The business review must contain
(a) a fair review of the companys business, and
(b) a description of the principal risks and uncertainties facing the company.
That means that anyone who becomes a company director has an absolute obligation first to make his or her assessment of the risks, and secondly, to communicate them to shareholders. The director must make absolutely clear what he or she believes to be the risks involved in the companys activities. That requirement should be made explicit, and if directors are doing a fair job on behalf of shareholders, shareholders should expect the information to be provided.
If the risks change, it must be up to the board to ensure that the public knowthat the market knowsthat they are changing. The public and the market must be made aware of the potential impact on the company of, for instance, a rise in the oil price or a war in the middle east. Things can change in the world, and that means that the risks faced by a company can change. It is important for directors to feel obliged to assess the risks and to make their assessment available to shareholders and hence to the market; otherwise false markets will develop.
environmental matters (including the impact of the companys business on the environment).
That is drafted extraordinarily widely. If the reference had been merely to the impact of the companys business on the environment, that would have been relatively precise. It could well be said that it is the responsibility of directors to know about the impact of their companys business on the environment, to assess it, and to communicate their assessment. Paragraph (5), however, does not say that. It says that the directors must provide information about
environmental matters (including the impact of the companys business on the environment).
Similarly, subsection (5)(b)(iii) refers to social and community issues. It does not even refer to social and community issues arising from the companys activities. What exactly does it mean? It is drafted dangerously widely, irresponsibly and imprecisely. I hope that it will be possible to tighten it in Committee or on Report.
Justine Greening (Putney) (Con):
I share my hon. Friends concerns. He may be interested to learn that in the other place subsection (5) was described as a slightly gnomic formulation. That was an eloquent
way of saying that it was a catch-all provision, and it accorded with the views expressed by my hon. Friend today.
Mr. Davies: I am grateful for my hon. Friends support. She has put me to shame by making it clear, modestly and indirectly, that she has done something that I have not done, and read the Hansard report of the debate in the House of Lords. I am afraid that, having learned that the report ran to several thousand columns, I immediately decided that I would try to understand the Bill on the basis that I was simply a citizen who might have to observe the provisions of a new Companies Act. I therefore have not done the extensive homework that my hon. Friend has obviously done, and I am very grateful to herespecially because, having done that homework and having considered the matter carefully in the light of comments made in the other place of which I was entirely ignorant, she has been able to come to my aid.
Other aspects of the Bill strike me as potentially problematic. One was raised by my hon. Friend the Member for Rutland and Melton, and I agree with what he said. He mentioned the dangers of derivative actions. The Secretary of State said that there were two protections against, in particular, vexatious or frivolous actions of that kind, and I can all too easily understand how such actions could arise in the modern world. First, a court must be satisfied that there is a prima facie case. Secondly, it would be a defence for a director to say that he or she had acted reasonably in the circumstances of the time and, presumably, given the extent of his or her knowledge at the time. Nevertheless, I think that the issue of derivative actions should be probed very carefully before the Bill is allowed to become law. Otherwise, we may open the floodgates to cynical, vexatious litigation against company directors, especially in view of the imprecision relating to community, social and environmental affairs.
I want to raise two more points. One relates to whether institutional investors should be obliged to publish their votes at company meetings, either extraordinary or annual general meetings. I have some sympathy with the view that they should make their votes known. Why? Because all of them are, directly or indirectly, fiduciary institutions. All of them have ultimate beneficiaries who are private individuals. In some cases, such as hedge funds, all those who have provided the money are themselves institutions, but those institutions in turn will be pension funds or investment trusts whose beneficiaries are private individuals. In the interests of transparency, as the investors are ultimately fiduciary institutions, they should be obliged to say how they cast their votes on behalf of their ultimate beneficiaries.
I consider that a reasonable argument. I would need a great deal of persuasion to accept that the cost consequences, or other perverse consequences, of such a requirement at law were so great that it should not be supported. I also hope that such an obligation might do something even more valuable in practical terms, and induce those institutions to vote and to take an interest in the governance of the companies in which they invest. Far too often, still, fund managers say, I do not have time for that. If we do not like the companys performance, we should just sell the shares. In many cases, if the block of shares is large in the
context of the liquidity of the market, those shares cannot be sold, except at a discount. The institution may then be forced to take a more direct interest in what is going on and, if it does not like it, to do something about it.
I am a great believer in everyone, including Members of Parliament, trying to face up to their obligations. Directors certainly should. If they should, so should institutions. It would be good if there were greater pressure on them to vote and if there were a requirement to say how they have voted.
That is an important matter. It should be debated by the House and considered as part of the Bill. It should not be left to subsequent secondary legislation. I am offended by the suggestion that a matter as important as that should be left out of the Bill and dealt with through a statutory instrument. As we all know, the scrutiny of statutory instruments is a farce and a disgrace to the House. The matter should be dealt with now, explicitly, openly and honestly in the debates that we will have over the coming weeks, and possibly months, on the Bill. We should come to a conclusion and it should be in the Bill. There will also be great advantages in terms of the comprehensibility of the corpus of the Bill if all the provisions are clearly set out in one document.
On the enfranchisement of indirect shareholders, there are many reasons why people decide to hold shares through a nominee account. One may say that, if they decide to set up a nominee account, why should they have the benefits of holding the shares directly, but there are some special categories for which Parliament has responsibility.
Through our tax system, we have made it clear that small investors who want to take a share in the equity marketI am glad that we have provided these incentives and advantages for themshould do so through personal equity plans and individual savings accounts. If they invest through PEPs and ISAs, their names do not appear on the shareholder register. Therefore, they are being forced, if they wish to take advantage of the tax breaks on income tax and capital gains tax, to forgo their rights as shareholders.
Parliament made a terrible mistake when it linked those two things. It was right to provide fiscal inducements for small savers, or indeed for anyone, to invest small amounts of money in the equity market. That was a positive thing. It was done first under a Conservative Administration and subsequently in a slightly different form under a Labour Administration. That is fine. That is common ground. However, it was fundamentally wrong to do it in such a way that, whether intentionally or otherwise, de facto, those shareholders were deprived of the rights of shareholderssome were taking an interest in the equity market for the first time, no doubtby virtue of being forced into those special vehicles, the ISAs and PEPs,. We have an opportunity in this Bill to rectify that wrong. It is both a moral and an economic wrong and I hope that we take this opportunity to right it.
Madam Deputy Speaker:
Order. I remind all hon. Members that quite a few Members are still hoping to
catch my eye. Perhaps we can have speeches covering the general principles of the Bill, but taking brevity into account as well.
Anne Snelgrove (South Swindon) (Lab): We have had a good debate. It has been interesting to hear the points of agreement on the Bill and the points of disagreement. I, too, welcome the Bill because it will reduce the burden on small and medium-sized businesses in Swindon and help to expose irresponsible companies. In particular, it has given us the chance to raise the important issue of corporate social responsibility this afternoon. However, I want reassurances that what we get from the Bill is CSR rather than PRpublic relations. I will outline the principles on which my concern is based.
Before I do that, I should say that the biggest factor in increasing social mobility in Swindon has been the increasing success of small businesses since the late 1990s. We have the best ever business environment under this Government. I come from a family who have run small businesses. My mother started a small business and my brother still has a small business, so my background is based on the success of small family businesses. I am delighted that the Bill will make it easier to set up and run a small business.
I work closely with the Federation of Small Businesses in Swindon. I have made it clear to the federation that I want to see the regulatory burden on smaller firms lightened and to work with them to identify new ways to simplify and to reduce the demands placed on them by Government. That is why I am pleased that the Bill could save small and medium-sized enterprises £100 million a year. It is right that the Bill changes the approach from looking at the needs of large businesses and large companies first to a think small first approach. I thoroughly welcome that.
I am pleased that there will be benefits from a range of measures for all businesses in my constituency, including greater clarity about directors' duties. The Bill makes it clear that they have not only to act in the interests of shareholders, but to pay regard to the longer term, the interests of employees, suppliers, consumers and the environment, as we have heard.
More than 30 international companies have their headquarters in Swindon. I heard and understood my right hon. Friend the Secretary of State's comments on the need to continue to attract such companies to incorporate in the United Kingdom but, as someone who has worked in corporate social responsibility for a large corporation, I know that CSR is essential to securing the future of British business, and I say respectfully to my right hon. Friend that strengthening it in the Bill would do us credit and would help companies.
My experience comes from three years working, in community relations in particular, for a large international company. That involved liaising with local stakeholdersI will use that term because it is understood by the industry. There is a difference between stakeholders and shareholders. I do not agree with the right hon. Member for Suffolk, Coastal (Mr. Gummer), who is no longer here, about that, because
stakeholders means people in the local community who have a stake in a company. They do not necessarily have to have shares in it; they may not even be able to buy shares in it. That was my experience of working in industry: people could not buy shares in a company, but were still directly affected by its work in their community.
I had to create a programme to ensure that local stakeholders concerns and views in a somewhat controversial area were taken on board. Initially, there was much suspicion within both the companypeople working for the company did not understand or see the need to talk to local people, to give their views or to explain why they were doing thingsand the local community, which over a period of years had come to distrust the company because of the actions that it had taken in the past. Although I was employed and paid by the company I found myself, as a middle-woman, so to speak, liaising between one group and the other and ensuring that there was dialogue. That is an important aspect of corporate social responsibility, and of working in the local community and with local society.
I hope that that explanation goes some way to explaining to the hon. Member for Grantham and Stamford (Mr. Davies) why we should enshrine the idea in law. In the long run, doing that made the company's work at large easier because there was less confrontation with the local community, more joint working and more understanding. It saved the company time and money, particularly with planning applications, which, as any of us who have worked in industry know, are among the most difficult things to get through local communities. Therefore, I commend that to him as an important part of the Bill.
Corporate social responsibility reports are often handled by public relations departments. That is wrong and we should change the emphasis to community relations and corporate social responsibility. We need to do that in this country, to ensure that our companies are the best in the world. Our high skills and high level of company intelligence need to be kept up. We need to empower stakeholder engagement in companies, because of the benefits that I have described.
The public are demanding more transparency on issues. They have woken up to the fact that those issues are affecting their families. They include the environment and all sorts of other responsibilities that companies have taken on board. It is an issue for nongovernmental organisations, too. When they work with companies, rather than standing outside and throwing brickbats at them, they may find that their views have changed, and things are going differently from how they thought they were going when they stood outside the company and did not engage with it.
The CSR reporting framework that we could have had through the Bill would cut many hours of argument and debate in companies, simplify things and save them time and money. I remember discussing at great length what should be in and what should be left out of those reports, which took a huge amount of time. If the framework that we could have used was available in law, it would be much easier and simpler for companies, stakeholders and other people outside companies to
understand, and to compare one company with another. It would also lead to a great deal more transparency.
We in this country should also recognise that, as MORI and many other polls have proved, NGOs are much more trusted by the public than are Governments, politicians and even businesses. If we can bring NGOs and companies closer together and get them to work together, that would be of mutual benefit to both. Even since the publication of the Bill, public opinion in this area has continued to shift. There has been growing evidence of the impact of irresponsible businesses on the environment, and growing public demand for the exposure of such businesses. The Opposition have been getting further and further out of step with public opinion, despite the comments of the right hon. Member for Suffolk, Coastal. Even though he said that he disagreed with the Trade Justice Movement, his arguments, which reflected many of the movements, led me to believe that he may have drafted some of its briefing notes.
I have been most disturbed to learn that while the Leader of the Opposition, the right hon. Member for Witney (Mr. Cameron), has been shopping for energy-efficient light bulbs at IKEA, his shadow Ministers in the House of Lords have tabled amendments that would have stripped away any green or ethical clauses in the Bill. While he was trying and failing to get planning permission for a windmill on his roof, Conservative peers in the Lords were trying to roll back company law to remove existing obligations for company directors that have been established in common law since 1862presumably a century in which Conservative peers feel more at home.
go into politics to be the mouthpiece for big business.
I will always stand up for big business.
That is an example of the confusion and contradiction that exists among Opposition Members, which I hope that they can overcome so that they can work with us to strengthen the Bill. If Opposition parties were serious about corporate accountability, they would join me to push for enforceable rules to ensure that companies act in the best interests of the community.
Justine Greening: I am interested in what the hon. Lady is saying, and I wonder whether she agrees with me about a very real issue facing my constituency, which is close to Heathrow. The Government are looking at ways of expanding Heathrow. Does the hon. Lady agree that they should take a similarly socially responsible attitude towards the development of Heathrow and the regulatory framework that they give to BAAor is that a different issue from the one that she is talking about?
Anne Snelgrove: Many of the hon. Ladys constituents work at Heathrow, so there will be differences of opinion among her constituents. Corporate social responsibilityand the Bill, if it is toughenedwill ensure that companies have to take note of the diverse views of her constituents. I hope that she will support the toughening of the Bill that I am suggesting.