Select Committee on Environmental Audit Appendices to the Minutes of Evidence


Memorandum from the Department of Trade and Industry (DTI)


  The Company Law Review was launched as an independent review by Margaret Beckett, then Secretary of State for Trade and Industry, in March 1998. The Department's consultation paper, "Modern Company Law for a Competitive Economy" (DTI/Pub 3162/6.3k/3/98/NP), published on the day of the launch, outlined the nature of the problems which the Review was designed to address, its proposed objectives, and the scope and process envisaged.

  2.  The DTIs objectives in undertaking this review are—as set out in the consultation paper—to promote a framework for the formation and constitution of British businesses which through an effective combination of law and non-statutory regulation:

    —  supports the creation, growth and competitiveness of British companies and partnerships;

    —  promotes an internationally competitive framework for business, so that the UK continues to be an attractive place to do business;

    —  provides straightforward, cost-effective and fair regulation which balances the interests of business with those of shareholders, creditors and others; and

    —  promotes consistency, predictability and transparency and underpins high standards of company behaviour and corporate governance.

  3.  The Review is managed by an independent, expert Steering Group. The Steering Group is advised by a number of working groups comprising experts in various fields of Company Law. There is also a Consultative Committee which provides a forum in which organisations with a wider interest in company law can comment on the emerging conclusions of the Review. Details of the Steering Group and Consultative Committee members are attached at Annexes 1 and 2.

  4.  The Steering Group is due to deliver its final report to Ministers in Spring 2001—probably in May. Ministers will then set out their response and proposed way forward in the light of the Steering Group's recommendations. The Secretary of State has underlined the importance of providing a modern framework of company law and expressed broad support for the Review's objective of improving disclosure and transparency. He has stated that he will not take a final view on the Review's proposals or on the details of its recommendations until he has studied its final report; but in his speech to the Greenpeace Business Conference on 4 October 2000 he noted that once the Review had produced its final report, their proposals relating to environmental reporting would be an important area for him to address.

  5.  The Review has been based on open consultation, and has sought to build a broadly-based consensus. The Steering Group published its first major consultation document (Modern Company Law for a Competitive Economy—The Strategic Framework, URN 99/654) in February 1999. In March 2000 it published its second major document: Modern Company Law for a Competitive Economy—Developing the Framework, (URN 00/656). Its last major consultation document before the final report is due to be published in November this year. In addition there have been a number of "single issue" consultation documents on more focused or technical issues.

  6.  The March 2000 consultation document set out at a fairly detailed level some key proposals on governance and transparency, including proposals on directors' duties and improved company reporting, which are relevant to the Committee's interest in companies' environmental performance. These are outlined below. The document to be published in November will set out the Steering Group's proposed way forward in the light of responses to the March consultation. While this will entail some revision at a detailed level, the key elements of the proposals are unlikely to change.


  7.  The key components of the Review's proposals on company governance are its proposed statement of directors' duties, and improvements in company reporting—principally through the proposed new statutory Operating and Financial Review (OFR).


  8.  In the March document the Steering Group recommended that a summary statement of directors' duties should for the first time be included in the Companies Act. It proposed an "inclusive" approach to directors' duties: this would require directors to act so as to achieve the success of the company in the best interests of shareholders; but it also recognises that this goal can only be achieved by taking due account, in cases where they are relevant, of wider interests such as relationships with employees, customers, suppliers and the community, and the impact of business decisions on the company's reputation and on the environment. The proposed statement of duties also recognises the need for directors to take proper account of the long-term, as well as the short-term, consequences of their decisions.

  9.  One of the objectives of the proposal is to bring about improvements in governance both by clarifying the law for directors and by helping to change the climate of decision-making.


  10.  For larger and listed companies, the Review has proposed that there should be a new format for the statutory Annual Report broadly based on the current Operating and Financial Review (a best-practice report devised by the Accounting Standards Board which comments on the wider aspects of the company's activities and performance). The new statutory OFR would include:

    —  a fair review of the development of the company's business over the year and its position at the end of it;

    —  the company's purpose, strategy and principal drivers of performance;

    —  an account of the company's key relationships with employees, customers, suppliers and others on which its success depends;

    —  the company's approach to corporate governance—values and structures;

    —  the dynamics of the business, ie known events, trends, uncertainties and other factors which may substantially affect future performance, including investment programmes: this would also cover risks, opportunities and related responses in connection with environmental costs and liabilities;

    —  the company's environmental policies and performance, including compliance with relevant laws and regulations;

    —  policies and performance on community, social, ethical and reputational issues; and

    —  receipts from, and returns to, shareholders (eg dividends, changes affecting the company's share capital).

  11.  All companies preparing an OFR would be required to report on the first two items. They would be required to report on the other items to the extent that they were material to the company's performance.

  12.  The aim of the OFR is to improve the quality, usefulness and relevance of information available to the markets and to everyone with an interest in the company. As such, the Review intends that it should lead to improved understanding of business performance and prospects, as well as promoting accountability and encouraging responsiveness and high standards of business practice.

  13.  The Review has suggested that the basic OFR requirements (including the requirements for coverage of each of the headings listed in paragraph 10 above) should be included in statute, with more detailed reporting requirements being set by a standards body. This part of their proposal will be developed further in the document to be published at the end of November. In principle it is envisaged that companies would be required to report in accordance with standards set by the standards-setting body, in order to ensure that items were properly reported on and to facilitate comparisons both of a company's year-on-year performance and between different companies.

  14.  As noted above, the Review has proceeded on an open and consultative basis, and has sought to build wide support for its approach. This has been the case during the development of the Review's proposals, including those on the OFR. In addition to the membership of the working groups and the Consultative Committee, the views of groups with a wider interest have been sought during the preparation of the proposals. This has included members of the Review team speaking at a number of public events and meeting organisations such as NGOs and interest groups to discuss the proposals in greater detail.

  15.  In addition, in June this year, the Review organised a seminar on the proposals for the new statutory OFR and reporting on wider non financial issues. The seminar was attended by a range of representatives of business, the users of accounts, the professions, Government and the NGOs and included sessions chaired by representatives of the Centre for Tomorrow's Company, SustainAbility, the business community, the investor community, the Accounting Standards Board and AccountAbility.

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Prepared 9 January 2001