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6 Jun 2006 : Column 181

Just before the recess I met two campaigners from Honduras—Rosa Giron and Pedro Landa—who were working with the Catholic aid agency known as the Catholic Fund for Overseas Development to reform mining laws in their country. As we heard in an earlier speech, mining multinationals, some of which are based in the UK, bring investment to developing countries, but we have to acknowledge that they also bring environmental destruction and slave wages. CAFOD wants to ensure that the people of Honduras and the Democratic Republic of the Congo benefit from their mineral wealth, rather then paying a heavy price for it. It is just one of several NGOs that are part of the Trade Justice Movement coalition, which is campaigning to support and to improve the Bill.

I was pleased to be able to sponsor a meeting of the Trade Justice Movement today, and in the light of it, I would like the Minister to clarify a couple of issues. The Bill makes it clear that the directors of a company must look at the long-term viability of the company and the future interests of shareholders, and that, in running the company for the long-term benefit of shareholders, they must have regard to factors such as the impact on employees and the environment, and report on the wider context in a business review. I would like some clarification of the nature of the business review, and to know what steps will be taken to ensure the quality of, and coverage of, the non-financial aspect of the reporting. The TUC and the Trade Justice Movement are asking for further amendments to ensure that there is a legal benchmark. All I would ask is that the Minister set out before us her benchmark for the acceptable quality and coverage of the business review.

The Secretary of State said that there would be too much litigation if we agreed to the Trade Justice Movement’s proposals. Arguably, that is wrong for two reasons. Section 309 of the Companies Act 1985 gave directors a duty to have regard to the interests of employees. Only about three cases were brought in 15 years. That definitely did not open the floodgates to litigation, and it is analogous to what is being proposed here. The prospect of a company or shareholders suing a director is unlikely to happen under the extended proposals from the Trade Justice Movement. A company would not ever take action against its own directors lightly.

Mr. Quentin Davies: There is all the difference in the world between creating an obligation for directors to have regard to the interests of their employees, which is a specific requirement, and their having to have regard to the community or the environment. The latter is a vast and more or less unending obligation. That is the difference between the obligation that we already have in the 1985 Act and that under clause 158(1)(d) in the Bill before us.

Anne Snelgrove: I understand the hon. Gentleman’s concern, but I do not agree with it, because such an obligation is not unending. There are companies in this country—I worked for one of them—that, although they did not necessarily find such an arrangement easy at first, have found it achievable, a good thing and of benefit to them in the long run. My argument is that that obligation will be of benefit to British business. It will ensure that we are competitive and moving ahead of many other countries.

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Under the terms of the Bill, shareholders can take action against directors only if they have cost the company financially, which is almost like the company suing itself. There is unlikely to be much litigation in those circumstances.

Finally, I want the Minister to confirm that the intention is that the Bill will ensure that UK companies are more accountable for their impact on workers, communities and the environment, both in the UK and overseas. Will the directors’ duties and the duty to report on corporate social responsibility be strengthened and given teeth? I, too, believe that it is a great shame that the operating and financial review has been abolished, because it would have provided a good framework and greater transparency for shareholders and stakeholders. The proposed business review is much weaker. There is no requirement for information on social issues, and less stringent audit requirements. The OFR was not just a good thing in theory; in my experience, corporate social responsibility and the implications of the OFR are a good thing in practice not only for the good health and wealth of UK companies, and for their employees, local communities, the environment and stakeholders, but also for those living in developing countries.

Mr. Weir: In connection with what the hon. Lady was saying earlier about companies being sued, does she agree that where a UK company is operating overseas in a regime in which it is often very difficult for a local person to sue the company, provision should be made for taking action in the UK?

Anne Snelgrove: I thank the hon. Gentleman for his intervention. I am indeed interested in that idea, and I should like to pursue it further.

In conclusion, and as I was saying, the OFR is also good for those living in developing countries, for whom we in this House have a duty of care.

7.29 pm

Mr. Stephen O'Brien (Eddisbury) (Con): I am grateful to have the opportunity to take part in this debate. At the outset, I must declare my interest, as recorded in the Register of Members’ Interests, not only as a non-practising solicitor—I have in the past practised in the City of London—but as a fellow of the Institute of Chartered Secretaries and Administrators and as its parliamentary adviser.

I was the group company secretary for a FTSE-100 company before entering Parliament, and it may help if I start with a small story from my by-election in 1999 that helps to describe the mental map with which the Government approach these complex issues. Anyone who has been trained in the law knows of the enormous amount of statute and common law that provides the certainty and the competitive base from which our country can compete, fairly, honestly and transparently. During the by-election, the Labour party made desperate attempts, with many investigators looking into my background and chasing my family and friends, to discover whether there was anything that it could give to The Guardian. At one point, as my campaign vehicle arrived at a country pub for a lunchtime rendezvous, I was greeted by two of my team, who were ashen-faced. They said, “There’s a real problem, Stephen. The Labour
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party has just fed The Guardian with a piece of news that will completely derail the campaign. It claims that you have 273 directorships.” I said, “Let them print.” Because I was so relaxed about it, The Guardian got cold feet and did not print, so we could not embarrass the Government on that issue.

It was obvious that a FTSE-100 company group secretary should be a director of all the subsidiary companies registered in the UK, because it would be grossly bad business and inefficient for different people to be employed as company secretary for each individual company, as the 1947 Act and other legislation stated. Indeed, as the group secretary, I was the chairman and director of the 100 per cent. owned Redland Secretaries Ltd, which was the corporate company secretary to each of the group companies. That was good business and good risk management, and it was what most FTSE-100 companies did. Clearly, Labour did not understand that, and we see the result today.

The Bill is a generally good reform of company law, which has undergone a tremendous amount of review and consultation, with experts being able to give their advice freely in a long process. However, at certain points the Government have decided that they want some totemic change and displayed their ignorance of the business world. We must be able to manage risk confidently so that everybody who treats with private enterprise—which creates all our wealth, underpins our democracy and gives Members of Parliament the chance to represent our constituents—makes the choice about how that wealth is raised, spent and, through the public purse, deployed.

I congratulate everybody involved in the process of company law reform. The Bill has been a long time in the making—we have been calling for it for many years—but after eight years, which more or less coincides with my time as a Member of Parliament, we have it. It is a large Bill that will get larger, as the Government have—rightly—decided to interleave it with the remaining parts of the 1985 Act, so that we have one statute as the corpus of corporate law.

It is sensible to seek to update the law. As every lawyer knows—indeed, most make their living from it—the danger is that tinkering with legal drafting creates uncertainty and inconsistency, because precedents are not necessarily included. However, my colleagues in the other place did an outstanding job in scrutinising this wide-ranging and technical Bill. Many other noble Lords made worthwhile and important contributions to the debate, which has given us a much better Bill.

Most of the issues will require clarification and detailed discussion, and that is best left to the Committee stage. It would not be right to take up the time of the House going through many technical issues. However, I have a keen interest in one point of principle, which will be obvious from my declaration of interest. The principle has not been much discussed today, although it was raised in the other place, but it is the proposal to scrap the requirement for private companies to have a company secretary, as set out in clause 253.

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In appraising whether the Government have made the right judgment call on that issue—whether it will deliver the totemic, deregulatory effort that they wish to be able to claim for this Bill—we have to go back to first principles. Will it bring company law up to date, and make it more flexible and accessible to all companies? We have to think small first, because that is where new wealth is created. It is also where most of the employment is generated. As legislators, we are now increasingly aware that we should seek to simplify the way in which the law is drafted and operates. As anybody who has had the foolish notion of listening to any of my utterances in the House over the past few years will know, I am obsessive about the need to deregulate, because the burden of regulation on companies, individuals, families and communities in this country is bearing down on our ability to enjoy life and be competitive, and it is anathema to the ways in which humans best behave and operate. It takes away their judgment and replaces it with a tick-box exercise, which means, as long as it is satisfied, that they need no longer think about how to do the right thing in the right way.

We must also at all times aid competitiveness. Above all, we must not lose sight of the fact that this country has a well deserved reputation for establishing so many of the principles that govern corporate competitiveness and the ability to trade across the world. Let us not forget that part of what we trade is our system for organising business—our corporate law and the way in which we administer our corporate affairs. Among our greatest exports are the various schemes for trading and methods of ensuring that companies have good administrators who act as internal civil servants.

On those principles, the Government have, understandably and logically, decided to retain the current law on public quoted companies. Clauses 254 to 263 enshrine the compulsory requirement for all publicly quoted companies to have a secretary. That is right and it is consistent with first principles. However, the requirement is to be scrapped for private companies, reversing section 283 of the 1985Act that

The reason behind that provision is that it gives every company, whatever its size, a second pair of eyes. Even in what we lazily call mom and pop companies, a second pair of eyes is needed—although we can consider the degree of the requirement. The principle applies to all areas of governance. The House has learned, from bitter experience, that problems have arisen in primary care clinical governance with single GP practices. I need not mention the name Shipman as an extreme example.

Many professional bodies, such as the one to which I belong and the Association of Chartered Certified Accountants, have argued that it is wrong in logic to remove the requirement for private companies to have a company secretary. What have the Government got against the poor old company secretary in private companies?

A company secretary is good at advising chairmen and directors about new developments, compliance requirements, codes of practice, regulations and points of law. The company secretary is often regarded as a company’s civil servant, or its conscience. He or she provides information and advice, records meetings and
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ensures that the proper processes are observed and recorded. He or she also monitors and records the implications of decisions, and ensures that papers for members of the board are properly prepared so that decisions are made and followed up correctly.

All of that can happen without a company secretary, but a company that has one knows that that person is required to carry out all those functions.

Mr. Weir: I agree with much of what the hon. Gentleman says, but he referred to what many call mom and pop companies. Does he accept that the post of company secretary in those companies was largely a titular position? I do not want to be sexist, but in many cases the role was carried out by the wife. Is not the real issue a company’s size, rather than whether it is public or private? Does that not offer a proper way to deal with this matter?

Mr. O'Brien: The hon. Gentleman is entirely correct. The whole House agrees with the principles on which this Bill is based. Public companies clearly have outside shareholders who need to know that there is a properly qualified person in a position to support the governance of the company, but why should the approach to private companies be so different?

The Government have identified mom and pop companies as the problem, but they are not. We must take account of a company’s size, and not be distracted by the distinction between private and public. That is where the Government have got this matter wrong. The problem goes all the way back to what the company law review group recommended, but the Government’s experience and mental map mean that they cannot counter that judgment. That is why we are in this muddle, and I am always worried that the Government are reluctant to lose face by admitting that an adjustment needs to be made.

However, we have come to the moment when that must happen. I know that my hon. Friend the Member for Grantham and Stamford (Mr. Davies) hopes to be a member of the Standing Committee, and he will want to take that opportunity to make the necessary changes to the Bill. We need to arrive at sensible and logical proposals that will accord with best practice in corporate governance.

Those who followed the Bill’s passage through the other place will know that concern was expressed about the consequences of removing company secretaries from private companies. Who will be authorised to sign documents on behalf of a company and give the outward authority on which third parties can rely? How can that be checked? Currently, we can find out by inspecting one form filed with Companies House—we can even do it online, if necessary—that a person has been registered as a company’s official secretary. We can then be sure that the liabilities that a limited company should be expected to undertake will be observed.

The proposal about authorised signatories has, however, given rise to many questions. I hope that the Minister will say that she is prepared for the detail of the proposal to be considered at length in Committee. A number of real problems have arisen, and need deep discussion.

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The proposal to remove the requirement for private companies to have a company secretary raises an important matter of principle. Those of us who are in tune with the notion that the private sector is the wealth creator believe that it gives people an opportunity to engage in the fulfilling activity that is business. That means that they can contribute to corporate wealth and therefore to the wealth of our country, and that they help to ensure a high quality of life for us all. We care deeply about good corporate governance, and want to make sure that the good reputation of business is not undermined by negligence, fraud or risk that is not accounted for properly.

I am worried that the Bill sends out precisely the wrong message. The one person in any company who is likely to be the most knowledgeable, capable and accountable when it comes to questions of governance is the one who services the ability of directors to take responsibility for those matters. That person is, of course, the company secretary.

Earlier, I intervened on the Secretary of State to emphasise that the company secretary is an office holder in a company. He or she is not merely an employee, nor another director. A chairman is simply the person whom the board of directors chooses to chair board meetings, but the company secretary is an office holder, with various responsibilities—directly to his or her employer and, in a non-executive capacity, to the chairman through the supply of free and impartial professional advice. The Government have been determined to ensure that the principles of good corporate governance should be enshrined in law, but they must not undermine that approach by removing the very person identified as having the responsibility of ensuring that those principles are put into practice.

How do address the problem identified a moment ago by the hon. Member for Angus (Mr. Weir)? The Government rejected the obvious answer offered in the other place—that there is no deregulatory attack if the cut-off points for small companies are allied to their audit threshold, which currently stands at £5.6 million. Other options are to determine a company’s status according to the number of people that it employs, or in accordance with its value added tax returns. That is rather complicated, however, and the audit threshold option is much more suitable.

The Minister in the other place dismissed that proposal, without giving it the consideration that it deserves. I hope that it receives serious consideration in Committee, as it will resolve the difficulty presented by a proposal—which is based on the difficulties encountered with smaller companies—to get rid of the one person likely to enhance corporate governance in private companies.

We must not forget that some of our biggest companies are privately owned. For instance, John Swire and Sons has a turnover in excess of £2 billion, and the shoe manufacturer C. and J. Clark International is another massive enterprise. The Government propose that such companies should get rid of their company secretaries. Of course, such companies will still have the option to retain the post, but it was made clear in the other place that exercising such an option has consequences. The Government were somewhat edgy about the argument, but a company secretary who is put in place because a company has exercised its option in that regard is not
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enshrined in law and so cannot carry the same authority as a postholder under the old regime. The relevant authority will go to the authorised signatory.

I do not want to go into too much detail, but the new system will weaken the stature of the company secretary. Those of us who have lived through the experience know how great the responsibility can be: one has to be ready to engage in major arguments with board directors who might want to do something a bit close to the wind, and that can be a tough old road to hoe. Importantly, the person who is prepared to have such arguments must be sure that he or she has the authority that comes with being appointed through statute. That is what gives a company secretary the necessary command in the boardroom, and without that there is the danger that directors will not respond with the respect that the company secretary’s office deserves. The company secretary is not merely an employee, who can be hired and fired and who is controlled by the board through the pay and conditions on offer.

The Bill quite properly repeats and expands the current law on the qualifications needed by company secretaries. It makes it clear that the postholder should be a qualified lawyer or accountant, or someone who has been a company secretary in the past.

We have an opportunity to do the right thing. I hope that the Minister will listen to the arguments in Committee and think about what can be done. The provision in the Bill that gives companies the option to have a company secretary does not confer on the postholder the authority that is needed if the valuable benefits of good corporate governance are to be delivered.

If the Government go ahead with their proposals, I hope that they will remember the arguments made against them when, as will inevitably happen, something goes wrong. There are never any thanks in politics for people who say, “I told you so,” but the Government would do well to recall that people become company secretaries because there is a need for them. They do not appear out of thin air, and there is still a need for them in public companies. We should keep the post in private companies whose size exceeds a certain threshold. Although the company secretary’s role is no longer so relevant in smaller firms, it is absolutely crucial in larger ones. If the Government are allowed to go ahead and remove the one person who can keep a company’s affairs on the straight and narrow when things go wrong, we will all have to come back here and hang our heads in shame, saying, “I told you so.”

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