Redwood : There is an important legal distinction here. I welcome the principle of more non-executive directors being appointed to boards, but each of those directors would serve on those boards with full collective responsibility and would be recognised in law as being entirely the same as executive directors in terms of their responsibilities. The new clause introduces the idea that there would be a group of people called independent

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directors. I cannot accept that tonight, because I have to think through the consequences of that for the rest of company law. My advice is that it could cause difficulties.

9 pm

Mr. Garrett : Our advice is that it would not cause the difficulties that the Minister fears.

In the Minister's second objection, he spoke of the impact on collective decision-taking. We propose leavening the wisdom of the collective with independent minds. He said that the proposals would not guarantee that the directors would be independent. That is true, but it would increase the likelihood of having independent advice on a board of directors. Once again, he has willed the end but denied the means.

I have tried to develop the argument that good independent objective audit would be facilitated by the existence of audit committees and I tried to explain the relationship between audit committees and the outside auditors. Given the history of the matter, it is time that the opinion of the House was tested. I ask those of progressive mind on both sides of the House to vote for the new clauses.

Question put, That the clause be read a Second time :

The House divided : Ayes 159, Noes 200.

Division No. 340] [9.01 pm

AYES

Abbott, Ms Diane

Allen, Graham

Anderson, Donald

Archer, Rt Hon Peter

Armstrong, Hilary

Ashley, Rt Hon Jack

Ashton, Joe

Barnes, Harry (Derbyshire NE)

Barron, Kevin

Battle, John

Beckett, Margaret

Bell, Stuart

Benn, Rt Hon Tony

Bennett, A. F. (D'nt'n & R'dish)

Bermingham, Gerald

Bidwell, Sydney

Blunkett, David

Boyes, Roland

Bradley, Keith

Brown, Gordon (D'mline E)

Brown, Nicholas (Newcastle E)

Bruce, Malcolm (Gordon)

Buchan, Norman

Buckley, George J.

Campbell, Menzies (Fife NE)

Campbell, Ron (Blyth Valley)

Campbell-Savours, D. N.

Canavan, Dennis

Carlile, Alex (Mont'g)

Clark, Dr David (S Shields)

Clay, Bob

Clelland, David

Clwyd, Mrs Ann

Cohen, Harry

Cook, Robin (Livingston)

Corbett, Robin

Corbyn, Jeremy

Cousins, Jim

Cryer, Bob

Cummings, John

Cunliffe, Lawrence

Darling, Alistair

Davies, Rt Hon Denzil (Llanelli)

Davies, Ron (Caerphilly)

Davis, Terry (B'ham Hodge H'l)

Dewar, Donald

Dixon, Don

Dobson, Frank

Doran, Frank

Dunwoody, Hon Mrs Gwyneth

Eadie, Alexander

Ewing, Harry (Falkirk E)

Ewing, Mrs Margaret (Moray)

Fatchett, Derek

Fearn, Ronald

Field, Frank (Birkenhead)

Flannery, Martin

Flynn, Paul

Foster, Derek

Fyfe, Maria

Galloway, George

Garrett, John (Norwich South)

Garrett, Ted (Wallsend)

Godman, Dr Norman A.

Golding, Mrs Llin

Gordon, Mildred

Gould, Bryan

Griffiths, Nigel (Edinburgh S)

Griffiths, Win (Bridgend)

Hardy, Peter

Harman, Ms Harriet

Heffer, Eric S.

Hinchliffe, David

Home Robertson, John

Howarth, George (Knowsley N)

Howells, Geraint

Howells, Dr. Kim (Pontypridd)

Hughes, John (Coventry NE)

Hughes, Robert (Aberdeen N)

Illsley, Eric

Ingram, Adam

Janner, Greville

Jones, Barry (Alyn & Deeside)

Jones, Martyn (Clwyd S W)

Kennedy, Charles

Leadbitter, Ted

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