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We agree with the Government that we should take the voluntary approach first for disclosure of how institutional investors vote. I think that we also agree that the Government should take only a reserve power to force disclosure if the voluntary process does not work and that Ministers would have to return to this House before taking up that reserve power. Our concern is whether the one-size-fits-all approach that seemed to be in the original drafting would in fact work. We want to avoid over-prescription and to ensure that business is
fully consulted about how a flexible regime for disclosure might be introduced, building on the best practice learned from voluntary disclosure. I say on the record that we are keen to discuss with the Government how we can take that forward. There are public interest cases for regulating institutional investors in this way so that they do disclose. The Government are therefore, in principle, broadly right. As my hon. Friend the Member for Cambridge (David Howarth) said, there is a case for boosting the market for ethical investment, and disclosure is important for that.
There is also a general point about transparency and accountability. It is important that people can be held to account for the way they vote on behalf of citizens—in some cases, millions of citizens. It is ironic that some of the investment institutions that do not want such disclosure are demanding extra disclosure and transparency in respect of corporates—the ones that they invest in—but they are not prepared to have the same principles of transparency applied to themselves. They are in danger of double standards in that respect.
There is a third public interest reason why we should at least have this reserve power: the confidence of investors and savers. They should be able to know what they are investing in, and to look at the track record of how that investment institution has voted and behaved in the past. I say to the Secretary of State that we may need to meet to thrash out that issue and to see how we can make progress on disclosure. I do not think that the difference between us is very great.
Where there is a difference—given the Secretary of State’s remarks today, there might be room for compromise—is on the enfranchisement of shareholders who hold shares through nominee accounts. The Liberal Democrats and the Conservatives in the other place tabled an amendment that would require the compulsory enfranchisement of shareholders where they hold their shares in that way. It is important to understand the benefits of that approach. First, it would enable shareholders to receive all the information—annual reports, notice of meetings, resolutions—that other shareholders currently receive. Surely they should have that right. It would give them the right to attend, speak at and vote at general meetings, and to vote on resolutions. Why should they not have that right? It would give them the right to be treated equally with shareholders who hold their shareholdings directly during corporate restructuring. We saw in the cases of O2 and Shell that shareholders who held their investments through nominee accounts were not given the same priority and benefits as other shareholders. There was also the case involving P&O, which gave shareholders various perks that did not go to shareholders holding their shares through nominee accounts. There are a lot of reasons why we should enfranchise this group of shareholders.
Key principles are at stake—this is about shareholder democracy. If the Secretary of State changes the Government’s position, he could enfranchise more shareholders than Baroness Thatcher. I am sure that he would like that to be one of his many epitaphs. He says, in his rhetoric, that he is in favour of shareholder engagement and accountability, and that is the way to do it.
We must also consider the key practical benefits for business of that approach. Often, when the institutional investors are giving guidance or making their voices
heard at a general or other meeting, they have conflicts of interest because they are employees of very large institutions. They do not always talk common sense. It is often the individual shareholder who says what needs to be said. On issues such as the remuneration of directors, it was not the institutional investors who chased the so-called fat cats, but the individual shareholders who asked why directors were paying themselves so much. The voices of individual shareholders are important, and that is why the Government should embrace that change.
The arguments about cost do not stack up, because we live in an e-world and costs can be minimised. The companies are already making savings to the tune of £100 million thanks to the dematerialisation of documents and they could share that with some of the shareholders who put money into their companies. Ministers need to engage with that issue and not say that they will overturn the Lords amendments at all costs. I hope that the Secretary of State will consider the issue in a spirit of co-operation.
We can deal with some of the practical difficulties that have been outlined. For example, we could put more of the burden on the people operating the nominee accounts, so the costs could be shared between the businesses and the people who are the nominees. We could try to make the Lords amendment less prescriptive, because there must be room for debate. We could also consider difficult cases, such as employee share ownership schemes.
Whatever practical problems are raised by those who oppose such enfranchisement, we can deal with them, if we have the will. It is up to us all to do so, because we must end shareholder apartheid. It is wrong to have second-class shareholders and it would do the country a real service to change that. More than 50 per cent. of shareholders hold their shares in that way, and that percentage is likely to grow in the next few years. We need to act now.
I mentioned two more major disagreements earlier. The first is the OFRs, on which I fear we have less room for negotiation. Let us be clear about how we got here. Just a few months ago, the Government were very much in favour of OFRs. They dreamed them up and consulted on them, and worked with business and the accounting standards boards. The OFRs had been thought through perfectly. Indeed, the 2004 annual report of the DTI said that OFRs were at the heart of the Government’s policy to improve corporate governance. Suddenly something changed, but what was it?
Thanks to the excellent work of Friends of the Earth, we know what changed. A senior official at the Treasury’s enterprise unit met a fund manager from Hermes last summer. They had a general chat about how the Government were doing and what they could usefully do. The fund manager suggested that if the Government wanted a quick win, they could get rid of the OFRs. It would, he suggested, be a good deregulatory measure that would go down well in the City. The official worked up the issue and sent a memo to the Chancellor, who ticked the right box, so other officials were told to work it up further. The officials then sent another memo to the Chancellor, dated 29 September—I have a copy if
the Secretary of State wants it—suggesting that he talk to colleagues in the DTI before going ahead with any announcement at the CBI conference.
The Chancellor did not engage with the DTI. He received another memo, dated 23 November that stated:
“Urgent. Action required this week...It is anticipated that a number of Ministers will have concerns about this proposal, given their departments’ specific interests in the initiative.”
The Chancellor made his speech five days later, on 28 November, and it is clear that there was a shambles in the Government. The Chancellor of the Exchequer took a unilateral decision and went against all other Cabinet Ministers without informing any of them. Most Ministers do not believe in the business review: their hearts are not in it, because they believe in the original proposal. Our aim is to give the Secretary of State a way to save the Chancellor’s face and return to the Government’s original position.
Martin Horwood (Cheltenham) (LD): The Accounting Standards Board put a great deal of work into developing accounting and audit standards for OFRs. Does my hon. Friend agree that that was an enormous waste of effort, given the fact that they are no longer part of the Bill? Will not the result be that companies are less transparent in their reporting and that reviews will be more expensive because companies will have to develop those standards themselves?
Mr. Davey: My hon. Friend is exactly right. He is something of an expert in this area and we intend to table an amendment on the subject.
The business review proposals arose out of European legislation. The Chancellor put the DTI in some difficulty and, in an attempt to put matters right, the Government tabled amendments in the other place, We welcome the progress that has been made in strengthening the proposals, but the Government have not gone far enough, especially in respect of reporting standards.
Mr. Stephen O'Brien: The hon. Gentleman may recall that the former Secretary of State called OFRs the last piece in the jigsaw when she introduced them. She is now Secretary of State for Health, and the phrase might be applied more aptly to that Department. She was very proud of OFRs, which the official Opposition decided would not present an extra regulatory burden, but would benefit both citizens and companies. No pressure was exerted by business or the CBI to get rid of OFRs—it was one of those strange instances when business was rather compliant and accepted the proposal—but it is clear that the Chancellor wanted something to announce at the CBI conference. The new proposal satisfies no one.
Mr. Davey: The hon. Gentleman is exactly right, although he has given a clear indication to the House of how the Conservatives keep changing their position. The Labour party does that too, whereas we Liberal Democrats have been consistent throughout in our support for OFRs.
Despite the amendments in the other place, the business review proposals remain unsatisfactory. My hon. Friend the Member for Cheltenham (Martin Horwood) mentioned reporting standards, and noted that they had already been worked up by the ASB, but the Bill contains no mandatory requirement that they should be adopted. If they were adopted, compliance would be easier, as would comparability, with the result that narrative reporting would be of greater use in meeting the objectives set out in the Bill.
Moreover, the Government’s amendments in the other place also fell far short in respect of applicability. The business review proposals will not apply to large, non-quoted firms or medium-sized enterprises, and the audit requirements applicable to narrative accounting are nowhere near stringent enough. One would expect auditors to have to check that narrative reporting is accurate and ensure that it is consistent with the facts, but the Bill does not require them to do either.
Another problem has to do with coverage. I believe that about 1,009 large quoted firms will have to compile business reviews, but they will not have to detail their relationship with suppliers. That may seem a minor point but, in some countries, British companies subcontract much of their work. There is evidence that they subcontract some of their social and environmental obligations to people who are less well known and who are not covered by the business review requirement. That alarms many people concerned about the proposed changes. The Government have made themselves look shambolic over OFRs and I hope that they will change their proposals between now and Third Reading.
My final major point concerns director duties, which are at the heart of the Bill. Clause 158 has already been discussed. Liberal Democrats agree with the Government. We think that Ministers have struck a good compromise. We are astonished by the position now advocated by the Conservative Front Bench, which seems to go against previous Conservative legislation. The hon. Member for Rutland and Melton did not seem to appreciate that section 309 of the Companies Act 1985 says:
“The matters to which the directors of a company are to have regard in the performance of their functions include the interests of the company’s employees in general, as well as the interests of its members.”
That was in 1985 under Lady Thatcher.
Mr. Djanogly: My hon. Friend the Member for Rutland and Melton (Mr. Duncan) did not mistake the position. Section 309 has not been included by the Government in the current Bill. It was not removed by the Conservative party in the other place. We think that it should remain in the Bill and we shall be proposing amendments that it should be included.
Mr. Davey: We may have seen the first of many U-turns by the Conservatives in this House from the position taken in the other place, where no doubt some of their lordly donors were keeping a rather close eye on their activities. I refer the hon. Gentleman to clause 158(1)(b), where the interests of the company’s employees are specifically mentioned. Clause 158 ensures that section 309 of the Companies Act 1985 is read across. Conservative peers’ attempt to get rid of that was a serious mistake and I hope that the Conservatives in this House will apologise and stand up to their rebellious peers.
This is a good Bill. It deserves a Second Reading. My colleagues who will sit on the Committee—my hon. Friends the Members for Caithness, Sutherland and Easter Ross (John Thurso) and for Solihull (Lorely Burt)—will work hard to make it an even better Bill, so that when it comes back on Report, we can give it a hearty send-off.
5.37 pm
Mr. Austin Mitchell (Great Grimsby) (Lab): When a Government Bill is praised with faint damns by the Conservatives representing the vested interests in business, and then even more lavishly by the Liberals in some kind of deteriorated Sharmanese language, we must believe that there is something wrong with it. What is wrong with the Bill is that it is a disappointment because of what it does not do rather than what it does. Indeed, the number of dogs that do not bark in this Bill is a deafening cacophony of examples where action should have been taken but has not been.
The Bill is a particular disappointment to those who felt in 1997 that an incoming Labour Government would be able to change the climate in business and ensure that companies were run with the participation of the workers and the stakeholders, and above all, that there was for accountancy and audit a framework of independent regulation along the lines of the Securities and Exchange Commission. Indeed, we promised such a framework in our business manifesto. Somehow, it never materialised. We were told that there would not be time, and that a foundation that was to be set up would fill the bill. We have now said RIP to the foundation; it accomplished nothing and was abolished fairly quickly.
We proceeded not to restrict or regulate the activity of auditors but to give them more power and independence. We proceeded to limited liability partnerships. Now in the Bill we proceed further in that direction by giving what amounts to a capping power based on an agreement between the auditor and the company. This is at a time when effective proportionate liability is already being established, as in the Barings case. Deloitte’s liability was cut down from a claim of £1.3 billion to £1.5 million on the ground that others were more largely responsible for the losses than they were.
In effect, we are seeing a dilution of the responsibility, role, power and effectiveness of audit. Audit is now used—particularly by the big four, but this is common over the whole profession—as a kind of foot in the door or market stall from which to sell other services. Companies can get a foot in the door by underbidding on the audit and then they can sell other services, where the profit is made. Most of the profits of the big four now come from the sale of other services—to audit clients; it is a fairly closed market. That means that the audit itself is debased. In order to bring the audit in at a low and competitive price, untrained staff are overworked and standards are not maintained. That way lies disaster, because the audit is not effective. I know of no other field where the limitation of responsibility improves performance. We have high standards for manufacturers and we demand that they live up to them. For audit, we have low standards, which we do not enforce in any case.
In the United States, Mr. Stiglitz, a Clinton appointee, argued that when an expensive campaign by the audit firms forced him to reduce auditors’ liability, that led directly to the Enron, WorldCom, Xerox and Global Crossing scandals and all the rest of it. That is what happens. If the standards are lowered and effective enforcement is not provided for, the audit is debased. In that way, we have no idea of the real health of the company. I am worried because the big four have been so much the spoilt darlings of my party in power and have benefited so substantially from us that I am surprised that we have not issued them with a request to affiliate to the party, as the trade unions do.
The machinery and regulation—the Financial Reporting Council—that we have been forced to set up in the wake of Enron, after denying that it was necessary for so long, essentially consists of one man and a dog to regulate extremely powerful bodies with a global income of £70 billion and an income in this country of £5 billion. The budget of the FRC is £12 million. That is pathetic compared with the role of the SEC. The FRC cannot regulate the big four effectively. In effect, the big four dominate it, just as they dominate the professional bodies and the DTI—the department of timidity and inaction, as it has sometimes been described—which, in my experience, after long sessions with various Ministers on these issues, always tells us what the big four want it to say.
We have the regulation of the big four, by the big four, for the big four, and that is not healthy for the public or for industry. We should not allow the mafia to regulate the mafia, as we have. The Government have been cosseting the big four. Ministers tell us, “We don’t want competition to be restricted by one of the big four”—the big five, as they were—“collapsing in the same way as Andersen collapsed.” Andersen collapsed because it was cheating; it was crooked. It provided Enron with all kinds of methods of financial manipulation that should never have been provided in the first place.
We are protecting the big four. It rings somewhat hollow in the mouth of a Labour Government to protect those four enormously powerful and wealthy institutions. Last December, KPMG partners got a bonus of £550,000 each. A senior partner at Deloitte is paid £3 million. The money is rolling into the big four accountancy houses. They have benefited richly from a Labour Government, but are they trustworthy? Are they the paragons of virtue that we treat them as? They are part of multinational organisations, which are all based in tax havens and very secretive. We do not know who runs them, who owns them, or what is going on.
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