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The Secretary of State left us in some confusion about the programme motion. He said that he was prepared to entertain the suggestion that we should extend the time available for the consideration of the Bill in Committee, which was extremely welcome. It is particularly important that we should do so because the Government now intend to introduce the clauses of the Companies Act 1985, which is not to be disapplied by the Bill and will therefore remain part of the corpus of company law. The Government are absolutely right
to do that, and I welcome and endorse their proposal. They intend to bring the clauses into the Bill for the convenience of the users of the legislation, so we now have a consolidation measure before us. That is thoroughly welcome, as is the fact that we might have more time to consider it.
However, the Secretary of State declined to say that he would withdraw the programme motion. Once it has been passed, we are stuck with it. Do the Government intend to waste the time of the House by bringing another programme motion back to the Chamber in a few weeks’ time? If the Secretary of State is serious in his undertaking to extend the time available to us, surely it would be sensible for him not to put the programme motion to the vote tonight. He should instead do what should be done in any sensibly organised legislature, which is to reserve programme motions for when there is a genuine problem of filibustering. In those circumstances, an ad hoc argument can be made to impose some kind of timetable.
This is a good Bill, and it reflects the fact that there have been seven years of consultation on it. Would that most legislation coming from this Government could have seven months or even seven weeks of consultation. Far too much legislation brought before the House has had no proper consultation at all. Far too much is simply dreamt up in Whitehall and determined through compromises among Whitehall committees or between Ministers, without the great unwashed public being allowed to know any of the arguments or on what basis those bureaucratic compromises are being reached. The Bill quite rightly imposes higher standards of transparency on business, and I hope that the Government will impose higher standards of transparency on themselves in future.
Anne Snelgrove: I should like politely to put the hon. Gentleman right on the consultation that the Labour party undertook in the run-up to the last election. The public consultation on the manifesto—which formed part of our national policy forum consultations with the general public as well as with Labour party members—was the biggest undertaken by any political party in the world.
Mr. Davies: I am not talking about consultations on a manifesto, and I do not want to get involved in that argument. I am talking about the role of this House as a legislature, as a body that conceives, drafts and eventually promulgates laws, subject to Her Majesty’s consent. We have received her consent—or that of her predecessors—pretty consistently for the past 300 years. We have an important job that must be taken seriously. It would be crazy to carry on a situation that we have had far too often in the recent past, in which Bills have been introduced that have not been properly thought through. We have then had much too little time to consider them, precisely because of the Government’s disgraceful habit of imposing automatic timetable motions. Whole rafts of legislation therefore go through without due consideration, and that is a disgrace to any Parliament. It is certainly a disgrace in this country, which is often said to have the mother of Parliaments.
On this occasion, however, I must give the Government their due for the fact that there has been proper consultation, and it has resulted in a sensible
Bill. On the whole, it is also well drafted. That point has already been made today, but it bears repeating. On the whole, the Bill is written in sensible, lucid English. There are one or two exceptions, and if I am lucky enough to be appointed to the Committee, I might raise them there. Generally, however, the Bill sets good standards of drafting.
Martin Horwood: I was interested to hear the hon. Gentleman’s declaration of interest as a director of a private company. As he is in favour of the transparency in the Bill being applied to listed companies, would he also be in favour of extending that to private companies, thereby enabling a £25 billion market in ethical consumerism in this country to be added to the transparency measures that will be allowed to ethical investors?
Mr. Davies: No, I would not. This is a question of proportionality, which is one of the criteria that we should always have in mind when we are legislating to impose constraints or costs on the citizen. It would be ridiculous to impose the whole apparatus of corporate governance that is appropriate to a public company—especially a quoted public company—on a company that might be owned by a married couple and have a turnover of only a few thousand pounds a year. That would be absurd.
Mr. Davies: As the suggestions that have come from that corner of the House have been so utterly unreasonable and un-thought-through, I am not going to waste the time of the House by giving way to them, or at least not for some time.
Whenever we look at a Bill, we should have regard to certain fundamental principles. I have already mentioned proportionality. Another obvious one is the issue of justice, in which we must consider whether a Bill is based on—or at least consistent with—certain fundamental principles on which we all agree, such as equality before the law and non-retrospectivity. As far as I can see, this Bill is fine in that regard. Another consideration is whether a proposed piece of legislation is rational—in other words, whether it will encourage virtuous behaviour and discourage behaviour that is damaging to the interests of society as a whole, or whether it will have a perverse impact. On the whole, the Bill is well conceived and passes that test pretty well.
We must also consider whether a prospective law is clear and creates legal certainty, or whether it creates legal uncertainty. Legal uncertainty can be extremely damaging, especially in businesses that will be impacted by company law. We must have a society in which people can make investment decisions with market risks attached, and sign contracts with other parties—corporate or individual—with reasonable certainty that those contracts will be enforceable in law and that the regime under which the investment decisions involved in setting up or expanding a company are made will be sustained by subsequent decisions of a court if they are challenged.
When Parliament adds legal risk, it does a very bad day’s work for the economy, because the total risk involved in investment and in other business transactions
may be enhanced. That could result in less investment and fewer transactions for any given prospective rate of return, which could ultimately mean a lesser gross domestic product and therefore a lesser GDP per capita for all of us. It is very simple. So we need to consider any Bill that comes before the House, but particularly a company law Bill, against the criteria of whether it will increase or reduce legal certainty, and whether it will enhance or reduce legal risks. I am going to come back to that, which is highly relevant to the Bill.
I shall now discuss some of the most problematic aspects of the Bill, which have received most attention. Clause 158, in particular, has already been the subject of considerable debate this afternoon. It deals with the duties of directors and I intend to comment on them. Frankly, all but one are statements of quite obvious obligations, which anyone becoming a director should—and if half-sane and half-competent would—accept without question. These definitions go to the heart of the duties of directors.
The first in paragraph (a) states that directors should, in taking decisions, consider
“the likely consequences of any decision in the long term”.
That is perfectly obvious. Any decision is likely to take into account the likely consequences in the short, the medium and the long term. In the case of financial decisions, a number of financial techniques are available for relating long-term to short-term decisions—discounted cash-flow analysis, for example. These decisions are part of the day-to-day and natural responsibilities of directors.
“the interests of the company’s employees”.
Well, anyone who is in business is in the business of management and in the business of recruiting, motivating and retaining employees and getting the best value for the company from them. Anyone who neglects employees cannot possibly be running a good business. A business is as good as the value of its employees and that applies whether it is a service company or a manufacturing company, a more or less labour-intensive or capital-intensive business. If employees are not doing the job properly, are unproductive, inefficient, poorly motivated and not conscientious, the business will not run properly. That seems to be absolutely fundamental and unexceptionable. I cannot imagine that anyone would be opposed to that statement as one of the fundamental obligations of directors.
“the need to foster the company’s business relationships with suppliers, customers and others”.
Again, anyone who— [Interruption.] Colleagues are laughing, precisely because that is a statement of the obvious. It is surely a legislative platitude. Anyone who wants to stay in business for more than five minutes obviously has to have regard to the interests of customers. If a company does not have any customers, it will not, by definition, be in business. Every day, the managers and directors of every well run business are thinking about the customers. They wonder whether their customers are satisfied, whether they could come up with a better solution for them, whether the reactions of customers
to the latest contract have been taken into account and so forth. That is absolutely clear.
Equally, it is not possible to run a business in most circumstances unless there are reliable suppliers. We want as many people as possible to compete for that business in order to secure the lowest possible prices and the best deal. That can be done only if a company has a reputation for being a good partner to deal with and a good customer to those suppliers. If companies become awkward and difficult to deal with, a price will be paid because fewer will quote so aggressively for the business. At best, a company will end up paying more for the supplies; at worst, those supplies may be interrupted. Once again, it is a statement of the obvious.
“the desirability of the company maintaining a reputation for high standards of business conduct”.
I cannot imagine anyone wanting to be on the board of a company unless he or she took some pride in the fact that it had the highest possible reputation. That translates, of course, into a good image with potential customers. The fact that someone is seen as being a reliable and good person to do business with is vital for success in the market and in dealings with other stakeholders, including suppliers.
Finally, paragraph (f) refers to
“the need to act fairly as between members of the company.”
I am particularly pleased about that. Although it is platitudinous in the sense that it should be obvious to everybody, I can remember occasions when I have sat around the boardroom table and had to remind colleagues of that particular obligation. It arises when a director is associated with one—perhaps a large minority or a majority—shareholding and is inclined to be insufficiently aware of potential conflict. When a director is sitting around the boardroom table, his or her obligation should be to the totality of shareholders of the company. Under no circumstances must a director be influenced by the interests of one particular minority or majority shareholder. I am glad that that vital aspect is included. I have no problem with any of that.
I think that I heard my hon. Friend the Member for Rutland and Melton (Mr. Duncan) saying that he did not like the explicit statement of the obligations of directors because it pre-empted the possibilities for jurisprudence. I believe that he said something along those lines. He believes that somehow the courts would not be able to develop a substantial and continuing jurisprudence in respect of the definition of the duties of directors after the Bill’s passage. If my understanding of what my hon. Friend said is correct, I profoundly disagree with him. To me, the creation of legal certainty is, as I have just explained, a very positive gain. What one does not want is uncertainty about the duties of a director. One does not want to have to wait for the next judgment of a judge. One does not want to have 10 different lawyers giving 10 different views about what a particular judge may decide. One wants to be able to point to a piece of legislation that is clearly and lucidly drafted and to say that it is there, thus creating some legal certainty. I believe that that is a positive advantage and a good reason for including the clause in the Bill.
I may well be told that I have completely misunderstood my hon. Friend the Member for Rutland and Melton.
Perhaps my hon. Friend the Member for Huntingdon (Mr. Djanogly) will produce some exegesis or a correction to my impression.
Mr. Djanogly: I have been enjoying my hon. Friend’s speech enormously and agree with most of it—until just then, when he did indeed misrepresent the position of my hon. Friend the Member for Rutland and Melton (Mr. Duncan), only in so far as he did not deny the merit of that the paragraphs that my hon. Friend the Member for Grantham and Stamford (Mr. Davies) has just explained and agreed with. No Conservative Member disagrees with those paragraphs; they are the established common law. What we are saying is that, by choosing a handful of existing common law obligations and putting them into a subsection over and above all the others, confusion could set in. Indeed, there could be a resultant reassessment of the established law. Of course, we shall discuss that issue at length in Committee, but I wanted to put him right now.
Mr. Davies: I am grateful to my hon. Friend for that but, unfortunately, I find that I did not misrepresent the remarks of my hon. Friend the Member for Rutland and Melton. Unfortunately, I find that there is a divergence in our views on this subject. It seems to me that the whole purpose of legislating in an area where only jurisprudence has existed since the Companies Act 1985 is precisely to create greater legal certainty, for all the reasons that I have just mentioned.
Mr. Stephen O'Brien: Will my hon. Friend give way?
Mr. Davies: Of course I will give way to my hon. Friend, who is a distinguished company lawyer among other things, if he will let me complete my paragraph.
The whole purpose is to create greater legal certainty if that can be achieved. Therefore, I see the advantage of identifying the key directors’ obligations and placing them, as Parliament considers them, in the Bill. That would be a very desirable thing. It is always open to my hon. Friends the Members for Huntingdon or for Rutland and Melton to suggest that other things have been left out—indeed, I have left something out, which I will come back to in a moment—and that things in addition to those that the Government have included in the Bill ought to be added to the key obligations. I personally do not think that anything should be added to them. The five paragraphs that I have listed encapsulate the key obligations, and it is right for Parliament to say that those are the key obligations and that other things are secondary.
The question in my mind is whether paragraph (d)—the one that I deliberately left out when I read out the list—which refers to
“the impact of the company’s operations on the community and the environment”,
should remain in the Bill and continue to have the same status as treating all members of the company equally, being concerned with one’s customers and employees and considering
“the likely consequences of any decision in the long term”.
Of course, the paragraph on employees is the only one that has been taken from the Companies Act 1985.
I shall give way to my hon. Friend the Member for Eddisbury (Mr. O'Brien), and then say what I have in mind and what my concerns are in relation to the community and the environmental obligations.
Mr. O'Brien: There is a grave danger in this important discussion in not distinguishing between understanding the justiciability of the future grounds for considering what has been referred to in statute, given that the previous common law basis will be effectively enshrined partly in statute, and the Bill’s other objective, which will be one of the most difficult things to contemplate in Committee: how do we move from a tick-box mentality, whereby such a list simply aids those who have no understanding of business—they can simply tick the box to show that they have monitored the business—to actually influencing the directors’ behaviour in a way that gives them the judgment to do the right thing in the first place, thus giving the courts less of a reason to judge against them in the future? That is the nub of the problem.
Mr. Davies: With respect to my hon. Friend, I think that the Bill adopts precisely the opposite of a tick-box approach. It sets out general principles. I need not repeat the five that I have just read out, because I know that he is even more familiar with the Bill than I am. I think that we should have some general principles, and that Parliament should formulate them as clearly as possible, avoiding any ambiguity that can be avoided to reduce the scope for legal uncertainty—thereby, of course, reducing the scope for litigation and jurisprudence.
Whenever I suggest in the House of Commons any action that reduces the scope for litigation and jurisprudence, members of a certain profession—well represented here—turn against me immediately. I cannot think why that is, but it always happens. Nevertheless, I believe that, as legislators, we should be concerned with clarifying for the citizen the regime under which he can undertake contractual obligations with other parties, make investment decisions and incur liabilities, knowing precisely—or as far as possible precisely—what the liabilities will be and how they will be interpreted by a court.
My problem arises with paragraph (d), which refers to
“the impact of the company’s operations on the community and the environment”.
I cannot conceive that a director doing an honest job would not be aware of, make himself or herself aware of, or ask all the requisite questions about, the impact on the community and the environment of any major investment or major change in the company’s business. Nevertheless, I doubt that the requirement should be enshrined in law as a fundamental obligation. The problem is the drafting, which is very wide and imprecise. It would be extraordinarily easy to argue that a director had not taken account of some aspect of the impact of his company’s operations on the community or the environment.
I think that paragraph (d) fails my test. I say “I think” because I am speaking tentatively. I am keeping an open mind, and I am prepared to be persuaded by my hon. Friends the Members for Huntingdon or for
Rutland and Melton, or any other Member—including those on the Standing Committee, if I am lucky enough to be on it. But I think that we should think about that paragraph very carefully.
Some of the same problems arise in clause 399, the business review clause. It has already been the subject of a good deal of comment of a different kind. Some of it is extremely good. Subsection (3), for example, states
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