Members will know of many examples that have arisen over a number of years. Minimal investment in a well-known brand may lead to a catastrophic decline in sales, but that may not have been clear at the time when the directors in question were in charge of the company. There is an indirect link between directors duties and actions and the success of their companies, and I am not sure that the business review will make that link clear enough. We must ensure that if there is a review, it delivers what we all want: a clear understanding of not just the directors assessment of their own and the companys performance to date, but how they intend to build on that performance.
The clause is very judgmental. In an increasingly changing business environment, companies and directors face difficult decisions. They may have to choose, for instance, between an expansion strategy involving buying other companies and going on an acquisitive spending spree and a period of consolidation in which they can concentrate on core business activities. It may be very difficult for shareholders and company members to assess whether proposed decisions will prove to have been right in the long term. There will, of course, always be some uncertainty around the business review, but that is an example of where the intention of the measure as it is currently worded may not necessarily be fulfilled. I am sure that we will come back to that in Committee.
Often, the performance of directors is seen as clearly in how well the internal processes of the company are functioning as in the company's performance itself. If the company is in a market that is rapidly expanding and it was for various historical reasons an early entrant, it can apparently be incredibly successful, despite the directors. The directors may be taking decisions that add bureaucracy to the company. They may be imposing reporting requirements that are unnecessary and that subsequently hold the company back. However, at a time of an expanding market, those matters may not be focused on by either the shareholders or any potential investors who may be interested. It comes back to the temporal aspect.
Linking clause 399 to clause 158 could, because of the arguable weaknesses in clause 158, present some problems in law in assessing whether the business review delivered what was intended. There is the other adequacy test regarding clause 158. I presume that that would need to be considered before an assessment could be made of whether a business review had been adequate. I am sure that we shall discuss in Committee whether the Government intend to have that dual conditionality. I look forward to probing the matter in more detail.
I should have said at the beginning of my contribution that I am a member of the Institute of Chartered Accountants and spent some time auditing during my training, as many people who become members of that institute do as part of their qualification. I welcome the fact that the concept of the true and fair statement is now enshrined in clause 375 and the related clauses 378, 386 and 485. That is a step forward. As for the further major change to the audit profession in clause 525, we need to be careful that the way in which the Bill is phrased regarding liability limitation agreements will enable the Government to deliver the benefits that they seek to achieve. I am sure that many in business have
concerns regarding that agreement and the potential for confusion that it may cause. Therefore, it is important that, as we refine the Bill, those risks and the need for balance are thoroughly addressed, particularly in Committee.
Obviously, any concept of proportionate liability would be new in the audit profession. We need to be careful to ensure not only that the audit profession receives the comfort that it is seeking to achieve through the clauses that the Government have now put into the Bill, but that, in doing so, small shareholders and other shareholders in the company being audited feel that the audit opinion expressed on the accounts following an audit that was underpinned by a liability limitation agreement is still valid. Therefore, we need to be careful that we do not undermine the purpose of an audit by having that agreement. I am sure that that is not the Government's intention and that the audit profession is seeking to have those agreements in place, so that it can perform high-quality audits that assure shareholders about the true and fair nature of accounts. However, we need to be very careful to ensure that the Bill delivers what is intended; otherwise, the unintended consequences could be profound. For example, shareholders might feel unable to have confidence in a report produced by an audit company that signed a limited liability agreement to accept a certain proportion of liability, without knowing in advance the circumstances in which that agreement might be called upon in deciding whether liability had been expressed in relation to potential problems with that company.
In Committee, I want the Government to think long and hard about clause 497formerly clause 498and the offence of knowingly or recklessly mis-auditing accounts. We need to couch this offence very carefully. In the other place, it was argued that a far better phrase would be dishonestly or fraudulently. As someone who has worked in the accounting and auditing profession, I know that, in looking at the risk-based approach to auditing, it is often very difficult to draw a line between when to accept and not accept management explanations of anomalies in an audit and changes in the figures from one accounting period to the next. At times, such a task confers a significant judgment requirement on all levels of an audit company. Any audit that is signed off is the product of the judgment of a number of people who participated in the audit on behalf of the auditing company.
On reading through the relevant debates in the other place, my initial reaction was that the phrase dishonestly or fraudulently might better capture what the Government are seeking to achieve. That said, I look forward to debating this issue further, and doubtless we will return to it in Committee. It is important that we do so, because if we do not get it right, there is a danger that we will put off some of our brightest, most initiative-driven business people from entering the audit profession. We need to make sure that the law is structured in such a way as to encourage those who encounter an issue in an audit to raise it, rather than to sweep it under the carpet. I am sure that that is the intention behind clause 497, but we need to ensure that it delivers on that intention, and that it does
not put off our best and brightest graduates from entering the audit profession in the long term. They may worry that if they make a judgment during an audit that subsequently proves wrong, they will be liable on behalf of their company. Nobody wants to be in that situation unnecessarily.
The Bill has gone through a number of iterations in reaching this stage, and all Members will agree that it has been improved immensely since the first draft. We Conservatives look forward to playing our role in ensuring that any remaining concerns that we may have on behalf of the business community, stakeholders and those worried about corporate social responsibility will be thoroughly debated and ironed out in Committee. I certainly look forward to playing my role in Committee in the coming weeksif I am lucky enough to be selected, which I very much hope will happen.
We have had an interesting debate, although it has focused on only some 20 of the 950 clauses in the Bill. I start by recognising that it is more than 20 years since the last major change to the company law framework. We are pleased, therefore, that after eight years of wide consultation, we now have the Bill. Consideration started in the other place, and I recognise that the 1,600 amendments considered to date have changed and improved the Bill dramatically. I join my hon. Friend the Member for Rutland and Melton (Mr. Duncan) in recognising the heroic efforts made in the other place by Lord Hodgson, Baroness Noakes, Lord Freeman and many others.
My hon. Friend the Member for Grantham and Stamford (Mr. Davies) gave a good summary of the criteria against which the Bill should be judged, focusing on the need to create a steady framework for companies. I agree with him that, for most of the Bills 950 clauses, it nearly reaches that objective. We also agree that the language of the Bill has been significantly improved, compared with the Companies Act 1985, which it replaces. Furthermore, we welcome the fact that the focus of the Bill is now on the private company with any further requirements being subsequently set out for public companies, rather than the other way round as it is done at present. It is right to think small first, considering the relatively few public companies.
As my hon. Friend the Member for Hornchurch (James Brokenshire) pointed out in his wide-ranging and interesting speech, in which he demonstrated his technical expertise on the issue, we welcome the fact that the Government have listened to us and now propose to include in the Bill most of the existing Companies Act 1985, thus producing one single
consolidated Act. I have no doubt that that will be warmly received by business and advisers alike, but with some caution by Committee members who will have a Bill of some 1,300 clauses to considerpossibly the largest ever.
Given the huge expansion of the Bill, the Governments insistence on a programme motion is not welcome. The single day for Report, instead of the four provided in the Lords, seems unwise, considering the likely consultations that will need to be finalised over the summer.
The protection of directors and shareholders from violence and intimidation arising out of their involvement with companies is a key issue that the Conservative party has been asking the Government to address for several years. The disgusting behaviour shown towards my constituents at Huntingdon Life Sciences and the intimidation of the companys shareholders have long given me the belief that the Government have to do more, including changing the law. Through amendments in the other place, the Government have gone some way towards heeding our calls. However, it is an example of the knee-jerk nature of much of what the Government do that it took the intimidation of GlaxoSmithKline shareholders to kick them into action. Reactive law can often be the worst law, as we all know. As my hon. Friend explained, we shall use the Committee stage to probe the Governments proposals, to compare them with alternative suggestions and to tighten up their effectiveness where necessary.
Let no one be in any doubt that for the Conservative party this issue extends beyond animal testing to the need to protect the secure environment that is so vital for all our companies in all sectors of operation. In any age in which more than half of shares are owned by nominees, we have given much thought to the rights of owners of shares, as well as the obligations owed by institutions to their investorsall in the context of our support for extending shareholder democracy and encouraging active involvement in general meetings. Our aspiration and ideal is active membership from the bottom up, rather than Government regulation from the top down. In that context, we welcome the changes to the Bill made by our noble Friends in the other place to enable beneficial owners to opt into receiving company documents and votes. The hon. Member for Islington, South and Finsbury (Emily Thornberry) made a strong case for that, as did the hon. Member for Kingston and Surbiton (Mr. Davey).
That is a new concept, at least in this country. We have listened carefully to business representatives in recent days, and we accept that the details of the proposals made by our noble Friends will need some refining. We look forward to working with the Government on this matter, given that Ministers today seem at least to have accepted the concept. We also strongly support the proposal that institutions should publish how they have voted on their share investments, and we commend the half dozen or so institutions that now do so on a voluntary basis.
My hon. Friend the Member for Grantham and Stamford called for institutions to become active and to vote, and he was spot on. We found the Governments threat of compulsion to be cack-handed and over regulatory. That is why, in the other place, we removed the relevant
clause from in the Bill. However, we agree that this is an important area, and one in which we would like to find a compromise with the Government. Accordingly, we intend to table amendments that would require institutions to publish whether, rather than how, they voted. We feel that that could be a good starting point for discussions aimed at encouraging shareholder activism in a way that is not heavy handed. We agree with the Liberal Democrats that we need to look very carefully at the mechanics of the issue.
With a Bill of this size, we must take account of the context. For the most part, its clauses are conceptually sound, and our work in Committee will be of a technical nature. However, significant elements of the Bill will complicate company law further, rather than make it more flexible. The review of accounting provisions is certainly timely, although I am not sure that I totally agree with the hon. Member for Great Grimsby (Mr. Mitchell), who asserted that lower audit standards necessarily lead to looser business ethics.
The Minister will correct me if I am wrong, but as far as I am aware the Bill contains no provisions to reduce audit standards. My hon. Friend the Member for Putney (Justine Greening) gave us some expert and welcome input in that regard. She used her expertise to give us some very pertinent observations about the business review, and made some excellent remarks on the vital importance of companies internal processes. She also spoke about auditors liability limitation, and we look forward to further contributions from her in Committee.
Government new clause 22 is interesting. The Government like to talk about shareholder democracy, but the clause will allow company members to entrench provisions in their companys articles. As drafted, the Bill therefore runs contrary to the concept of shareholder democracy. For instance, company directors with enough shares will be able to entrench their right to have apossibly largesalary.
It is interesting and somewhat bizarre to note that the Labour party in opposition liked to attack what it called corporate fat cats. In government, it seems to want to introduce laws that will allow those people to entrench their right to get fatter. In Committee, we hope to address that matter and redress the balance in favour of shareholder votes.
We will also wish to reassess the role of the company secretary. My hon. Friend the Member for Eddisbury (Mr. O'Brien) made a very convincing case that proper recognition should be given to what is a very important officer role in a company. Company secretaries are especially important in larger companies, whether public or private. We also intend to look carefully in Committee at the proposed use of criminal sanctions by the takeover panel.
The question of directors duties featured strongly in the debate. Clause 158 in part 10 of the Bill is intended to codify a limited number of existing common-law principles relating to the responsibilities of directors. That has led to vociferous and growing complaints from across the legal and business communities. As my hon. Friend the Member for Clwyd, West (Mr. Jones) skilfully demonstrated in an excellent contribution, historically judges have had the discretion to deal with
complicated issues relating to directors duties on a case-by-case basis. That system has been adaptable and effective in dealing with cases that are often complicated and highly technical. A flexible system is at risk of being replaced by Labour with an inflexible tick-box one.
The Governments position has been inconsistent. They have said that there will be no change in the common law position yet they talk about introducing the concept of enlightened shareholder value. If nothing is to change, the Government need to explain what they mean by enlightened shareholder value. That will be a theme in Committee.
The Law Society doubts the level of anticipated savings for business from the Bill. On the contrary, it believes that the new provisions on directors duties will result in new uncertainty, increased legal costs and additional bureaucracy. It seems clear to us that, while the Government protest that they are holding some kind of middle ground, as the Secretary of State suggested, and are not changing the common law position, in fact they are doing exactly that. Such a course can only lead to confusion where there should be clarity. We shall support the position of our noble Friends and the Law Society that a non-statutory guide to directors duties is the way forward, not wishy-washy confusing platitudes that seek to show concern but will probably do little other than confuse.
The stated aim was to make directors duties clearer and more up-to-date. The reality is a confused list that mixes platitudes with necessary duties...the governments approach betrays an underlying mistrust of business.
We say that company law exists to provide a stable framework in which companies can operate. Part 10 of the Bill does not do that. It bases law on fashion, not reason. That is an issue that we will address in Committee.
A major concern of hon. Members in todays debate has been that the Bill should enable company law to become the arena for a number of interest groups to further their causes. Corporate social responsibility is now taken more or less seriously by all larger companies based in this country. There is general agreement, which we certainly share, that it is only good business for companies to do so. The Conservative party places high value on the issue. We strongly support action taken towards social responsibility by companies and we believe that companies, sometimes more than Government, can be a positive driver of environmental and social change.
The hon. Member for Richmond Park (Susan Kramer) made an important point when she said that the Government spent too little time recognising and encouraging good corporate social responsibility practice when they found it. That is not a lesson lost on the Conservative party. The question is whether the Bill is the place to advance CSR. That will be an important theme for the Committee.
Mr. Michael Wills (North Swindon) (Lab):
I have been listening to the hon. Gentlemans case with great
care. If he thinks that the Bill is not the place to enhance corporate social responsibility, where is the place?
Mr. Djanogly: I have just explained that I see the primary way of advancing CSR as being through companies voluntarily putting measures in place. However, there are other ways in which it should be encouraged. The hon. Member for Gower (Mr. Caton) mentioned the OECD. That is certainly an international context in which CSR should be advanced.
One of the problems that we have is that the amendments mean that burdens will be placed on company directors of all UK companiesthe corner shop as much as the multinational. We shall argue that that will not just lead to uncertainty and the fear of litigation, but will set back the agenda of engagement in corporate social responsibility that our party supports. That point was made elegantly by the right hon. Member for Cardiff, South and Penarth (Alun Michael). The hon. Members for Richmond Park, for Kingston and Surbiton, for Portsmouth, North (Sarah McCarthy-Fry), for Caernarfon (Hywel Williams), for Gower, for Great Grimsby, and for Islington, South and Finsbury, and my right hon. Friend the Member for Suffolk, Coastal (Mr. Gummer), in their own ways and often elegantly, made their cases for more regulation on business and mandatory reporting in the name of corporate social responsibilitymany different forms of corporate social responsibility, I hasten to add.
Although some of the causes that were mentioned were certainly appealing, the recipe for dealing with those issues was much less so. I appreciate that this is a significant and important area and I foresee that we will spend some time on it in Committee. Let me just give hon. Members one example now. Most of the campaigns involving international development or environmental issues will probably involve large multinational companies and most of those companies will probably be foreign. Some hon. Members may have overlooked the fact that the Bill applies only to UK companies. Quite apart from the merits of the campaigns involved, is this the place to deal with those issues? We will suggest that it is not.
Mr. Gummer: I have great sympathy with what my hon. Friend is saying, but surely the situation is rather different. It would be possible for us to produce a mix of sensible legislation that would not be overburdening, but which would show quite clearly that we were taking the lead. This country ought to take the lead. The idea that we are not doing that because other countries will not do it is surely not suitable. Climate change and its environmental results are too urgent for us not to take the lead. I hope that he will find ways in which we can do that.