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Mr. Deputy Speaker (Sir Alan Haselhurst): Order. I do not promise to call every hon. Member who is seeking to catch my eye, but I will be encouraged to be well disposed if questions have just one part and receive concise answers.
Fiona Mactaggart (Slough): My right hon. Friend the Secretary of State will be aware of a serious fraud in my constituency, as I have written to her Department about it. It involves some issues to do with accounting practices. In her statement, she referred only to listed companies. The very large multinational company in which some of the fraud to which I refer originated is privately owned. What protection will be given to third parties such as the small company in my constituency that purchased a company that was formerly a supplier to the multinational? That small company's representatives have told me that audit is merely a tax on firms such as theirs. The audit on the company that it purchased was fine, but completely superficial. How will the new recommendations make such audit less superficial?
Ms Hewitt: From what my hon. Friend has said, the company to which she refers would be a suitable candidate for consideration by the financial reporting and review panel. I am aware in outline of the case to which she refers, but it may be sub judice and I therefore do not propose to comment further.
Mr. Archie Norman (Tunbridge Wells): I thank the Secretary of State for her remarks on payments for failure to departing directors, which is the subject of my private Member's Bill, and I welcome her confirmation that the Department will put the matter out to consultation. However, my Bill has widespread support across the House, especially among Labour Members. It is also supported by Sir Adrian Cadbury, who in a sense is the father of the combined code, and by firms of solicitors in the City. One of those companies is McFarlane's, which was instrumental in preparing a practical and robust solution. What form will the consultation take; how long will it last; who will be consulted; who will be responsible; and will the right hon. Lady take this opportunity to say that she will present the conclusions of the consultation in a statement to the House in a few months' time?
Ms Hewitt: I know that many hon. Members of all parties want companies and boards to take action on the matter of big rewards for big failure, and they also want better and proportionate regulation. I do not believe in legislating without sensible consultation and consideration of how proposals would work.
We will publish a consultation document on this issue, I think in March. I certainly want to assess views about the changes that we have made already and which will come into effect for the next round of corporate AGMs. We will put forward the proposal made by the
There are a number of matters that need to be considered. We will have three months of consultation with everyone who has an interest in these matters and who would like to express a view. Of course I shall report the conclusions to the House.
Alan Howarth (Newport, East): Will my right hon. Friend explain further why she has stopped short of proposing a ban on the provision by auditors of non-audit services such as consultancy services, which may be much more profitable than audit? Following the events at Enron and elsewhere, does she accept that confidence in the integrity of audit is undermined where there is evident conflict of interest? Does she accept that investor confidence is also undermined, with all the damage that that causes?
Ms Hewitt: This is a matter of enormous interest, and one on which I have elaborated already. It has been looked at carefully by the various reviews. Clearly, as the co-ordinating group concluded, there are situations in which a ban would be appropriate. Those circumstances depend on the relationship between the client company and the audit firm, and the particular non-audit services that it is proposed will be bought. In some cases, a company will not be able to buy those non-audit services from its external auditor. In other cases, however, as Sir Robert Smith makes clear, there is no conflict of interest and so no risk of jeopardising the independence of the audit. In those cases, the expertise built up in the external audit may be valuable to the company and therefore help to strengthen its governance and its competitive success. That is why I do not think that the proper way forward is to write into the regulations a blanket ban. Instead, we must ensurethrough the role of the audit committee on the company's side, and through the audit standards on the auditor's sidethat we have the right balance. We must also ensure that the non-audit services are banned in those cases where that is required.
Mr. Jonathan Djanogly (Huntingdon): The pool of people qualified for non-executive positions is relatively small at present. If the role of non-executives is to become more onerous and demanding as a result of these recommendations, that pool could become even smaller. However, Mr. Higgs has also suggested that the boards will have to have more than 50 per cent. non-executive content. That could mean that boards will get larger. How will the Secretary of State tackle the
Ms Hewitt: There is a real problem with non-executive directors, especially in the larger companies, being drawn from such a small pool. The hon. Gentleman is right to say that the burden on any director of a firm is becoming increasingly difficult. We therefore need to widen the recruitment pool. It is pretty implausible to suggest that only the very small number of already existing non-executives are capable of carrying out that role.
We can widen the pool in two ways. First, a growing number of large and medium-sized companies regard a non-executive directorship as an important contribution to the professional and career development of younger executives. That means that the corporate governance of the smaller firms on which those younger executives cut their teeth will be strengthened, and also that the pool of people with the commercial experience needed by good non-executives of major companies in future will grow.
The other step that we are taking, as I have indicated, is to encourage firms appointing non-executive directors to look to the non-commercial sector. In the public services and the not-for-profit sector, there are large organisations such as NHS trusts that are responsible for very large sums of money. Their non-executive directors tend to be drawn from a rather more diverse community than their counterparts in FTSE 100 companies, and to have built up exactly the sort of expertise need by the boards of large listed companies.
Linda Perham (Ilford, North): As my right hon. Friend knows, I am interested in the issue of corporate governance and, with 20 or so other colleagues, made a submission on the White Paper. How will the measures that she has announced today fit in with the rest of the agenda for the reform of company law? Is it not a rather piecemeal approach if some reforms are introduced now, while others have to wait for the introduction of a new company law Bill?
Ms Hewitt: I am grateful to my hon. Friend and the other hon. Members for their very detailed submission. I think that my hon. Friend is in part referring to the proposals for the operating and financial report that we made in the company law reform report. It is important that that enormous rewriting of the whole of our company law is all taken forward together, as we intend it will be, so that we can deal with the problem of 150 years' accumulation of company law, both statute and case lawand that is what we are doing, building on last year's White Paper. However, the package that I have announced today can in large part be taken forward by the actions that we have described in reorganising the Financial Reporting Council and the other bodies, and through the combined code and the audit standards that I have mentioned. They will complement and provide a solid foundation for the much larger reform of company law that is also coming.
Ms Hewitt: I think that the hon. Gentleman is referring to how we monitor the comply-or-explain provisions. The combined code on corporate governance is, of course, attached to the listing rules, so for large listed companiesthat is what we are talking about herethe Financial Services Authority has responsibility in its role as the listing authority.